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|Despite all the hype, the only Holy Grail to trading stocks and commodities is to trade with trend -- if it is up, buy the dips; if it down, sell the rallies.|
|But the question is - How do you determine trend?|
trading with cycles, the answer is simple --
The trend for the trading cycle is determined by the dominant cycle (trend cycle) in the next longer time frame.
|In a daily chart, the trend is determined by the cycle in the weekly chart. In a 5-minute chart, or a 7-minute chart, the trend is determined by the cycle in a 20-minute chart. The chart examples below show the weekly trend cycle/daily trading cycle relationship in the S&P500 Index. The same trading concepts and techniques work in all time frames, all markets.|
1- DETERMINE THE TRADING TREND
The trading trend is set by the dominant cycle in the next longer time frame.
|The weekly cycle in the S&P; Index averages 20 weeks from bottom to bottom. This weekly cycle sets the trend for the daily cycle; therefore, the tops and bottoms of the weekly cycle will be trend reversals for the daily trading trend.|
|The direction of the weekly 10DS oscillator is a prime indicator of the trading trend in the daily chart. A rising oscillator indicates an uptrend; a declining oscillator indicates a downtrend.|
|Cycle tops and bottoms tend to occur as the blue Bressert Double Stoc (DS) oscillator tops and bottoms, and trend reversals are usually confirmed by the 10DS Mechanical Buy and Sell Signals.|
|In Chart 1, the weekly cycle tops and bottoms are identified by the up and down arrows. The weekly cycle, and the daily trading trend, are up from cycle bottom A to cycle top B. From cycle top B to cycle bottom C, the weekly cycle and daily trading trend are down.|
|Other indicators also provide a visual picture of trend.|
|Chart 2 - The Dynamic Trend Indicator (DTI) Trailing Stop shows the downtrend.|
|In Chart 2, the Dynamic Trend Indicator plots a green weekly Trailing Stop on the daily chart from the weekly cycle bottom at A to show an uptrend. From the weekly cycle high at "X", the green DTI Trailing Stop shows the downtrend.|
|Chart 3 - The EMA Trend Indicator is used to confirm the trading trend after a trend reversal.|
|Chart 3 shows the EMA Trend Indicator. When the red EMA line rises above the blue EMA line, the trend is up. When it drops below the blue EMA line, the trend is down. This does show trend, but not until well after a trend reversal.|
|Chart 4 - When both the EMA and MA %Diff lines are moving up, the trend is usually up; when both are moving down, the trend is usually down. A divergence in direction often shows trend reversals.|
|Chart 4 shows the red EMA %Diff line, and the green MA %Diff line that turn much more quickly than the EMA Trend Indicator at trend reversals, and give a clearer picture of trend. When both are moving up the trend is usually up, and when both are moving down the trend is usually down. A divergence in direction as at "X" in which the red EMA %Diff went higher, while the green MA %Diff was moving down, often shows trend reversals.|
|Chart 5 - When the trend is up, downside retracements to the green DTI line can often be bought when the blue Double Stoc oscillator is oversold; when the trend is down, upside retracements to the green DTI line can often be sold as the Bressert Double Stoc oscillator is at a high level indicating the market is overbought.|
|Chart 5 combines the EMA %Diff and MA %Diff with the DTI Trailing Stop. The combination of the two shows a fast up trend from the weekly cycle bottom. (A marks the Friday of the blue weekly buy setup bar in Chart 1; B, the Friday of the weekly purple sell setup bar; C, the Friday of the blue weekly buy setup bar). The green DTI lines also show trend. When the trend is up, retracements to the green Dynamic Trend Indicator line can often be bought when the oscillator is oversold; when the trend is down, retracements up to the green DTI line can often be sold as the Bressert Double Stoc oscillator indicates the market is overbought.|
2 - USE MECHANICAL BUY/SELL SIGNALS TO ENTER THE MARKET
The ProfitTrader Mechanical Buy/Sell signals are generally 70-90% accurate in their identification of cycle bottoms and tops.
|When the trend is up, Mechanical Buy/Sell Signals in the Bressert Double Stochastic (blue setup bar; red entry dot) are taken at cycle bottoms, and sell signals (purple setup bar; red entry dot) are ignored or used to take profits. When the trend is down, Mechanical Sell Signals are taken at cycle tops and the Buy Signals ignored or used to lock in profits. When the weekly oscillator is moving up or is flat at a high level, the trend is up and we can buy the daily oscillator bottoms. When the weekly oscillator is moving down or is flat at a low level, we can sell the daily oscillator tops as the trading trend is down.|
Chart 6 - When the weekly Double Stoc is rising, or flat at a high level, the trend is up; when it is declining or flat at a low level, the trend is down.
