Already a member? Login here.

Trading tutorial:

• Signal:

• Green arrow: a potential buy signal or long trade.
• Red arrow: a potential sell signal or short trade.

Every new potential long/short trade to be must be TRIGGER (see Trigger below) to be considered a valid signal. 

Good signal disappear? as noted above, every potential signal must be trigger (see Trigger) to be considered valid.  As a part of the special design and to avoid confusion and also for the sake of a clear looking chart, if either the signal failed to trigger within 5 bars and/or price drops below the critical low (see Critical points below) within 5 bars, the signal will be automatically considered invalid and hence eliminated or disappear from the system (or chart).  

• Critical points: these are important short-term support/resistance.

• Critical high: signal day's high. 
• Critical low: signal day's low.

• Trigger:

• Buy trigger: a move ABOVE the signal day's high.
• Sell trigger: a move BELOW the signal day's low.

As noted above, every new potential long/short trade to be must be "TRIGGER" to be considered a valid signal.   However, if a new potential long trade initially gaps higher (ABOVE the trigger price) by more than 5%, it is NOT considered for purchase.  The same rule is applied for short-sell. That is, if a new potential short candidate initially gaps lower (BELOW the trigger price) by more than 5%, it is NOT considered for short-sell.

In addition, as we've mentioned earlier, the potential signal will be automatically considered invalid, hence remove, or disappeared (see Good signal disappear), if it did NOT trigger within 5 bars and/or price drops below the critical low (see Critical points) within 5 bars.

Signal late one day? Although it is a leading indicator, since we're working with EOD (End of day) data, we have no interest in day trading at the moment, the signal is, sometimes, lagged by 1 bar.  For example, on the daily chart, Thursday's buy signal will not be seen until the system is updated on Friday afternoon.  This, we believe, is not a major concern since, as noted above, we're treated every signal as potential signal until it triggered (see Trigger) and/or confirmed (see Confirmation). 

In short, we only take the trades when the trigger price listed in the Trend Forecaster Bulletin has been met. We strongly believe that these stocks are not worth owning until they trigger the entry price. A signal, which is not triggered, is not considered on the move, and therefore we have no interest in owning stocks which are not moving!  In addition, we want to see a confirmation that a stock is on the move with a penetration and also a close above the trigger line as shown in The Trend Forecaster Bulletin before entering positions.

• Confirmation:

The potential buy or long signal is confirmed if and only if price moved and closed above the trigger price.  The same applies for short signal.

• Target:

A short-term target is provided for each signal.  However, since we're working with a "stop-and-reverse" system, it's better to stay with the trade until the signal reverse.  For example, if we're in a buy signal, we'd remain long until we've got a new sell signal.  Target levels are routinely managed and raised, as the underlying instrument appreciate in price.

• Stop-loss point:

Capital preservation is the first step towards prolonged profitability. An exit strategy (or stop-loss point) is assigned to each and every trade to reduce risk and hence preserve capital. 

With the use of stop loss orders, there is absolutely no reason why any subscriber has to "watch" the market during the trading day. That is precisely why we're here! The process is fully mechanical. Note: Always use the figures as guidelines, and realize gains and losses according to your personal risk parameters. Furthermore, we recommend researching the type of stop order that is appropriate for your specific style of trading.

While taking losses is inevitable in investing, the important thing is to avoid BIG losses. Stop loss levels are routinely managed and raised, as the underlying instrument appreciate in price.

Sound good? Click here to take a one-week trial.

Strategy:

The Trend Forecaster takes the emotion - the number one reason for investor failure - out of investing!   However, how do you approach a trade is another big factor that influences your P/L.  That being said, AGGRESSIVE traders would trade every single signal, while a CONSERVATIVE would wait for a confirmation and better still, he'll only trade on the LONG side if the underlying instrument is OVERSOLD and SELL-SHORT only if the underlying instrument is OVERBOUGHT.  Sure, he'll miss a lot of opportunities though, at a meantime, he can avoid overtrading, which a huge factor for investor failure.  In summary:

Aggressive trader:

• Trade every signal so that he won't miss single opportunity.

Conservative traders:

• Long only if the underlying instrument is OVERSOLD and SELL-SHORT only if the underlying instrument is OVERBOUGHT. 
• To make life easier, Trend Forecaster overbought/oversold (OB.OS) indicator is included in every single chart (see below).

Trend Forecaster overbought/oversold (OB.OS) indicator:

Chart 1.1 - Trend Forecaster overbought/oversold (OB.OS) indicator - strength illustrator.

As you can see, the Trend Forecaster OB.OS indicator is doing a very good job filter out bad signals.  Another good thing about this indicator is that it shows us "traps and pitfalls" ahead of time.  In late April & early May, the indicator keep us from getting burn on the short side  - see the  group of yellow arrows on the top panel of the above chart - it's indicating a strong upside momentum.  And what we can do in this case is, jump onto the bullish bandwagon as soon as the indicator to dip into the oversold territory -see how the SPY pushed to the higher group in mid-May immediately followed the brief swing into the oversold territory (point A on the chart).

The  Trend Forecaster OB.OS indicator is doing a very good job in keeping us away catching the falling knife.

Chart 1.2 - Trend Forecaster overbought/oversold (OB.OS) indicator - weakness illustrator.

As you can see from the above chart, the SPY keeps on falling to the lower ground every time the "pink" arrow appears on the Trend Forecaster OB.OS indicator - point B & C on the chart.

In short, a Conservative trader would:

• Long only if the underlying instrument is OVERSOLD and SELL-SHORT only if the underlying instrument is OVERBOUGHT.
• Avoid going long if there's a pink arrow on the Trend Forecaster OB.OS indicator.  On the same token, he'd not initiate a short sell if there's a yellow arrow on the Trend Forecaster OB.OS indicator.

You see, the whole process is fully mechanical and so easy to apply - just follow the color!

Bottom line, while historical stats favors the "Conservative trading styles", always use the figures as guidelines.  Always, trade/invest according to your personal risk parameters and life style. 

Disclaimer: THIS CONTENT IS FOR EDUCATIONAL PURPOSES AND IS NOT INTENDED AS ADVICE.

Capital Essence staff and contributors may trade or hold securities that are discussed in an article. Staff and contributors will indicate whether they have a position in any security discussed, but will not indicate size or direction. The information on this site is not intended as individualized investment advice and all investment decisions by a reader must in all cases be made by the reader either individually or together with his/her investment professional. The views expressed in articles appearing on this site are solely those of the staff and contributors and should not be attributed to any other person or entity except where expressly stated. Capital Essence staff and contributors will not respond to requests for investment advice.