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Trading Strategies

CCI Correction - A strategy that uses weekly CCI to dictate a trading bias and daily CCI to
generate trading signals.
CVR3 VIX Market Timing - Developed by Larry Connors and Dave Landry, this is a strategy
that uses overextended readings in the CB! "olatility Index #$"I%& to generate buy and sell
signals 'or the ()* +,,.
Gap Trading Strategies - "arious strategies 'or trading based on opening price gaps.
Ichimoku Cloud - A strategy that uses the Ichi-oku Cloud to set the trading bias, identi'y
corrections and signal short-ter- turning points.
Last Stochastic Technique - A si-ple trading syste- based on a special version o' the
(tochastic scillator.
Moving Momentum - A strategy that uses a three step process to identi'y the trend, wait 'or
corrections within that trend and then identi'y reversals that signal a end to the correction.
arro! Range "a# R$ - Developed by .ony Crabel, the narrow range day strategy looks 'or
range contractions to predict range expansions. Advance scan code included that tweaks this
strategy by adding Aroon and CCI /uali'iers.
%ercent &'ove ()*da# SM& - A strategy that uses the breadth indicator, percent above the
+,-day -oving average, to de'ine the tone 'or the broad -arket and identi'y corrections.
%re*+olida# ,--ect - 0ow the -arket has per'or-ed prior to -a1or 2( holidays and how that
can a''ect trading decisions.
RSI. - An overview o' Larry Connors3 -ean reversion strategy using 4-period 5(I.
Sector Rotation /ased on %er-ormance - Based on research 'ro- 6ebane 7aber, this
sector rotation strategy buys the top per'or-ing sectors and re-balances once per -onth.
Si0 Month C#cle M&C" - Developed by (y 0arding, this strategy co-bines the six -onth
bull-bear cycle with 6ACD signals 'or ti-ing.
Stochastic %op and "rop - Developed by 8ake Berstein and -odi'ied by David (teckler, this
strategy uses the Average Directional Index #AD%& and (tochastic scillator to identi'y price
pops and breakouts.
Slope %er-ormance Trend - 2sing the slope indicator to /uanti'y the long ter- trend and
-easure relative per'or-ance 'or use in a trading strategy with the nine sector (*D5s.
S!ing Charting - 9hat (wing .rading is and how it can be used to pro'its under certain
-arket conditions.
Trend 1uanti-ication and &sset &llocation - .his article shows chartists how to de'ine long-
ter- trend reversals as a process by s-oothing the price data with 'our di''erent *ercentage
*rice scillators. Chartists can also use this techni/ue to /uanti'y trend strength and deter-ine
asset allocation.
CCI Correction
Introduction
Developed by Donald La-bert, the Co--odity Channel Index #CCI& is a -o-entu- oscillator that
can be used to identi'y a new trend or warn o' extre-e conditions. .his strategy uses weekly CCI to
dictate the trading bias when it surges above :;,, or plunges below -;,,, which are key levels noted
by La-bert. nce the trading bias is set, daily CCI is used to generate trading signals when it
reaches its extre-es.
Strateg#
La-bert3s trading guidelines 'or the CCI 'ocused on -ove-ents above :;,, and below <;,, to
generate buy and sell signals. Because =, to >, percent o' the CCI values are between :;,, and
<;,,, a buy or sell signal will be in 'orce only 4, to ?, percent o' the ti-e. 9hen CCI -oves above
:;,,, a security is considered to be entering into a strong uptrend and a buy signal is given. .he
position should be closed when CCI -oves back below :;,,. 9hen CCI -oves below <;,,, the
security is considered to be in a strong downtrend and a sell signal is given. .he position should be
closed when CCI -oves back above <;,,.
By re/uiring an exit on a -ove back below :;,, or a -ove back above -;,,, La-berts original
trading strategy produced lots o' relatively short signals. .his CCI Correction strategy o''ers a tweak
to La-berts original, but -aintains his general trading guidelines, which rely on a surge above :;,,
or plunge below -;,,. .here are three steps.
23 "e-ine the 'igger trend and trading 'ias3 A CCI surge above :;,, on the weekly chart indicates
that an uptrend is e-erging and a bullish trading bias is adopted. .his bullish bias re-ains until there
is a surge below -;,,. A CCI surge below -;,, on the weekly chart indicates that a downtrend is
e-erging and a bearish trading bias is adopted. .his bearish bias re-ains until proven otherwise with
a surge above :;,,.
.3 4ait -or a smaller counter trend movement3 2se the daily chart to look 'or overbought pullbacks
when the weekly chart dictates a bullish trading bias. A CCI plunge below -;,, re'lects a pullback
within a bigger uptrend. Look 'or oversold bounces when the trading bias is bearish. A CCI surge
above :;,, on the daily chart indicates bounce within a bigger downtrend.
33 Look a reversal o- this counter trend movement3 9hen the trading bias is bullish and daily CCI
-oves below -;,,, a surge back into positive territory signals a reversal o' the pullback. .his
indicates that the bigger uptrend is also resu-ing. 9hen the trading bias is bearish and daily CCI
-oves above :;,,, a plunge into negative territory signals a reversal o' the bounce. .his indicates
that the bigger downtrend is resu-ing.
.he general idea is to trade in the direction o' the bigger trend. Chartist -ust shorter the ti-e 'ra-e to
look 'or signals based on the shorter trend. In theory, any co-bination o' ti-e 'ra-es can be used.
7or exa-ple, daily charts could be used to identi'y the bigger trend and dictate the trading bias. .hirty
-inute charts could be then used to 'ollow the shorter trend and generate trading signals. Initiating
positions a'ter a correction i-proves the risk-reward ratio.
Trading ,0amples
.he 'irst chart in this article shows the ()* +,, !.7 #(*@& with 4A-week CCI. I chose 4A weeks
because it represents six -onths, which is a pretty good yardstick 'or a -ediu- or long ter- trend.
.he yellow areas show when 4A-week CCI was in bull -ode, which -eans the -ost recent signal
was a surge above :;,,. .he white areas show when 4A-week CCI was in bear -ode, which -eans
the -ost recent signal was a plunge below -;,,. .he next three charts show daily bars and 4A-day
CCI to generate signals 'or 4,,>, 4,,B and 4,;,. Let3s start with 4,,>.
