FDates Trading Strategy
FDates Trading Strategy Determine First the Trend Always Trade in the Direction of the Trend The FDates Trading Strategy (FTS) is a simple yet powerful trading strategy designed to provide you with complete confidence in your method of trading. With this strategy, you are put in position to know the right time to trade and the correct direction to do so. While it is simple to learn, it does require that you exercise discipline in following its simple rules. The first step is to determine the trade direction we consider as “allowable”. Once this direction is determined, we only take trade setups in that direction only. The suggested method of determining the trend direction is to use the WEEKLY time‐frame price chart. On this chart, plot the simple Slow Stochastic with a 14‐period and settings of 5,5,3 for the %K, %Ks and %D respectively. Add the MACD oscillator with the settings of 7,20,7, although the standard 12,26,9 can be chosen if you desire. The rules are 95% objective with a tad (5%) of subjectivity. Bring your eyes down to the Histogram of your MACD. What you want to look for is where the Histogram is crossing the zero line. If the Histogram is crossing from below to above the zero line, consider this bullish. If the Histogram is crossing from above to below the zero line, consider this bearish.
You should also use the Stochastic to help further confirm this. If the Stochastic is crossing up around the time the MACD is suggesting bullish, that’s further indication of a bull trend. It is of course best when this is happening from oversold territory. If the Stochastic is crossing down around the time the MACD is suggesting bearish, that’s further indication of a bear trend. It is of course best when this is happening from overbought territory.
Optional: You can apply a 3ma and 5ma (simple) as well for the purpose of additional confirmation. Once you have determined the TREND, we now go to the DAILY time‐frame price chart to look for our trade setups.
Determine Your Trade Setups for Entry Locate Setups to Trade with the Determined Trend The same indicators are used for the DAILY time‐frame that is being used for determining the trend on the WEEKLY time‐frame. If the trend is considered bullish, we only want to look for BUY setups. A BUY SETUP is a price bar with the potential to become a DAILY SWING BOTTOM (DSB) and must be within one trading day of a listed FDate on the FDate Report. It is also advised to make sure that the MACD on the DAILY chart is bullish or in the process of turning bullish (subjective). For example, say that we have a price bar that made a new low (compared to previous price bar low) and is within a trading day of a FDate. Take a look at the MACD and see if it either is bullish (Histogram above zero line) or heading ‘up’ towards zero line (subjective aspect). You may also want to see if the Stochastic appears to support the bullish indication of the MACD. If the DAILY indications appear to favor the bullish side, then look to go LONG off the Buy Setup by buying just above the high of the Buy Setup bar during the next trading session (when the next daily bar is being formed.) A SELL SETUP is a price bar with the potential to become a DAILY SWING TOP (DST) and must be within one trading day of a listed FDate on the FDate Report. It is also advised to make sure that the MACD on the DAILY chart is bearish or in the process of turning bearish (subjective). For example, say that we have a price bar that made a new high (compared to the previous price bar high) and is within a trading day of a FDate. Take a look at the MACD and see if it is either bearish (Histogram below zero line) or heading ‘down’ towards the zero line (subjective aspect). You may also want to see if the Stochastic appears to support the bearish indication of the MACD. If the DAILY indications appear to favor the bearish side, then look to go SHORT off the Sell Setup by selling just below the low of the Sell Setup bar during the next trading session (when the next daily bar is being formed.)
Manage Your Trade A Strategy for Risk Management and Exit
The following example is based on a LONG trade. The same logic in the opposite direction applies to SHORT trades. Initial Stop‐loss Initially you will want to have your stop‐loss placed below the low of the Buy Setup bar IF that bar’s range is too large. Knowing the ATR (Average Trading Range) would help you gauge this. If the range is a bit large that it would require too much capital being put at risk, consider using a ratio of that range such as 62% or 50%. Once a price bar low has formed that is at or above the entry price, consider moving your stop‐loss immediately to breakeven for a virtual free trade. Stop‐loss adjusting If the MACD histogram starts showing signs of moving down towards the zero line, you may want to consider moving your stop‐loss up tight to exit your trade (and take profit). Moving the stop‐loss “up tight” refers to moving the stop‐loss to just below each new price bar low. The trade would then be stopped out whenever any price bar makes a new lower‐low price bar. The following pages will show examples of how you would first determine the TREND and then only take setups in the direction of that TREND.
