It's Just A Base Output
A Simple-Range Trading Strategy
by Xavier Maria Raj
Creating a trading system is always a good idea, and keeping it simple is even better. Here's a look at one strategy that could make all the difference.
IT is always tempting to react to price movements, but doing so to each one may not be a good idea. If you react to each and every price move, your transaction costs could be comparatively more than your profits!
To avoid this situation, you could use filters or identify specific patterns and build a trading strategy. With this in mind, I have presented a simple strategy based on a specific chart pattern.
THE LOGIC BEHIND THE PATTERN
The chart pattern involves identifying the bar with an expanded range
relative to the previous bar's range. This pattern is confirmed when the
current bar's range (High - low) is greater than the previous bar's range.
Today's Range (High - Low)> Previous Day's Range
Based on this pattern, let's formulate a trading strategy.
- Signals to be generated for the next day are based on the direction of the expanded day. So on the day of the upward direction in prices - when the close is greater than the open - take only long signals for the next trading day.
- If prices move in a downward direction, take only short signals for the next trading day.
The last bar on Figure 1 shows an expanded range day with an upward direction. Figure 2 shows an expanded range day with a downward direction.
FIGURE 1: EXPANDED RANGE DAY WITH UPWARD DIRECTION
Based on this trading rule, let's generate signals using the following condition:
- Generate a buy signal on the trading day following the upward direction expanded range day with a stop-loss buy order above the previous high plus one tick.
- Generate a sell signal on the day following a downward direction expanded range day with a stop-loss sell order below the previous low minus one tick.
...Continued in the December issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the December 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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