9eekly CCI -oved to bear -ode in Cove-ber 4,,= #blue line&. .his -eans we approach the daily
chart with a bearish bias and only look 'or bearish signals. Bullish signals are ignored because the
bigger trend is down. Deep in -ind that a bearish signal is a surge above :;,, and then a -ove
below the Eero line. .he red dotted lines show 'ive signals, one in late 4,,= and 'our in 4,,>. .he sell
signal in late 7ebruary did not work out that well, but the others aligned with (*@ peaks /uite well.
.he chart above shows weekly CCI changing over 'ro- bear -ode to bull -ode at the beginning o'
6ay 4,,B. *rior to this changeover, daily CCI produced another good sell signal in early 8anuary.
A'ter the 6ay changeover, CCI produced a buy signal in -id 8uly as CCI dipped below -;,, and then
surged above the Eero line. .he proved /uite a ti-ely signal. .here were two near-signals as CCI
dipped to -B= in late 8une and early Cove-ber.
4,;, started with a bullish bias, switched to a bearish bias in late 8une and then back to a bullish bias
in early ctober. .his -eans there were three di''erent trading periodsF bullish signals were
considered 'ro- 8anuary to -id 8une, bearish signals were considered 'ro- -id 8une to early
ctober and bullish signals were considered 'ro- early ctober until year end. It was a violent year.
.he 'irst bullish signal in -id 7ebruary 'oreshadowed a nice advance. .he bullish signal in -id 8une
would have been a loser a'ter the sharp decline below ;,,. .here was so-e 'ollow through a'ter the
bearish signal in August, but a good stop-loss was needed to either lock in pro'its or prevent a loss.
&d5usting
2sing two ti-e 'ra-es, such as weekly charts 'or trading bias and daily charts 'or signals can be
cu-berso-e. Chartists can e-ulate weekly CCI on the daily chart by using a longer look back period.
.he exa-ple below shows a daily chart 'or the ()* +,, !.7 'ro- 7ebruary 4,;, to 7ebruary 4,;4,
two years. Instead o' a 4,-week CCI on a weekly chart, this chart shows a ;,,-day CCI to dictate the
trading bias. A bullish bias is in 'orce a'ter a surge above :;,, #yellow areas& and a bearish bias is in
'orce a'ter a plunge below -;,, #white areas&.
4,-day CCI is used to generate trading signals in har-ony with the trading bias dictated by ;,,-day
CCI. .here were bearish signals in late 8une and early August #red dotted line&. A bullish bias took
hold when ;,,-day CCI surged above ;,, in -id (epte-ber 4,;,. A strong uptrend subse/uently
took hold and 4,-day CCI did not dip below -;,, until 6arch 4,;;, six -onths later. .here was a
near-signal in Cove-ber as CCI reached -BG be'ore turning back up. .his perhaps a ti-e when so-e
personal 1udg-ent is re/uired.
Conclusions
.he CCI Correction strategy o''ers traders the best o' both worldsF trading with the trend and initiating
positions a'ter a corrective phase. As the exa-ples show, 'inding the per'ect setting would be pretty
-uch i-possible. 6oreover, chartists should avoid curve-'itting with designing a trading strategy. Also
note that the CCI Correction strategy is not -eant as a stand-alone syste-. Chartists need to
consider how to i-ple-ent stop-losses, when to take pro'its and how to tailor the strategy to their
own goals and trading style. 6ore aggressive traders could pre'er a shorter look back period to
generate /uicker signals, while less aggressive traders -ight pre'er a CCI surge above :;,, to
generate signals on the short ti-e 'ra-e. Deep in -ind that this article is designed as a starting point
'or trading syste- develop-ent. 2se these ideas to aug-ent your trading style, risk-reward
pre'erences and personal 1udg-ents.Click here 'or a chart o' the ()* +,, with the CCI indicators.
Ichimoku Cloud Trading Strateg#
Introduction
!ven though the na-e i-plies one cloud, the Ichi-oku Cloud is really a set o' indicators designed as
a stand alone trading syste-. .hese indicators can be used to identi'y support and resistance,
deter-ine trend direction and generate trading signals. Ichi-oku Dinko 0yo, which is the 'ull na-e,
translates into Hone look e/uilibriu- chartH. 9ith one look, chartists can identi'y the trend and look 'or
potential signals within that trend.
"e-ining the Indicators
.here are 'ive lines on the Ichi-oku Cloud chart at any given ti-e so let3s review the indicators be'ore
looking at strategy in depth (ee our Chart(chool 'or a detailed article on the Ichi-oku Cloud. .he
8apanese na-e is shown 'irst and the !nglish e/uivalent is then shown in parenthesis. .his article
will use the !nglish e/uivalents.
Tenkan*sen 6Conversion Line78#B-period high : B-period low&I4&& JIbK n a daily chart, this line is
the -id point o' the B-day high-low range, which is al-ost two weeks.
9i5un*sen 6/ase Line78#4A-period high : 4A-period low&I4&& JIbK n a daily chart, this line is the -id
point o' the 4A-day high-low range, which is al-ost one -onth.
Senkou Span & 6Leading Span &78 #Conversion Line : Base Line&I4&& JIbK .his is the -idpoint
between the Conversion Line and the Base Line. .he Leading (pan A 'or-s one o' the two Cloud
boundaries. It is re'erred to as HLeadingH because it is plotted 4A periods in the 'uture and 'or-s the
'aster Cloud boundary.
Senkou Span / 6Leading Span /78 #+4-period high : +4-period low&I4&& JIbK n the daily chart, this
line is the -id point o' the +4-day high-low range, which is a little less than ? -onths. .he de'ault
calculation setting is +4 periods, but can be ad1usted. .his value is plotted 4A periods in the 'uture
and 'or-s the slower Cloud boundary.
Strateg#
Chartists use the actual cloud to identi'y the overall trend and establish a trading bias. nce a trading
bias is established, chartist will wait 'or a correction when prices cross the Base Line #red line&. An
actual signal triggers when prices cross the Conversion Line #blue line& to signal an end to the
correction.
