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72
08/2012
www.tradersonline-mag.com
TRADERS´
PEOPLE
of price consolidations, prior
“swing lows”, and various moving
averages. When uptrending
stocks and ETFs pull back to
those support levels, they often
will “undercut” the exact support
price level by one to three per
cent, trigger traders’ sell stops,
then rip back up above the
support level and continue higher.
With this type of setup, we like
to buy the stock or ETF if it
immediately snaps back into the
range, above prior support, no
more than one to two
days after the actual
“undercut”. If prices
remain below the
support level for more
than a day or two, it
may be a legitimate
break of support and
trend reversal, versus
an “undercut” stop
run that provides a
buying opportunity.
For the “overcut” on short entries,
the opposite of all this is true.
Another pattern we like is
buying the first pullback to the
20-EMA on the hourly chart,
after a stock or ETF has broken
out sharply. The first kiss of the
20-EMA, after a strong uptrend
has taken hold, often leads to
an immediate resumption of the
trend. On the short side, one can
also sell short a new position
on the first bounce into the
20-EMA on the hourly chart, if the
downtrend is new and steady.
TRADERS´: What is your
method for drawing trend
lines?
Deron Wagner: The best method
for drawing trend lines is kind of a
grey area. Some traders prefer to
connect the major anchor points
at their closing prices, while other
traders swear by connecting the
anchor points at the intraday
highs or lows of the swings. For
me, I usually will connect trend
line anchor points at the intraday
highs or lows, as I have found
that trends tend to conform to
them more frequently. However,
there will occasionally be wild
price spikes on a particular day,
often driven by news, that cause
the trend line to be inaccurate.
In this case, I will often revert to
connecting the closing prices,
while ignoring the one-day
spike if it is large enough of an
aberration.
This is what I refer to as a
“dirty trend line”. Overall, I think
drawing trendlines is more of an
art than a science, and a bit of
flexibility and common sense is
required.
TRADERS´: Thank you Deron
for the detailed explanations
regarding both your strategy
and technical approach. We
would like to move on to
two very important topics:
trade execution and risk
management. First, on trade
execution – when buying ETFs
how do you determine the
correct entry point?
Deron Wagner: If the
major indices are
trending strongly,
without a significant
pullback, I prefer
pullback entries into
individual ETFs and
stocks, rather than
breakouts. I then use
the 10-day MA, as
well as the 20-period
EMA on the hourly
chart. If the market is trending,
but not so strongly, I would then
revert to waiting for pullbacks
to the 20-day EMA instead.
However, in most cases, I like
to see price confirmation before
buying the pullback, so I would
then wait for the first rally above
the previous day’s high, which
often sets momentum in motion
to continue the dominant trend.
In markets that are trending,
but are presently on a pullback,
I like to buy breakouts because
odds are good, the market will
F4)
Trend Reversal Setup
After a prolonged downtrend in the market, Apple (AAPL) is basing
out at the lows, forming a lower level base. For the reversal setup to
develop, several things need to happen: 1) The stock and the market
must be in a prolonged downtrend, 2) The stock must form a lower
level base at the lows, 3) The 50-day Moving Average must have
flattened out or begin to trend higher, 4) The 20-day Moving Average
is usually above the 50-day or setting higher lows, 5) There must be a
higher low within the base.
Source: www.tradesignalonline.com
Averaging down
on a losing trade can
be a very dangerous
proposition.