Plotting the weekly oscillator in the same panel as the daily oscillator gives us a visual representation of trend and trend reversals.
|Chart 6 combines the daily Double Stoc with the weekly Double Stoc to show trend. The light blue oscillator line is the daily Double Stoc. The dark blue is the weekly Double Stoc. (Lines ABC are the same lines as in Chart 1. Line A is the Friday of the uptrend reversal week; line B is the Friday of the downtrend reversal week; line C shows the Friday of the uptrend reversal week.)|
|When the weekly oscillator is moving up, or at a high level, the Buy Signals generated by the daily oscillator (blue setup bar, red entry dot) should be taken; but in an uptrend, the Sell Signals (purple setup bar, red entry dot) should be ignored or used to take profits.|
|When the weekly oscillator is moving down, the Sell Signals should be used to short the market as the daily oscillator turns down generating the purple setup bar and red entry dot; but in a downtrend, the Buy Signals are ignored or used to take profits.|
|With the visual picture of trend shown by the weekly oscillator, our confidence level for trading in the direction of trend is greatly increased.|
PT Users: When using the PT Trailing Stops, the Sell Signals can be turned off in a rising market; in a declining market, the Buy Signals can be turned off.
|Chart 7 - When a market is in an uptrend and prices retrace back towards the green Dynamic Trend Indicator line, trading cycle bottoms can be bought with the oscillator generated Mechanical Buy Signals.|
Chart 7 shows an uptrend with oscillator generated buy setup/entry bars. The blue buy setup bars are generated by the daily blue Double Stoc oscillator. The red price bars are generated by the red BLine oscillator not shown on this chart. The green Dynamic Trend Indicator line shows a strong uptrend from the trend reversal at the bottom of the chart. With the green DTI line rising, and the weekly oscillator bullish (as in Chart 6), the Mechanical Buy Signals at 1 and 2 are high probability Buy Signals with small dollar risk (entry dot to price low), and high profit potential. As prices approach the green DTI line, the market could have been bought with the Mechanical Buy Signals at 1 and 2.
8 - In a downtrend, when prices retrace back up towards the green
Dynamic Trend Indicator, the cycle highs can be sold with the oscillator
generated Mechanical Sell Signals.
|STEP 3 - FOLLOW THE MARKET WITH TRAILING STOPS TO LOCK IN A PROFIT|
|Trailing stops take much of the judgment and stress out of trading the market. Rather than evaluate your position as each price bar forms, you can simply follow the market with a mechanical trailing stop. But trailing stops are a two-edged sword. If too tight, they can stop you out early in the trade, leaving a lot of money on the table; if too wide, you can give back big profits before being stopped out.|
|Chart 9 - Using Trailing Stops that closely follow the market, yet give elbow room to move, takes much of the judgment and stress out of trading. The protective stop for each price bar is automatically calculated on the close of the previous bar.|
|Chart 9 illustrates the use of the daily Short-Term (ST) and Long-Term (LT) Trailing Stops.|
|The red ST Trailing Stop from the highs at 4 and 5 is designed to closely follow prices down and stop out following a trading cycle bottom (or closely follow prices up to a top in a rising market).|
|The green LT Trailing Stop is designed to give prices more leeway to keep us in the market for a more sizeable move, often carrying into a second trading cycle or weekly cycle bottom.|
|Using two trailing stops also highlights the advantage of trading in multiple contracts. All too often with one contract it is an either/or situation that puts us in an uncomfortable bind wanting to lock in a profit but worried that money will be left on the table.|
|With two contracts we can have our cake and eat it too, as the Short-term Stop takes us out of the market near cycle bottoms, and the Long-term Stop provides a mental reassurance that if the market does continue down in a larger more sizeable move, we will be there to participate in the larger profits.|
The "3 Steps to Successful Trading" are improved and enhanced by the use of other indicators.
|Click on "See ProfitTrader in Action!" below to see actual market situations using the ProfitTrader indicators to trade the S&P Index intraday.|
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