Thursday, March 17, 2011

Trading Strategies

We have four different strategies based on daily charts that we commonly use:
1. The first is the one most familiar to traders and that’s the “break-out”. This is a trend-following strategy. It works well in trending bull markets.
2. The second is the “break-down” and it is also a trend-following strategy. It works well in trending bear markets.
2. The third is buying support, a reversion to mean strategy. This works well in markets that are correcting but still in longer term bull trend.
3. The fourth is shorting resistance and is also a reversion to mean strategy. This works well in rallies within longer term bear trends. This strategy can however also work well in range bound markets or nervous markets.
In addition to these strategies (all based on daily charts) we have three intraday strategies that we have created over the years that work in conjuction with the daily strategies: the base and break, the Indy, and the overshoot support. The first two are used in the trend following strategy, while the third is used in reversion to mean buying support strategy.
Here is an example of a typical break-out: BHI breaks out of congestion over 72.

Here is an example of a typical break-down: JDSU will probably hit some stops through this support base of 20. This strategy hasn’t work well for a while as buyers have repeatedly bought the dip; where stocks should typically die, they instead reverse. We are not interested in breakdowns at this point.

Here is an example of the third strategy, buying support within established longer term bull trends: CLF near 80 would be supported by the ascending 100SMA and daily support and would get us involved long:

Here is an example of the fourth strategy, selling resistance within established bear trends, OR in nervous markets. QCOM short 55 would most likely be good for a daytrade short as there is strong resistance at that level. Note that we always buy the first test of support and short the first test of resistance. After that we don’t get involved. This means we would expect the first touch of 55 to work well as a resistance short, but the second test to quite possibly be a successful breakout.

Of course there are also many nuances that come from the intraday set-up (for example we don’t buy support if it is basing on it instead of a vertical panic move towards it, etc) and many smaller points one has to keep in mind when trading these strategies. However, this is the skeleton of how we have traded over the last 14 years, and will most likely trade until we retire.