.his trading strategy will set three criteria 'or a bullish signal. 7irst, the trading bias is bullish when
prices are above the lowest line o' the cloud. In other words, prices are either above the cloud or
re-ain above cloud support. (econd, price -oves below the Base Line to signal a pullback and
i-prove the risk-reward ratio 'or new long positions. .hird, a bullish signal triggers when prices
reverse and -ove above the Conversion Line.
As you can see, the three criteria will not be -et in 1ust one day. .here is a pecking order to the
process. 7irst, the trend is bullish as de'ined by the cloud. (econd, the stock pulls back with a -ove
below the Base Line. .hird, the stock turns back up with a -ove above the Conversion Line.
/u# Signal Recap8
*rice is above the lowest line o' the cloud #bullish bias&
*rice -oves below the Base Line #pullback&
*rice 6oves above the Conversion Line #up turn&
.here are also three criteria 'or a bearish signal. 7irst, the trading bias is bearish when prices are
below the highest line o' the cloud. .his -eans price is either below the cloud or has yet to break
above cloud resistance. (econd, price -oves above the Base Line to signal a bounce within a bigger
downtrend. .hird, a bearish signal triggers when prices reverse and -ove below the Conversion Line.
Sell Signal Recap8
*rice is below the highest line o' the cloud #bearish bias&
*rice -oves above the Base Line #bounce&
*rice -oves below the Conversion Line #down turn&
Trading ,0ample
.he exa-ples below show (andisk #(CDD& with 'ive di''erent trading biases over a twelve -onth
period. !ven though the stock declined 'ro- 8anuary 4,;; until August 4,;;, the trading bias shi'ted
three ti-es 'ro- 8anuary to 8une #blue box&. (ignals ; and 4 resulted in whipsaws because the
(CDD did not hold the cloud. .he trading bias can change o'ten 'or volatile stocks because the cloud
is based on lagging indicators.
A relatively strong trend is re/uired to sustain a trading bias. *rices re-ain above the lower cloud line
during a strong uptrend and below the upper cloud line during a strong downtrend. .he trading bias
shi'ted to bearish in early 8une and re-ained bearish as a strong decline un'olded. .here were two
sell signals during this period. (ignal ? resulted in a whipsaw, but (ignal G preceded a sharp decline.
A'ter a sharp reversal in August, the trading bias turned bullish with the upside breakout in (epte-ber
and re-ained bullish as the advance extended. .he 'irst pullback produced a buy signal #+& with a dip
below the Base Line #red& and subse/uent -ove above the Conversion Line #blue&. .here were two
-ore buy signals during the consolidation period #A ) =&.
&d5usting
Chartists can use volu-e to con'ir- signals, especially buy signals. A buy signal with expanding
volu-e would carry -ore weight than a buy signal on low volu-e. !xpanding volu-e shows strong
interest and this increases the chances o' a sustainable advance.
Chartists also need to consider a strategy 'or stops, which can be based on indicators or key levels
on they actual price chart. .he low 1ust be'ore a buy signal would be logical 'or an initial stop-loss
a'ter a buy signal. .he high 1ust be'ore a sell signal would be logical 'or an initial stop-loss a'ter a sell
signal.
nce the trade is underway and prices -ove in a 'avorable direction, chartists should consider a
trailing stop to lock in pro'its. .he exa-ple above shows Covellus #C"L(& with the *arabolic (A5 'or
trailing stops. .he indicator window shows the Average .rue 5ange #A.5&, which can be used to set
a volatility type stop. (o-e traders set stops two A.5s above current prices 'or long positions and
two A.5s above current prices on short positions.
Conclusions
.his Ichi-oku Cloud syste- provides chartists with a -eans to identi'y a trading bias, identi'y
corrections and ti-e turning points. .he cloud sets the overall tone and provides a longer perspective
on the price trend. .he Conversion Line #blue& is a relatively short-ter- indicator designed to catch
turns early. Catching the turn early will i-prove the risk reward ratio 'or trades. Deep in -ind that this
article is designed as a starting point 'or trading syste- develop-ent. 2se these ideas to aug-ent
your trading style, risk-reward pre'erences and personal 1udg-ents. Click here 'or a chart o' IB6 with
the Ichi-oku trading strategy.
Gap Trading Strategies
Lap trading is a si-ple and disciplined approach to buying and shorting stocks. !ssentially one 'inds
stocks that have a price gap 'ro- the previous close and watches the 'irst hour o' trading to identi'y
the trading range. 5ising above that range signals a buy, and 'alling below it signals a short.
4hat is a Gap:
A gap is a change in price levels between the close and open o' two consecutive days. Although -ost
technical analysis -anuals de'ine the 'our types o' gap patterns as Co--on, Breakaway,
Continuation and !xhaustion, those labels are applied a'ter the chart pattern is established. .hat is,
the di''erence between any one type o' gap 'ro- another is only distinguishable a'ter the stock
continues up or down in so-e 'ashion. Although those classi'ications are use'ul 'or a longer-ter-
understanding o' how a particular stock or sector reacts, they o''er little guidance 'or trading.
7or trading purposes, we de'ine 'our basic types o' gaps as 'ollowsF
A ;ull Gap <p occurs when the opening price is greater than yesterday3s high price.
In the chart below 'or Cisco #C(C& , the open price 'or 8une 4, indicated by the s-all tick -ark to
the le't o' the second bar in 8une #green arrow&, is higher than the previous day3s close, shown by the
right-side tick -ark on the 8une ; bar.
A ;ull Gap "o!n occurs when the opening price is less than yesterday3s low. .he chart 'or A-aEon
#A6MC& below shows both a 'ull gap up on August ;> #green arrow& and a 'ull gap down the next
day #red arrow&.
A %artial Gap <p occurs when today3s opening price is higher than yesterday3s close, but not higher
than yesterday3s high.
.he next chart 'or !arthlink #!LCD& depicts the partial gap up on 8une ; #red arrow&, and the 'ull
gap up on 8une 4 #green arrow&.