The WEEKLY chart above is of the British Pound. It has just confirmed a weekly swing bottom (WSB) for week ending 6/1/2013 (A). The MACD histogram (B) is starting to move up towards the zero line, but it is still well within the bearish zone. The Stochastic (C) does not yet support the bullish side. So even though a WSB has confirmed, this would not be considered a bullish trend. Not yet anyway.
The weekly chart (A) now shows a new higher (WSB) has confirmed for week ending 7/13/2012. This time, the MACD histogram is heading to cross above the zero line (C) and is getting bullish confirmation from the Stochastic that had already crossed up a few bars earlier (B). Remember, we use the Stochastic to help confirm the MACD and not the other way around. This is why (B) was not used to determine the trend, only to help support (C). At this point, we have a higher WSB, we have a MACD that will cross the zero line if prices rise just a little higher, and we have the Stochastic supporting this bullish conclusion. Therefore, we go to the DAILY chart and look for Buy Setups to follow week ending 7/13/2012.
On the DAILY chart we are only looking for Buy Setups to follow week ending 7/13/2012. The first opportunity came with $FDate 7/24. On Monday 7/23, price was clearly moving down towards the zero line. This was formed during a period of sideways activity, as can be easily determined by the two MACD lines oscillating around the zero line. Here you have to be a tad subjective to realize that any new higher‐high price bar would swing this back up above the zero line. Had this been further below the zero line, I would likely not consider taking the Buy Setup. But since it was ‘at’ the zero line, and a daily swing bottom (DSB) here would be HIGHER than the one that formed back when the MACD was deeper below the zero line (11 bars from right), this potential bullish pattern put me on alert for a possible buy. On 7/24 prices failed to move lower. The histogram made its first red bar (below zero line). Still being so close to the zero line, a higher‐high would move it above the line. Prices did not move higher, so no entry. On 7/25, the last day inside $FDate 7/24 and last Buy opportunity, it does form a DSB when prices rise the next trading session, also causing the histogram to move above the zero line. The point here, although based on some subjectivity and anticipation, is that we want to BUY when the TREND is bullish (which we have already determined from the WEEKLY chart) and when our entry DSB is at least followed by a bullish histogram on the MACD.
On 7/31/2012, a lower‐low price bar formed. However, it was the histogram of the MACD (A) that alerts us that prices may be taking a bearish turn on the DAILY chart (although still bullish on the WEEKLY). When that smaller histogram formed, we could consider moving our stop‐loss up to just below that low (B). If prices move lower, we will be stopped out with some nice profits. Another note: When we went LONG on 7/26 above the high of 7/25, price closed up near the high of a very large range day bar. At this point it would have been a good idea to move our stop‐loss from below the low of 7/25 to breakeven for a virtual free trade.
Our $FDate 7/25 trade did stop out with good profits. Prices dropped to 8/2/2012. There was a FDate for 8/3, so 8/2 would be the first bar to investigate as a possible Buy setup because 8/2 is within one trading day of 8/3 and the low of 8/2 was higher than the last swing bottom low of 7/25. Bull trend patterns are based on higher swing bottoms, so this is still a good bullish pattern. Before we consider whether to attempt to buy this potential higher DSB price bar, we need to verify that the weekly trend is still pointing bullish.
The WEEKLY chart above has indicated week ending 8/3/2012. Notice that although week ending 8/3/2012 formed a bearish bar (although not a new low), the histogram was still in bullish territory and even formed a higher bar. The Stochastic also continued to support a bullish trend. So we can indeed continue looking for Buy Setups on our DAILY chart.
The DAILY chart above shows price bar 8/6/2012 making a higher‐high than 8/3. We can buy here and put our initial stop‐loss below the 8/2 low. Notice that this higher‐high confirmed the 8/2 low as a higher daily swing bottom (DSB) and that the histogram pattern is moving UP towards the zero line. You want to either see this bullish pattern of the histogram or be at the line that you know it will cross above it if your DSB were to confirm.
