Trend Trading tool No 2

Mr. Jim Berg

Jim Berg , again an Australian trader, won "Personal Investor" magazine trading competition in 2002. It was a difficult time to trade, yet he managed to make a handsome profit. Later on, in the February 2005 issue of the magazine "Technical Analysis of Stocks And Commodities", he revealed the strategy he used in the competition, with the title "The truth About Volatility " . I have given a link to the original article at the end of the post. Jim has more than 30 years of trading experience under his belt. Those, who like to follow trends ,It could be a good strategy to use.The analysis should be started in weekly chart. It is important to determine whether the stock is in an up trend in weekly chart or not. If it is , then we will go to the daily chart and try to find an entry point. If the higher time frame is trending up then the chance of success is greater.  Now, how can you spot an up trend? Just look for three sings on the chart.


1. The stock is making higher highs and higher lows on the weekly chart. 
2. The closing prices are above the 34 week moving average.
3. And the 34 week moving average is rising. 

Look at the image below ...

In the weekly chart of Sunpharma , From  September to December 2012 , the prices are making higher highs and higher lows , Trading above their 34 week MA and The 34 week MA is rising. So this is the condition we should prepare for going long. 

Then , for precise entry point, flip to the daily chart. In this type of strategy we look for a  temporary oversold condition in daily chart as it usually gives a good pullback setup. Relative strength index , better known as RSI, is an oscillator widely used in technical analysis. If it's reading goes below 30 , it is an oversold condition. For an overbought condition it should go above 70. Plot a 7 period RSI just under your daily chart and look for an oversold condition   i.e let it go below 30. Don't Jump in and buy as soon as oversold condition happens. You need to have another criteria for that. 

Average True Range is an indicator to measure volatility. It is nothing but an average of an indicator known as "True range". The default value of the average is 14. True Range is the greatest of the following :
   
* The distance from today's high to today's low 
* The distance from yesterday's close to today's high
*The distance from yesterday's close to today's low

The idea is to use ATR to determine the exact entry point. Here we will be using 10 period ATR for our calculation. When The price moves higher from it's recent low (20 day low ) after RSI breached the 30 mark,it is the specific entry point for a long trade.

This is the daily chart of the same stock. I highlighted The period from September to December 2012. The price bars are colour coded according to the ATR criteria. When the bars turned blue immediately after the RSI(7) goes below 30 , that is the time you take a long position. Put a stop loss just below the recent low (Red Lines on the chart).

Exits  

There are three types of Exit rules in this strategy.

1) When the price turns against you , that is when the close is less than the highest high         
    Value 20 days minus twice the 10 day ATR. (Red bars in the chart).

2) If the price goes in favour of you, use a trailing stop. When the price closed two consecutive days below the trailing stop you  close the position.

   This is how you can calculate a trailing stop. Multiply 10 period ATR with 2 and subtract the value from close. Now take the highest high value of that of last 15 days. That is your trailing stop.

3) Profit target. For specially short term trades. Calculate 13 period Exponential moving average of High, and add 10 period ATR multiplied by 2. That is the profit target for your long entry. If the price touched or pierce Profit taker from below , take your profit.

On the chart Trailing stop (brown colour) and profit target (Lime colour) is shown. The first exit was due to price reversal and the second exit was because price had reached at its target.

One suggestion , Please always choose fundamentally sound stocks. And also try to take trades when the general market condition is favourable.That will increase the chances of your trade to be profitable a lot.

Thanks to Mr. Jim Berg for such a great contribution.

if you wish to read the  original article, it is available on the net , Just click here  .

Metastock codes:


(Expert Advisor)

Entry signal : C>(LLV(L,20)+2*ATR(10))
Exit Signal: C<(HHV(H,20)-2*ATR(10))

(Indicator)

Trailing Stop : HHV(C-2*ATR(10),15)
Profit taker:   Mov(H,13,E)+2*ATR(10)