A %artial Gap "o!n occurs when the opening price is below yesterday3s close, but not below
yesterday3s low.
.he red arrow on the chart 'or ''shore Logistics #LL& , below, shows where the stock opened
below the previous close, but not below the previous low.
4h# <se Trading Rules:
In order to success'ully trade gapping stocks, one should use a disciplined set o' entry and exit rules
to signal trades and -ini-iEe risk. Additionally, gap trading strategies can be applied to weekly, end-
o'-day, or intraday gaps. It is i-portant 'or longer-ter- investors to understand the -echanics o'
gaps, as the 3short3 signals can be used as the exit signal to sell holdings.
The Gap Trading Strategies
!ach o' the 'our gap types has a long and short trading signal, de'ining the eight gap trading
strategies. .he basic tenet o' gap trading is to allow one hour a'ter the -arket opens 'or the stock
price to establish its range. A 6odi'ied .rading 6ethod, to be discussed later, can be used with any o'
the eight pri-ary strategies to trigger trades be'ore the 'irst hour, although it involves -ore risk. nce
a position is entered, you calculate and set an >N trailing stop to exit a long position, and a GN
trailing stop to exit a short position. A trailing stop is si-ply an exit threshold that 'ollows the rising
price or 'alling price in the case o' short positions.
Long ,0ample8 @ou buy a stock at $;,,. @ou set the exit at no -ore than >N below that, or $B4. I'
the price rises to $;4,, you raise the stop to $;;,.?=+, which is approxi-ately >N below $;4,. .he
stop keeps rising as long as the stock price rises. In this -anner, you 'ollow the rise in stock price
with either a real or -ental stop that is executed when the price trend 'inally reverses.
Short ,0ample8 @ou short a stock at $;,,. @ou set the Buy-to-Cover at $;,G so that a trend reversal
o' GN would 'orce you to exit the position. I' the price drops to $B,, you recalculate the stop at GN
above that nu-ber, or $B? to Buy-to-Cover.
.he eight pri-ary strategies are as 'ollowsF
;ull Gaps
7ull Lap 2pF Long
I' a stock3s opening price is greater than yesterday3s high, revisit the ;--inute chart a'ter ;,F?, a-
and set a long #buy& stop two ticks above the high achieved in the 'irst hour o' trading. #CoteF A 3tick3 is
de'ined as the bidIask spread, usually ;I> to ;IG point, depending on the stock.&
7ull Lap 2pF (hort
I' the stock gaps up, but there is insu''icient buying pressure to sustain the rise, the stock price will
level or drop below the opening gap price. .raders can set si-ilar entry signals 'or short positions as
'ollowsF
I' a stock3s opening price is greater than yesterday3s high, revisit the ;--inute chart a'ter ;,F?, a-
and set a short stop e/ual to two ticks below the low achieved in the 'irst hour o' trading.
7ull Lap DownF Long
*oor earnings, bad news, organiEational changes and -arket in'luences can cause a stock3s price to
drop uncharacteristically. A 'ull gap down occurs when the price is below not only the previous day3s
close, but the low o' the day be'ore as well. A stock whose price opens in a 'ull gap down, then
begins to cli-b i--ediately, is known as a HDead Cat Bounce.H
I' a stock3s opening price is less than yesterday3s low, set a long stop e/ual to two ticks -ore than
yesterday3s low.
7ull Lap DownF (hort
I' a stock3s opening price is less than yesterday3s low, revisit the ;--inute chart a'ter ;,F?, a- and
set a short stop e/ual to two ticks below the low achieved in the 'irst hour o' trading.
%artial Gaps
.he di''erence between a 7ull and *artial Lap is risk and potential gain. In general, a stock gapping
co-pletely above the previous day3s high has a signi'icant change in the -arket3s desire to own or
sell it. De-and is large enough to 'orce the -arket -aker or 'loor specialist to -ake a -a1or price
change to acco--odate the un'illed orders. 7ull gapping stocks generally trend 'arther in one
direction than stocks which only partially gap. 0owever, a s-aller de-and -ay 1ust re/uire the
trading 'loor to only -ove price above or below the previous close in order to trigger buying or selling
to 'ill on-hand orders. .here is a generally a greater opportunity 'or gain over several days in 'ull
gapping stocks.
I' there is not enough interest in selling or buying a stock a'ter the initial orders are 'illed, the stock will
return to its trading range /uickly. !ntering a trade 'or a partially gapping stock generally calls 'or
either greater attention or closer trailing stops o' +-AN.
*artial Lap 2pF Long
I' a stock3s opening price is greater than yesterday3s close, but not greater than yesterday3s high, the
condition is considered a *artial Lap 2p. .he process 'or a long entry is the sa-e 'or 7ull Laps in
that one revisits the ;--inute chart a'ter ;,F?, a- and set a long #buy& stop two ticks above the high
achieved in the 'irst hour o' trading.
*artial Lap 2pF (hort
.he short trade process 'or a partial gap up is the sa-e 'or 7ull Laps in that one revisits the ;--inute
chart a'ter ;,F?, a- and sets a short stop two ticks below the low achieved in the 'irst hour o' trading.
*artial Lap DownF Long
I' a stock3s opening price is less than yesterday3s close, revisit the ; -inute chart a'ter ;,F?, a- and
set a buy stop two ticks above the high achieved in the 'irst hour o' trading.
*artial Lap DownF (hort
.he short trade process 'or a partial gap down is the sa-e 'or 7ull Lap Down in that one revisits the
;--inute chart a'ter ;,F?,A6 and sets a short stop two ticks below the low achieved in the 'irst hour
o' trading.
I' a stock3s opening price is less than yesterday3s close, set a short stop e/ual to two ticks less than
the low achieved in the 'irst hour o' trading today.
I' the volu-e re/uire-ent is not -et, the sa'est way to play a partial gap is to wait until the price
breaks the previous high #on a long trade& or low #on a short trade&.
,nd*o-*da# Gap Trading
All eight o' the Lap .rading (trategies can also be applied to end-o'-day trading. 2sing
(tockCharts.co-3s Lap (cans, end-o'-day traders can review those stocks with the best potential.