Prices moved up slowing the next following days. There presented no opportunity to move our stop‐loss to breakeven during this period. Notice that two price bars formed with lower‐lows following our entry. Because our stop‐loss was still below the 8/2 low, and that the histogram never made a declining pattern, we remained long. When the inside bar formed following the second lower‐low bar shown in the example daily chart above, this caused the histogram to make a smaller bar towards the zero line. This was a tip‐off that momentum is waning, so we can move our stop‐loss up tight. The option chosen here is to use the low of the lower‐low bar just prior to the inside bar (last bar on chart). Unfortunately we have yet to enter into profit territory. If we are stopped out, we will have a loss on this trade.
When prices continued higher to point (A), this was a clear go‐ahead to move our stop‐loss from below the 8/2 low to BREAKEVEN (E) from (B). Prices continued higher into profit territory until (D), when it formed a declining histogram (C) due to the lower‐low price bar (D). Because of this, tightening up our stop‐loss to protect profits was an option to take. The stop‐loss was moved up to below the low of (D) as an aggressive maneuver. For a more conservative play, you could move the stop just below the trend line and use that as your guide up. You would do this as long as the histogram was ABOVE the zero line.
Let’s example both exit strategies, the Aggressive and the Conservative.
With the aggressive stop‐loss adjustment made as a result of the declining histogram, you would have exited out at price (A) with really good profit. With the conservative stop‐loss adjustment, you would have used the trend line as a guide to adjust the stop‐loss up as long as price continued to trade above it. Notice that price respected this line and that the histogram started back above the zero line again. With the exception of two bars that just barely dipped below the line (don’t look for perfection!), price pretty much remained above this line and now is starting to show additional profit. It should be noted that the DSB that formed on the trendline was 8/28 and a FDate. It looks like a good Buy setup being higher than the prior DSB low and respecting the trend line. What I did not like was that the histogram was moving toward the zero line and a higher‐high bar following would not make a higher
histogram bar (this I verified using my the WhatIF tool in Previsions Charting that allows you to create your own next price bar). Had the WhatIF showed a positive histogram bar for a higher‐high, I would have taken the trade. As you can see it would have turned out quite well (so far), but high probability is what I am looking for.
In this trading example, you can see that the conservative strategy provided a greater profit opportunity. This does not say it always will, but giving the market some room to move has often resulted in trades like this when you have already determined the TREND and are only trading in that direction. Notice that the inside bar formed at the current top here resulted in our histogram to start declining. In fact the last histogram bar didn’t form a higher bar but only an equal bar to the bar before it. This is a clear indication of momentum slowing down. Because we really do not have a good lower‐low bar of recent past that we can use to create a new trend line, we do not have a conservative option, only our aggressive option. We move our stop‐loss just below the low of the last bar here.
On 9/25/2012, following getting stopped out with loads of profits 4 days ago, we find this price bar that has the potential to form a lower daily swing top (DST) in comparison to the very top DST price bar. We take notice of this bar because the histogram has moved below the zero line and the negative bars are growing in size (moving down). The question here is whether we can take this as a Sell Setup. There is a FDate for 9/26, so it does meet that requirement. All we need to know now is whether the TREND is still considered bullish or is it bearish to allow the sell.
On the weekly chart, the current peak (top) is week ending 9/21/2012. At this time, the histogram was still bullish and the Stochastic still pointing bullish. The FDate Report did show that week ending 9/21/2012 was a potential weekly swing top. However, this lesson is not about PRE‐CONFIRMATION setups, which is what our possible DST would have been. That’s a completely different lesson. So based on our TREND strategy in this lesson, we do not yet have a green light for sells. The following week, week ending 9/28/2012, we got our lower histogram bar and the Stochastic appeared to support this with a cross‐over down. We can now look for sell setups on the daily chart.
On 9/28/2 2012, an outsside bar formed that was w within a tradi ng day of FDaate 10/2. Thiss presented o out first official potential lo ower DST pricce bar and sell setup. Noti ce that the histogram wass still in its beearish direction as well. The entryy to short wass just below th he low of thiss setup bar annd the initial sstop‐loss wou uld be above its high.
