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Here we can see that the market has come off, but the increased volume (the red bar and the preceding bar, figure 40) is evidence of support. A high bar is then formed a few bars later. In this situation we have seen evidence of support and are looking for conformation that buyers are in control and will push prices higher. 8th 64 This conformation comes when the high bar is broken a few bars later (figure 41). Figure 41 The market subsequently rises to close at 909.50 without breaking a low bar, a profit of 28.75 points or $1437 per contract. 65 As an exit You could simply use this technique as an exit mechanism. This will ensure that you stay in a profitable trade while the trend is in your favor. This is an effective way of implementing a trailing stop, where the market action, rather than a fixed number of points, determines the stop. In the FTSE example above (figure 38), exiting the trade, short at 4554, on the breakout of the most recent high bar stays in the market all the way down and exits at 4465 for a profit of 89 points, or 880 per contract. As a trading filter You could use this technique to determine the broader trend of the market. For example, using a 60-minute chart, determine the trend and then during the day only take trades from a 5-minute chart in line with the 60-minute trend. Or use a 5-minute chart to determine the trend and trade from a 1-minute chart only in the direction of the 30-minute trend. When you use an indicator as a filter of your trades the indicator must give you an edge. In other words, it must make a profit if you were to trade it alone. It does not have to make a big profit, it does not need to be so good that you would want to trade it on its own, but it must make some sort of profit for it to give you an edge. So if you use, say, a 30 period moving average to help you read the market, to find out whether it is of value (gives you an edge) test it over a period of a month to see if it makes a profit on its own. |
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