Increases in volu-e 'or stocks gapping up or down is a strong indication o' continued -ove-ent in
the sa-e direction o' the gap. A gapping stock that crosses above resistance levels provides reliable
entry signals. (i-ilarly, a short position would be signaled by a stock whose gap down 'ails support
levels.
4hat is the Modi-ied Trading Method:
.he 6odi'ied .rading 6ethod applies to all eight 7ull and *artial Lap scenarios above. .he only
di''erence is instead o' waiting until the price breaks above the high #or below the low 'or a short&O you
enter the trade in the -iddle o' the rebound. .he other re/uire-ent 'or this -ethod is that the stock
should be trading on at least twice the average volu-e 'or the last 'ive days. .his -ethod is only
reco--ended 'or those individuals who are pro'icient with the eight strategies above, and have 'ast
trade execution syste-s. (ince heavy volu-e trading can experience /uick reversals, -ental stops
are usually used instead o' hard stops.
6odi'ied .rading 6ethodF Long
I' a stock3s opening price is greater than yesterday3s high, revisit the ; -inute chart a'ter ;,F?, a-
and set a long stop e/ual to the average o' the open price and the high price achieved in the 'irst hour
o' trading. .his -ethod reco--ends that the pro1ected daily volu-e be double the +-day average.
6odi'ied .rading 6ethodF (hort
I' a stock3s opening price is less than yesterday3s low, revisit the ; -inute chart a'ter ;,F?, a- and
set a long stop e/ual to the average o' the open and low price achieved in the 'irst hour o' trading.
.his -ethod reco--ends that the pro1ected daily volu-e be double the +-day average.
4here do I -ind gapping stocks:
6e-bers o' (tockCharts3 !xtra service can run scans against daily data that is updated on an
intraday basis. .his is per'ect 'or 'inding gapping stocks. (i-ply run the pre-de'ined gap scans using
the Intraday data setting around ;,A6 !astern. (tockCharts.co- also publishes lists o' stocks
that 'ully gapped up or 'ully gapped down each day based on end-o'-day data. .his is an excellent
source o' ideas 'or longer ter- investors.
Although these are use'ul lists o' gapping stocks, it is i-portant to look at the longer ter- charts o'
the stock to know where the support and resistance -ay be, and play only those with an average
volu-e above +,,,,,, shares a day until the gap trading techni/ue is -astered. .he -ost pro'itable
gap plays are nor-ally -ade on stocks you3ve 'ollowed in the past and are 'a-iliar with.
+o! success-ul is this:
In si-ple ter-s, the Lap .rading (trategies are a rigorously de'ined trading syste- that uses speci'ic
criteria to enter and exit. .railing stops are de'ined to li-it loss and protect pro'its. .he si-plest
-ethod 'or deter-ining your own ability to success'ully trade gaps is to paper trade. *aper trading
does not involve any real transaction. Instead, one writes down or logs an entry signal and then does
the sa-e 'or an exit signal. .hen subtract co--issions and slippage to deter-ine your potential pro'it
or loss.
Lap trading is -uch si-pler than the length o' this tutorial -ay suggest. @ou will not 'ind either the
tops or botto-s o' a stock3s price range, but you will be able to pro'it in a structured -anner and
-ini-iEe losses by using stops. It is, a'ter all, -ore i-portant to be consistently pro'itable than to
continually chase -overs or enter a'ter the crowd.
Moving Momentum
Introduction
6any trading strategies are based on a process, not a single signal. .his process o'ten involves a
series o' steps that ulti-ately lead to a signal. .ypically, chartists 'irst establish a trading bias or long-
ter- perspective. (econd, chartists wait 'or pullbacks or bounces that will i-prove the risk-reward
ratio. .hird, chartists look 'or a reversal that indicates a subse/uent upturn or downturn in price. .he
strategy put 'orth here uses -oving average to de'ine the trend, the (tochastic scillator to identi'y
corrections within that trend and the 6ACD-0istogra- to signal short-ter- reversals. It is a co-plete
strategy based on a three step process.
"e-ining the Indicators
6oving averages are trend-'ollowing indicators that lag price. .his -eans the actual trend changes
be'ore the -oving averages generate a signal. 6any traders are turned o'' by this lag, but this does
not -ake the- totally ine''ective. 6oving averages s-ooth prices and provide chartists with a cleaner
price plot, which -akes it easier to identi'y the general trend.
.his strategy e-ploys two -oving averages to de'ine the trading bias. .he bias is bullish when the
shorter--oving average -oves above the longer -oving average. .he bias is bearish when the
shorter--oving average -oves below the longer -oving average. 9hile chartists can use any
co-bination o' -oving averages, this article uses the 4,-day (6A and the ;+,-day (6A. .he
exa-ple below shows Baxter International #BA%& -oving 'ro- a bullish trading bias to a bearish
trading bias as the 4,-day (6A -oved below the ;+,-day (6A in -id August.
.he second part o' this trading strategy uses the (tochastic scillator to identi'y correction. As a
bound oscillator that 'luctuations between , and ;,,, the (tochastic scillator is ideal 'or spotting
short-ter- pullbacks or bounces. A -ove below 4, signals a pullback in prices, while a -ove above
>, signals a bounce in prices.
.he third part o' this trading strategy uses the 6ACD-0istogra- to identi'y upturns and downturns in
prices. .he 6ACD-0istogra- -easures the di''erence between 6ACD and its signal line. .he
indicator is positive when 6ACD is above its signal line and negative when 6ACD is below its signal
line. .he 6ACD-0istogra- turns positive when prices turn up and turns negative when prices turn
down.
Strateg#
/u# Signal8
;. 6oving averages show a bullish trading bias with 4,-day (6A trading above the ;+,-day
(6A.
4. (tochastic scillator -oves below 4, to signal a pullback.
?. 6ACD-0istogra- -oves into positive territory to signal an upturn a'ter the pullback.
.he exa-ple above shows *olo 5alph Lauren #5L& with a 'ew buy signals. 7irst, notice that the 4,-
day (6A is above the ;+,-day (6A to establish a bullish trading bias. (econd, the (tochastic
scillator declined below 4, to indicate a price pullback and 'avorable risk-reward ratio. Chartists
then turn to the 6ACD-0istogra- to signal an end to the pullback with a -ove into positive territory.