Notice that on 10/2 price ticked below the 9/28 low to fill the SHORT. On 10/3, a higher‐high price bar formed that also produced a mildly shorter histogram bar. This may have suggested a mild weakening of momentum. At any rate, the aggressive stop‐loss adjustment would have been to move our stop‐loss to just above the high of this price bar. The conservative adjustment would have us leave our stop‐loss where it is UNLESS the histogram moves above the zero line. The next day prices moved lower and momentum increased as indicated by the histogram.
As can be seen here, th he aggressive e stop‐loss wo ould have us sstopped out w with a loss. This is unfortunate ular part of trrading. but a regu The conse ervative stop‐‐loss strategy keeps us in tthe trade. Wee have more ccapital at riskk of course, bu ut as long as prrice trades be elow the trend d line and esp pecially as lonng as the histo ogram is belo ow the zero line, the trade has an opporrtunity to pro ofit in our beaarish trend.
Prices never move above the trendline and the histogram never goes anywhere near the zero line. Another interesting note here is that the 10/5 DST show here is within a single trading day of a 10/8 $FDate! Knowing that the next bar enters another FDate (especially a ‘$’ FDate) while still below our stop‐loss level is a nice clue that a possible lower DST could be forming…and it did. The result is much lower prices. Also, now that price has moved below the last DSB low and that also being below our breakeven price level, our stop‐loss can now go to breakeven at the very least for a virtual free trade.
Prices continue lower until the histogram forms a line that is a tad less in size than the prior line, showing signs of decreasing momentum. This is a warning. Here you can start to lock in some profits but leave room for it to pick up momentum again. The next day (the last bar shown here) forms yet another histogram line with less momentum. The aggressive strategy is to immediately move our stop‐loss down above the high of this last bar. The conservative strategy is to keep our stop‐loss where it is, having locked in ‘some’ profit but giving it some room to move. Let’s see how this pans out.
As we can see, both strategies would have resulted in being stopped out of the trade with profit. The aggressive strategy here would have reaped much more profit in this example than the conservative strategy. The lesson that might be learned from this is that the conservative strategy is best when the move is just getting started, but the aggressive may be best when price is clearly extended (overbought/oversold). The last price bar on this chart shown above is 10/17/2012. This happens to be within one trading day of the 10/18 FDate and is a potential lower DST price bar when compared to the DST high of 10/5/2012. So the question is, is this trend still considered bearish so that we can still consider sell setups? The fact that on the daily chart the histogram is “at” the zero line that it is not an issue. We need to look at the weekly chart for the trend, however. On the weekly chart, the histogram is still moving lower towards the zero line and the Stochastic is still very much pointing bearish. We’re good for a sell setup here. The sell‐stop is placed just below the low of the 10/17/2012 low and we’ll now see if we get filled.
The daily chart above has been updated to 10/19/2013 so that you can see not only that our sell have been filled, but also the histogram immediately going negative again (below the zero line). Also, note that we can also move our stop‐loss to breakeven or even a little in profit if we want. This is a virtual free trade.
Notice that prices continues to drop and the momentum (histogram) continues to move south. But then we get a shorter histogram bar indicating some waning of the momentum. The aggressive stop‐loss adjustment is to move our stop‐loss to just above the high of the last bar we see here. The conservative strategy, because we are still below the zero line, is to leave our stop‐loss where it is since this is still a virtual free trade (and perhaps with some profit locked in).
Both strategies result in being stopped out. The aggressive strategy results in greater profit. It should be noted that the bottom made here was exactly on a FDate. In fact, although I did not mention it, FDates pointed to many of the turns against our position. However, we are not looking at FDates to warn of impending danger although you certainly are encouraged to include them in your warning strategy. For this lesson, we are focused on using FDates strictly as part of your setup determination. One big reason why you need to be careful about using FDates as part of your exit strategy is that you could jump out prematurely. For example, that first higher‐high price bar (last bar of chart on previous page) following the DSB is also within a trading day of the FDate. In a bearish trend, this would be a sell setup, although it would not have been filled as we can see from the chart above. But had you exited due to the FDate and then it had actually formed a lower DST one day later, you would have missed out on a continuation of the downward move.
