This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
This is a follow up on Tapeworm’s PMA post from yesterday. This is a short term trading technique that combines PMA’s with a pattern that LBR calls the “anti” in “Street Smarts”. The lower indicator is a 7 period %K smoothed with 4, and a 10 period %D. You will find this pattern occurs quite often, but it does have some subtleties to it.
Mainly, do not countertrend trade this pattern, always go in the direction of the current trend, using the slope of the %D for the direction of the trade.
In Tradestation I set alerts when this pattern occurs. The list posted on this site called “Top Stocks to Daytrade” will normally work well on this setup.
The PMA’s help to maintain the trade. Once you are in, use the PMA’s as an exit, though the %K can alert you to an early need to exit.
If you look at the previous day, this would not have worked as well, though there were two 25 cents moves even though there was chop, as long as you used the %D slope and the PMA’s.
The best one I caught today was on UTX:
This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
May 4th, 2007 at 4:30 pm
Welcome to MTM, TraderD! This is a great first post. I’m a QuoteTracker fan myself. :)
Here comes my armada of questions:
I’m a bit confused on the setup. What are you looking for specifically before you enter? Is it the %K / %D crossover? Is it a close below one of the PMA’s?
Also, how do you exit based on the PMA’s? A close above one of them? When they cross over?
I assume it works both long and short. It looks like it this was a countertrend trade, since the dominant trend in the day was up! Or do you mean that you trade in the direction of the %D slope, regardless of price trend?
May 4th, 2007 at 4:56 pm
I’ll try to be more specific. Before the PMA post, I would used a single MA as the close below or above. Now I would use the 5 period SMA close above or below, plus the %K to move through the %D with the same slope.
The 3 PMA’s give you a better visual indication of the trend change that is happening, confirming this kind of entry.
The Key point is the the %K and %D slope must be the same when you enter.
The entry on the chart was on the 4th bar from the peak. My entry was 68.50. You have to make sure its is if fact rolling over (PMA’s), and the %D is rolling over. Swap for long.
This is also a good entry for when the trend is well defined. The %K would go below, then above, and you would enter on a pause before the next leg. Posting a chart like this probably would have been more straight forward.
For exit, the PMA’s help as they show the trade is going in your direction or not. In the example, the 8 period average is never being broken. Once the second average is being taken out, I would exit, or a move of the %K opposite your position, with the PMA’s confirming the trade is moving against you.
This is a early warning pattern, much like an NR7, It will get you into the short moves you get day trading, but you have to wait until it develops, usually 2 or 3 bars. I hope I answered the questions.
This is not a setup you “jump” into.
- TraderD
May 4th, 2007 at 5:44 pm
D: welcome to MtM…interesting idea
May 4th, 2007 at 7:26 pm
So for the short, you want to see price close below your 5 period P(S)MA, along with a %K / %D crossunder, with both sloping down? So on your chart, there was no setup until about 7:30, since that’s where the last piece (the %D slope) came about?
I’m trying to set up the indicators like you have them on your chart, and I’m having trouble. How do you do the smoothed stochastic?
May 7th, 2007 at 6:57 am
In QuoteTracker, there is no smoothing parameter, though it looks like there is some smoothing (probably 3). In Quotetracker set Slow Stoch to 7,10, and in Tradestation use SlowKClassic(4, 7) and SlowDClassic(1, 10). The difference in the indicators is small (smoothing). You are looking for a major cross, so the smoothing will not matter in that context.
I use this for a reversal, or to enter a trend on a pullback. My first trades in the morning will be 45 to 60 minutes after open.
As a trading style, I would not chase UTX, so I would be looking for a reversal, or a pullback of the trend as an entry (I have to wait to see which). The PMA rollover pointed to the reversal.
A high probability entry is Low - .05 or High + .05 so the next bar is moving into your position.
- TraderD