Cotice that the 6ACD-0istogra- is al-ost always in negative territory when the (tochastic scillator
-oves below 4,. (o-eti-es this indicator stays negative 'or another week or two so it is i-portant to
wait 'or con'ir-ation o' an upturn.
Sell Signal8
;. 6oving averages show a bearish trading bias with the 4,-day (6A trading below the ;+,-
day (6A.
4. (tochastic scillator -oves above >, to signal a bounce.
?. 6ACD-0istogra- -oves into negative territory to signal a downturn a'ter the bounce.
.he exa-ple above shows 7lour Corp #7L5& with a 'ew sell signals. 7irst, the trading bias turned
bearish when the 4,-day (6A -oved below the ;+,-day (6A in 8une. (econd, the (tochastic
scillator -oved above >, several ti-es as prices bounced within the downtrend. A -ove above >,
is 1ust an alert to watch the 6ACD-0istogra- closely. Acting on a -ove above >, can result in a
losing trade because it can so-eti-es take a week or two 'or prices to turn back down. .he third, and
'inal, signal is when the 6ACD-0istogra- turns negative.
Trading ,0ample
.he exa-ple below shows 2nited *arcel (ervice #2*(& with six signals over a ;4 -onth period. .his
is not the -ost ideal exa-ple, but it does provide so-e insights into real world trading, which is o'ten
not ideal. .here were 'our di''erent trading biases on this chart. .he yellow areas -ark two periods
with a bearish trading bias and two periods with a bullish trading bias. Bearish signals are ignored
when the bias is bullish. Bullish signals are ignored when the bias is bearish.
A'ter the (tochastic scillator signaled pullbacks in 6arch and April, the 6ACD-0istogra- turned
positive to trigger two bullish signals #; and 4&. .hese did not last long or work out well because
trading was /uite choppy. .he thin blue lines -ark support levels that could have been used 'or initial
stops. A bearish bias started in 8une and there was a bearish signal in -id 8uly #?&, which occurred
1ust be'ore the bias switched to bullish. .his was a tricky signal, but chartist setting a stop-loss at
resistance would have re-ained in the position and caught the big decline. A'ter a couple -ore
whipsaws #G and +&, the strategy triggered a nice bullish signal in early Dece-ber.
T!eaking
9ith 'our indicators, there are lots o' di''erent ways to tweak this strategy. Chartists can ad1ust the
-oving averages to rede'ine the trend. Instead o' the 4,-day and ;+,-day (6As, chartists could
lengthen the ti-e'ra-e 'or an even longer perspective on trend. Alternatively, chartists could use one
long-ter- -oving average and co-pare actual prices to the -oving average 'or trend identi'ication.
.he oscillators can be shortened to increase sensitivity or lengthened to decrease sensitivity. A ;,-
day (tochastic scillator would beco-e overboughtIoversold -ore o'ten than a 4,-day (tochastic
scillator. (i-ilarly, the 6ACD-0istogra- #+,?,,B& would cross the Eero line -ore o'ten than 6ACD-
0istogra- used with the de'ault settings #;4,4A,B&.
.he decision to increase or decrease sensitivity rests with the characteristics o' the underlying
security. (tocks with lower volatility, such as those in the utilities and consu-er staples sectors,
would warrant -ore sensitive settings. (tocks with higher volatility, such as those in the technology
and biotech sectors, -ay warrant less sensitive settings. .he trick is to 'ind the setting that produces
enough signals, but not too -any.
Conclusions
.his H6oving 6o-entu-H strategy provides charts with a -eans to trade in the direction o' the bigger
trend. 6oreover, this strategy is designed to identi'y lower risk and higher reward opportunities by
waiting 'or corrections. .he -oving average sets the tone, bullish or bearish. .he (tochastic
scillator is used to identi'y pullbacks within bigger uptrends and bounces within bigger downtrends.
.he 6ACD-0istogra- is used to signal the end o' a pullback or bounce. Deep in -ind that this article
is designed as a starting point 'or trading syste- develop-ent. 2se these ideas to aug-ent your
trading style, risk-reward pre'erences and personal 1udg-ents. Click here 'or a chart o' IB6 with the
4,-day (6A, ;+,-day (6A, (tochastic scillator and 6ACD-0istogra-.
arro! Range "a# R$
Introduction
Carrow range patterns co-e 'ro- .ony Crabbel3s book, H Day .rading with (hort .er- *rice *atterns
) pening 5ange BreakoutH. !ven though the book, which was published in ;BB,, is currently out o'
print, -any o' its ideas are still e''ective. In particular, the C5G #Carrow 5ange G& and C5= #Carrow
5ange =& patterns are /uite popular with short-ter- traders. .he philosophy behind the pattern is
si-ilar to the Bollinger Band (/ueeEeF a volatility contraction is o'ten 'ollowed by a volatility
expansion. Carrow range days -ark price contractions that o'ten precede price expansions. !ven
though Crabel traded -ainly 'utures, traders can apply these techni/ues to stocks, indices and !.7s.
Strateg#
.his strategy starts with the day3s range, which is si-ply the di''erence between the high and the low.
Crabel used the absolute range, as opposed to the percentage range, which would be the absolute
range divided by the close or the -idpoint. Because we are only dealing with 'our and seven days,
the di''erence between the absolute range and percentage range is negligible.
Crabel 'ocused on two di''erent narrow range ti-e'ra-esF 'our days and seven days. An C5G pattern
would be the narrowest range in 'our days, while an C5= would be the narrowest range in seven
days. It is a very short-ter- pattern designed to initiate a trade based on an Hopening range
breakoutH, which is another ter- 'ro- Crabel3s book. .he 5B is based on the price range in the 'irst
'ive -inutes o' trading, which is a too short-ter- 'or this article. Instead, chartists can look 'or an
upside breakout when prices -ove above the high o' the narrow range day and a downside
breakdown when prices -ove below the low o' the narrow range day.