According to the weekly chart, the trend continued to be considered BEARISH until week ending 12/7/2012, when a two‐week rise in prices finally caused the histogram to go above the zero line supported by the Stochastic that had already gone bullish two weeks earlier. I hope that this walk‐through the FDates Trading Strategy has given you a greater boost of confidence in deciding the trend and entering/exiting trades. May you profit handsomely! ☺ Rick J. Ratchford Market Analyst http://www.AmazingAccuracy.com
You should also use the Stochastic to help further confirm this. If the Stochastic is crossing up around the time the MACD is suggesting bullish, that’s further indication of a bull trend. It is of course best when this is happening from oversold territory. If the Stochastic is crossing down around the time the MACD is suggesting bearish, that’s further indication of a bear trend. It is of course best when this is happening from overbought territory.
Optional: You can apply a 3ma and 5ma (simple) as well for the purpose of additional confirmation. Once you have determined the TREND, we now go to the DAILY time‐frame price chart to look for our trade setups.
Determine Your Trade Setups for Entry Locate Setups to Trade with the Determined Trend The same indicators are used for the DAILY time‐frame that is being used for determining the trend on the WEEKLY time‐frame. If the trend is considered bullish, we only want to look for BUY setups. A BUY SETUP is a price bar with the potential to become a DAILY SWING BOTTOM (DSB) and must be within one trading day of a listed FDate on the FDate Report. It is also advised to make sure that the MACD on the DAILY chart is bullish or in the process of turning bullish (subjective). For example, say that we have a price bar that made a new low (compared to previous price bar low) and is within a trading day of a FDate. Take a look at the MACD and see if it either is bullish (Histogram above zero line) or heading ‘up’ towards zero line (subjective aspect). You may also want to see if the Stochastic appears to support the bullish indication of the MACD. If the DAILY indications appear to favor the bullish side, then look to go LONG off the Buy Setup by buying just above the high of the Buy Setup bar during the next trading session (when the next daily bar is being formed.) A SELL SETUP is a price bar with the potential to become a DAILY SWING TOP (DST) and must be within one trading day of a listed FDate on the FDate Report. It is also advised to make sure that the MACD on the DAILY chart is bearish or in the process of turning bearish (subjective). For example, say that we have a price bar that made a new high (compared to the previous price bar high) and is within a trading day of a FDate. Take a look at the MACD and see if it is either bearish (Histogram below zero line) or heading ‘down’ towards the zero line (subjective aspect). You may also want to see if the Stochastic appears to support the bearish indication of the MACD. If the DAILY indications appear to favor the bearish side, then look to go SHORT off the Sell Setup by selling just below the low of the Sell Setup bar during the next trading session (when the next daily bar is being formed.)
Manage Your Trade A Strategy for Risk Management and Exit
The following example is based on a LONG trade. The same logic in the opposite direction applies to SHORT trades. Initial Stop‐loss Initially you will want to have your stop‐loss placed below the low of the Buy Setup bar IF that bar’s range is too large. Knowing the ATR (Average Trading Range) would help you gauge this. If the range is a bit large that it would require too much capital being put at risk, consider using a ratio of that range such as 62% or 50%. Once a price bar low has formed that is at or above the entry price, consider moving your stop‐loss immediately to breakeven for a virtual free trade. Stop‐loss adjusting If the MACD histogram starts showing signs of moving down towards the zero line, you may want to consider moving your stop‐loss up tight to exit your trade (and take profit). Moving the stop‐loss “up tight” refers to moving the stop‐loss to just below each new price bar low. The trade would then be stopped out whenever any price bar makes a new lower‐low price bar. The following pages will show examples of how you would first determine the TREND and then only take setups in the direction of that TREND.
The WEEKLY chart above is of the British Pound. It has just confirmed a weekly swing bottom (WSB) for week ending 6/1/2013 (A). The MACD histogram (B) is starting to move up towards the zero line, but it is still well within the bearish zone. The Stochastic (C) does not yet support the bullish side. So even though a WSB has confirmed, this would not be considered a bullish trend. Not yet anyway.
The weekly chart (A) now shows a new higher (WSB) has confirmed for week ending 7/13/2012. This time, the MACD histogram is heading to cross above the zero line (C) and is getting bullish confirmation from the Stochastic that had already crossed up a few bars earlier (B). Remember, we use the Stochastic to help confirm the MACD and not the other way around. This is why (B) was not used to determine the trend, only to help support (C). At this point, we have a higher WSB, we have a MACD that will cross the zero line if prices rise just a little higher, and we have the Stochastic supporting this bullish conclusion. Therefore, we go to the DAILY chart and look for Buy Setups to follow week ending 7/13/2012.
On the DAILY chart we are only looking for Buy Setups to follow week ending 7/13/2012. The first opportunity came with $FDate 7/24. On Monday 7/23, price was clearly moving down towards the zero line. This was formed during a period of sideways activity, as can be easily determined by the two MACD lines oscillating around the zero line. Here you have to be a tad subjective to realize that any new higher‐high price bar would swing this back up above the zero line. Had this been further below the zero line, I would likely not consider taking the Buy Setup. But since it was ‘at’ the zero line, and a daily swing bottom (DSB) here would be HIGHER than the one that formed back when the MACD was deeper below the zero line (11 bars from right), this potential bullish pattern put me on alert for a possible buy. On 7/24 prices failed to move lower. The histogram made its first red bar (below zero line). Still being so close to the zero line, a higher‐high would move it above the line. Prices did not move higher, so no entry. On 7/25, the last day inside $FDate 7/24 and last Buy opportunity, it does form a DSB when prices rise the next trading session, also causing the histogram to move above the zero line. The point here, although based on some subjectivity and anticipation, is that we want to BUY when the TREND is bullish (which we have already determined from the WEEKLY chart) and when our entry DSB is at least followed by a bullish histogram on the MACD.
On 7/31/2012, a lower‐low price bar formed. However, it was the histogram of the MACD (A) that alerts us that prices may be taking a bearish turn on the DAILY chart (although still bullish on the WEEKLY). When that smaller histogram formed, we could consider moving our stop‐loss up to just below that low (B). If prices move lower, we will be stopped out with some nice profits. Another note: When we went LONG on 7/26 above the high of 7/25, price closed up near the high of a very large range day bar. At this point it would have been a good idea to move our stop‐loss from below the low of 7/25 to breakeven for a virtual free trade.
Our $FDate 7/25 trade did stop out with good profits. Prices dropped to 8/2/2012. There was a FDate for 8/3, so 8/2 would be the first bar to investigate as a possible Buy setup because 8/2 is within one trading day of 8/3 and the low of 8/2 was higher than the last swing bottom low of 7/25. Bull trend patterns are based on higher swing bottoms, so this is still a good bullish pattern. Before we consider whether to attempt to buy this potential higher DSB price bar, we need to verify that the weekly trend is still pointing bullish.
The WEEKLY chart above has indicated week ending 8/3/2012. Notice that although week ending 8/3/2012 formed a bearish bar (although not a new low), the histogram was still in bullish territory and even formed a higher bar. The Stochastic also continued to support a bullish trend. So we can indeed continue looking for Buy Setups on our DAILY chart.
The DAILY chart above shows price bar 8/6/2012 making a higher‐high than 8/3. We can buy here and put our initial stop‐loss below the 8/2 low. Notice that this higher‐high confirmed the 8/2 low as a higher daily swing bottom (DSB) and that the histogram pattern is moving UP towards the zero line. You want to either see this bullish pattern of the histogram or be at the line that you know it will cross above it if your DSB were to confirm.
Prices moved up slowing the next following days. There presented no opportunity to move our stop‐loss to breakeven during this period. Notice that two price bars formed with lower‐lows following our entry. Because our stop‐loss was still below the 8/2 low, and that the histogram never made a declining pattern, we remained long. When the inside bar formed following the second lower‐low bar shown in the example daily chart above, this caused the histogram to make a smaller bar towards the zero line. This was a tip‐off that momentum is waning, so we can move our stop‐loss up tight. The option chosen here is to use the low of the lower‐low bar just prior to the inside bar (last bar on chart). Unfortunately we have yet to enter into profit territory. If we are stopped out, we will have a loss on this trade.