Because this is a short-ter- setup, it is i-portant that the trade starts working right away. 7ailure to
continue in the direction o' the signal is the 'irst warning. A'ter a buy signal, a -ove below the low o'
the narrow range day would be negative. Conversely, a -ove above the high o' the narrow range day
would negate a sell signal.
Chartists also need to consider pro'it targets and stop-losses. Crabel took pro'its /uite /uick, usually
at the close o' the 'irst trading day or on the 'irst pro'itable close. Again, this is very short-ter-
oriented and -ight not be suitable 'or all traders. Alternatively, pro'its can be taken near the next
resistance levels or a percentage target can be used. 7or stops, chartists can use the *arabolic (A5
to trail stops or base their stops on the Average .rue 5ange #A.5&. 7or exa-ple, the stop-loss on a
long position could be set two Average .rue 5ange values below current prices and trailed higher.
Bull (ignal 5ecapF
;. Identi'y C5G or C5= day.
4. Buy on -ove above high o' narrow range day high.
?. (et trailing stop-loss.
Bear (ignal 5ecapF
;. Identi'y C5G or C5= day.
4. (ell on -ove below low o' narrow range day low.
?. (et trailing stop-loss.
Trading ,0ample
.he trading exa-ple shows 6organ (tanley with twelve signals in less than three -onths. .he blue
arrows show the C5= candlesticks and the thin blue lines -ark the high-low o' the range. A next day
-ove above the high is bullish, while a next day -ove below the low is bearish. Cotice that C5= days
'or-ed back-to-back on at three di''erent occasions. 9hile not always the case, these back-to-back
C5= days did not result in di''erent signals, they si-ply a''ir- the existing signal 'ro- the prior C5=
breakout. 9ith nine signals in total, traders could have to watch price action close, exercise 1udg-ent
and -ange stops.
SharpCharts &lternatives
(harpCharts does not o''er an indicator that shows the day3s range or identi'ies C5G and C5= days.
0owever, it is possible to scan 'or C5G or C5= days using the Advanced (can 9orkbench to write
the code, an exa-ple o' which is provided in the next section. n (harpCharts, chartists can use a ;-
period Average .rue 5ange #A.5& to i-itate or esti-ate the HrangeH and visually identi'y HCA.5=H
readings, which -eans A.5 is its narrowest in seven days. 9hile this CA.5= will not produce the
exact sa-e signals, -any will overlap with the basic C5= readings. 6ore i-portantly, the Average
.rue 5ange does show when the range is contracting or expanding.
T!eaking
6ost chartists will want to /uali'y C5= signals because they are /uite 're/uent. A typical stock will
produce doEens o' C5= days in a twelve -onth period and a daily scan o' 2( stocks will o'ten return
hundreds o' stocks with C5= days. Chartists can increase or decrease the nu-ber o' narrow range
periods to a''ect the results. A decrease 'ro- C5= to C5G would increase the nu-ber o' stocks 'itting
the criteria, while an increase 'ro- C5= to C54, would decrease the nu-ber o' candidates. In
general, the nu-ber o' stocks -eeting the criteria will increase as the narrow range period decreases
and decrease as the narrow range period increases.
Chartist can also add other indicators to 'urther /uali'y signals. In 'act, it is o'ten a good idea to add a
trend indicator and an overboughtIoversold indicator. Adding a trend indicator insures that trades are
in the direction o' a bigger trend. Adding an overboughtIoversold oscillator identi'ies pullbacks or
bounces to i-prove the risk-reward ratio.
.he chart below shows 6cDonalds with the ;-period Average .rue 5ange #A.5& to -i-ic C5=
signals, the Aroon indicators to de'ine the bigger trend and the Co--odity Channel Index #CCI& to
de'ine overboughtIoversold conditions. A bullish signal occurs when Aroon 2p is above Aroon Down
#uptrend&, the +-day low 'or CCI is below -;,, #oversold& and the range -oves to a seven day low
#turning point&. Bearish signals occur when Aroon Down is above Aroon 2p #downtrend&, the +-day
high 'or CCI is above :;,, #overbought& and the range -oves to a seven day low #turning point&.
.here were two signals in late Cove-ber. 5e-e-ber. Carrow range days are ignored until CCI
-oved below -;,, when the bigger trend is up, which signi'icantly li-its the nu-ber o' signals. .he
'irst signal did not work, but there was another a 'ew days later that -arked a good botto-.
Conclusions
.he C5= day is based on the pre-ise that range contractions are 'ollowed by range expansions. In
this regard, the indicator is neutral when it co-es to 'uture price direction. As with Bollinger Bands,
chartists -ust e-ploy other tools 'or a directional bias. Because C5= days are relatively
co--onplace and the range is s-all by de'inition, the chances o' whipsaw are above average. A
break above the C5= high can 'ail and be 'ollowed by a break below the C5= high. 8ust be aware o'
this probability and keep the bigger picture in -ind. In other words, be wary o' sell signals within a
bullish pattern, such as a 'alling 'lag or at a support test. .his article is designed as a starting point 'or
trading syste- develop-ent. 2se these ideas to aug-ent your trading style, risk-reward pre'erences
and personal 1udg-ents. Click here 'or a chart o' IB6 with the Average .rue 5ange #A.5&, Aroon
indicators and Co--odity Channel Index #CCI&.
Technical Indicators and =verla#s
Technical Indicators are the o'ten s/uiggly lines 'ound above, below and on-top-o' the price
in'or-ation on a technical chart. Indicators that use the sa-e scale as prices are typically plotted on
top o' the price bars and are there'ore re'erred to as >=verla#s3>
.his section describes the various kinds o' technical indicators and overlays that are available here
at(tockCharts.co-.
Introduction to .echnical Indicators and scillators - An in-depth introduction to the various
kind o' technical indicators and oscillators out there. A H-ust readH article 'or (tockCharts.co-
users.
=verla#s
Bollinger Bands - A chart overlay that shows the upper and lower li-its o' 3nor-al3 price
-ove-ents based on the (tandard Deviation o' prices.
Chandelier !xit - A indicator that can be used to set trailing stop-losses 'or both long and short
position.