When prices continued higher to point (A), this was a clear go‐ahead to move our stop‐loss from below the 8/2 low to BREAKEVEN (E) from (B). Prices continued higher into profit territory until (D), when it formed a declining histogram (C) due to the lower‐low price bar (D). Because of this, tightening up our stop‐loss to protect profits was an option to take. The stop‐loss was moved up to below the low of (D) as an aggressive maneuver. For a more conservative play, you could move the stop just below the trend line and use that as your guide up. You would do this as long as the histogram was ABOVE the zero line.
Let’s example both exit strategies, the Aggressive and the Conservative.
With the aggressive stop‐loss adjustment made as a result of the declining histogram, you would have exited out at price (A) with really good profit. With the conservative stop‐loss adjustment, you would have used the trend line as a guide to adjust the stop‐loss up as long as price continued to trade above it. Notice that price respected this line and that the histogram started back above the zero line again. With the exception of two bars that just barely dipped below the line (don’t look for perfection!), price pretty much remained above this line and now is starting to show additional profit. It should be noted that the DSB that formed on the trendline was 8/28 and a FDate. It looks like a good Buy setup being higher than the prior DSB low and respecting the trend line. What I did not like was that the histogram was moving toward the zero line and a higher‐high bar following would not make a higher
histogram bar (this I verified using my the WhatIF tool in Previsions Charting that allows you to create your own next price bar). Had the WhatIF showed a positive histogram bar for a higher‐high, I would have taken the trade. As you can see it would have turned out quite well (so far), but high probability is what I am looking for.
In this trading example, you can see that the conservative strategy provided a greater profit opportunity. This does not say it always will, but giving the market some room to move has often resulted in trades like this when you have already determined the TREND and are only trading in that direction. Notice that the inside bar formed at the current top here resulted in our histogram to start declining. In fact the last histogram bar didn’t form a higher bar but only an equal bar to the bar before it. This is a clear indication of momentum slowing down. Because we really do not have a good lower‐low bar of recent past that we can use to create a new trend line, we do not have a conservative option, only our aggressive option. We move our stop‐loss just below the low of the last bar here.
On 9/25/2012, following getting stopped out with loads of profits 4 days ago, we find this price bar that has the potential to form a lower daily swing top (DST) in comparison to the very top DST price bar. We take notice of this bar because the histogram has moved below the zero line and the negative bars are growing in size (moving down). The question here is whether we can take this as a Sell Setup. There is a FDate for 9/26, so it does meet that requirement. All we need to know now is whether the TREND is still considered bullish or is it bearish to allow the sell.
On the weekly chart, the current peak (top) is week ending 9/21/2012. At this time, the histogram was still bullish and the Stochastic still pointing bullish. The FDate Report did show that week ending 9/21/2012 was a potential weekly swing top. However, this lesson is not about PRE‐CONFIRMATION setups, which is what our possible DST would have been. That’s a completely different lesson. So based on our TREND strategy in this lesson, we do not yet have a green light for sells. The following week, week ending 9/28/2012, we got our lower histogram bar and the Stochastic appeared to support this with a cross‐over down. We can now look for sell setups on the daily chart.
On 9/28/2 2012, an outsside bar formed that was w within a tradi ng day of FDaate 10/2. Thiss presented o out first official potential lo ower DST pricce bar and sell setup. Noti ce that the histogram wass still in its beearish direction as well. The entryy to short wass just below th he low of thiss setup bar annd the initial sstop‐loss wou uld be above its high.
Notice that on 10/2 price ticked below the 9/28 low to fill the SHORT. On 10/3, a higher‐high price bar formed that also produced a mildly shorter histogram bar. This may have suggested a mild weakening of momentum. At any rate, the aggressive stop‐loss adjustment would have been to move our stop‐loss to just above the high of this price bar. The conservative adjustment would have us leave our stop‐loss where it is UNLESS the histogram moves above the zero line. The next day prices moved lower and momentum increased as indicated by the histogram.
As can be seen here, th he aggressive e stop‐loss wo ould have us sstopped out w with a loss. This is unfortunate ular part of trrading. but a regu The conse ervative stop‐‐loss strategy keeps us in tthe trade. Wee have more ccapital at riskk of course, bu ut as long as prrice trades be elow the trend d line and esp pecially as lonng as the histo ogram is belo ow the zero line, the trade has an opporrtunity to pro ofit in our beaarish trend.
Prices never move above the trendline and the histogram never goes anywhere near the zero line. Another interesting note here is that the 10/5 DST show here is within a single trading day of a 10/8 $FDate! Knowing that the next bar enters another FDate (especially a ‘$’ FDate) while still below our stop‐loss level is a nice clue that a possible lower DST could be forming…and it did. The result is much lower prices. Also, now that price has moved below the last DSB low and that also being below our breakeven price level, our stop‐loss can now go to breakeven at the very least for a virtual free trade.
Prices continue lower until the histogram forms a line that is a tad less in size than the prior line, showing signs of decreasing momentum. This is a warning. Here you can start to lock in some profits but leave room for it to pick up momentum again. The next day (the last bar shown here) forms yet another histogram line with less momentum. The aggressive strategy is to immediately move our stop‐loss down above the high of this last bar. The conservative strategy is to keep our stop‐loss where it is, having locked in ‘some’ profit but giving it some room to move. Let’s see how this pans out.
As we can see, both strategies would have resulted in being stopped out of the trade with profit. The aggressive strategy here would have reaped much more profit in this example than the conservative strategy. The lesson that might be learned from this is that the conservative strategy is best when the move is just getting started, but the aggressive may be best when price is clearly extended (overbought/oversold). The last price bar on this chart shown above is 10/17/2012. This happens to be within one trading day of the 10/18 FDate and is a potential lower DST price bar when compared to the DST high of 10/5/2012. So the question is, is this trend still considered bearish so that we can still consider sell setups? The fact that on the daily chart the histogram is “at” the zero line that it is not an issue. We need to look at the weekly chart for the trend, however. On the weekly chart, the histogram is still moving lower towards the zero line and the Stochastic is still very much pointing bearish. We’re good for a sell setup here. The sell‐stop is placed just below the low of the 10/17/2012 low and we’ll now see if we get filled.
The daily chart above has been updated to 10/19/2013 so that you can see not only that our sell have been filled, but also the histogram immediately going negative again (below the zero line). Also, note that we can also move our stop‐loss to breakeven or even a little in profit if we want. This is a virtual free trade.
Notice that prices continues to drop and the momentum (histogram) continues to move south. But then we get a shorter histogram bar indicating some waning of the momentum. The aggressive stop‐loss adjustment is to move our stop‐loss to just above the high of the last bar we see here. The conservative strategy, because we are still below the zero line, is to leave our stop‐loss where it is since this is still a virtual free trade (and perhaps with some profit locked in).
Both strategies result in being stopped out. The aggressive strategy results in greater profit. It should be noted that the bottom made here was exactly on a FDate. In fact, although I did not mention it, FDates pointed to many of the turns against our position. However, we are not looking at FDates to warn of impending danger although you certainly are encouraged to include them in your warning strategy. For this lesson, we are focused on using FDates strictly as part of your setup determination. One big reason why you need to be careful about using FDates as part of your exit strategy is that you could jump out prematurely. For example, that first higher‐high price bar (last bar of chart on previous page) following the DSB is also within a trading day of the FDate. In a bearish trend, this would be a sell setup, although it would not have been filled as we can see from the chart above. But had you exited due to the FDate and then it had actually formed a lower DST one day later, you would have missed out on a continuation of the downward move.
According to the weekly chart, the trend continued to be considered BEARISH until week ending 12/7/2012, when a two‐week rise in prices finally caused the histogram to go above the zero line supported by the Stochastic that had already gone bullish two weeks earlier. I hope that this walk‐through the FDates Trading Strategy has given you a greater boost of confidence in deciding the trend and entering/exiting trades. May you profit handsomely! ☺ Rick J. Ratchford Market Analyst http://www.AmazingAccuracy.com