Ichi-oku Clouds - A co-prehensive indicator that de'ines support and resistance, identi'ies
trend direction, gauges -o-entu- and provides trading signals.
Deltner Channels - A chart overlay that shows upper and lower li-its 'or price -ove-ents
based on the Average .rue 5ange o' prices.
6oving Averages - (i-ple and !xponential - Chart overlays that show the 3average3 value over
ti-e. Both (i-ple 6oving Averages #(6As& and !xponential 6oving Averages #!6As& are
explained.
6oving Average !nvelopes - A chart overlay consisting o' a channel 'or-ed 'ro- si-ple
-oving averages.
*arabolic (A5 - A chart overlay that shows reversal points below prices in an uptrend and
above prices in a downtrend.
*ivot *oints - A chart overlay that shows reversal points below prices in an uptrend and above
prices in a downtrend.
*rice Channels - A chart overlay that shows a channel -ade 'ro- the highest high and lowest
low 'or a given period o' ti-e.
"olu-e by *rice - A chart overlay with a horiEontal histogra- showing the a-ount o' activity at
various price levels.
"olu-e-weighted Average *rice #"9A*& - An intraday indicator based on total dollar value o'
all trades 'or the current day divided by the total trading volu-e 'or the current day.
MigMag - A chart overlay that shows 'iltered price -ove-ents that are greater than a given
percentage.
Indicators
Accu-ulation Distribution Line - Co-bines price and volu-e to show how -oney -ay be
'lowing into or out o' a stock.
Aroon - 2ses Aroon 2p and Aroon Down to deter-ine whether a stock is trending or not.
Aroon scillator - 6easures the di''erence between Aroon 2p and Aroon Down.
Average Directional Index #AD%& - (hows whether a stock is trending or oscillating.
Average .rue 5ange #A.5& - 6easures a stock3s volatility.
Band9idth - (hows the percentage di''erence between the upper and lower Bollinger Band.
NB Indicator - (hows the relationship between price and standard deviation bands.
Co--odity Channel Index #CCI& - (hows a stock3s variation 'ro- its 3typical3 price.
Coppock Curve - An oscillator that uses rate-o'-change and a weighted -oving average to
-easure -o-entu-.
Correlation Coe''icient - (hows the degree o' correlation between two securities over a given
ti-e 'ra-e.
Chaikin 6oney 7low - Co-bines price and volu-e to show how -oney -ay be 'lowing into or
out o' a stock. Alternative to Accu-ulationIDistribution Line.
Chaikin scillator - Co-bines price and volu-e to show how -oney -ay be 'lowing into or out
o' a stock. Based on Accu-ulationIDistribution Line.
Detrended *rice scillator #D*& - A price oscillator that uses a displaced -oving average to
identi'y cycles.
!ase o' 6ove-ent #!6"& - An indicator that co-pares volu-e and price to identi'y signi'icant
-oves.
7orce Index - A si-ple price-and-volu-e oscillator.
Dnow (ure .hing #D(.& - An indicator that -easures -o-entu- in a s-ooth 'ashion.
6ass Index - An indicator that identi'ies reversals when the price range widens.
6ACD - A -o-entu- oscillator based on the di''erence between two !6As.
6ACD-0istogra- - A -o-entu- oscillator that shows the di''erence between 6ACD and its
signal line.
6oney 7low Index #67I& - A volu-e-weighted version o' 5(I that shows shi'ts is buying and
selling pressure.
Cegative "olu-e Index #C"I& - A cu-ulative volu-e-based indicator used to identi'y trend
reversals.
n Balance "olu-e #B"& - Co-bines price and volu-e in a very si-ple way to show how
-oney -ay be 'lowing into or out o' a stock.
*ercentage *rice scillator #**& - A percentage-based version o' the 6ACD indicator.
*ercentage "olu-e scillator - .he ** indicator applied to volu-e instead o' price.
*rice 5elative - .echnical indicator that co-pares the per'or-ance o' two stocks to each other
by dividing their price data.
5ate o' Change #5C& - (hows the speed at which a stock3s price is changing.
5elative (trength Index #5(I& - (hows how strongly a stock is -oving in its current direction.
(tockCharts .echnical 5anks #(C.5s& - ur relative ranking syste- based on a stock3s
technical strength.
(lope - 6easures the rise-over-run 'or a linear regression
(tandard Deviation #"olatility& - A statistical -easure o' a stock3s volatility.
(tochastic scillator - (hows how a stock3s price is doing relative to past -ove-ents. 7ast,
(low and 7ull (tochastics are explained.
(toch5(I - Co-bines (tochastics with the 5(I indicator. 0elps you see 5(I changes -ore
clearly.
.5I% - A triple-s-oothed -oving average o' price -ove-ents.
.rue (trength Index #.(I& - An indicator that -easures trend direction and identi'ies
overboughtIoversold levels.
2lcer Index - An indicator designed to -easure -arket risk or volatility.
2lti-ate scillator - Co-bines long-ter-, -id-ter- and short-ter- -oving averages into one
nu-ber.
"ortex Indicator - An indicator designed to identi'y the start o' a new trend and de'ine the
current trend.
9illia- N5 - 2ses (tochastics to deter-ine overbought and oversold levels.
Market Indicators
Introduction to 6arket Indicators - An in-depth introduction to popular -arket indicators 'ound
on (tockCharts.co-.
6arket Indicator Dictionary - A co-plete list o' all the -arket indicators that we track on
(tockCharts.co-.
Advance-Decline Line - A cu-ulative breadth indicator derived 'ro- Cet Advances.
Advance-Decline *ercent - A breadth indicator that -easures the percentage o' net advances
within a particular group, such as an (*D5 or index !.7.
Advance-Decline "olu-e Line - A cu-ulative breadth indicator derived 'ro- Cet Advancing
"olu-e.
Advance-Decline "olu-e *ercent - A breadth indicator that -easures the percentage o' net
advancing within a particular group, such as an (*D5 or index !.7.
Ar-s Index #.5IC& - A breadth indicator derived 'ro- the AD 5atio and AD "olu-e 5atio.
Bullish *ercent Index - A breadth indicator derived 'ro- the percentage o' stocks on *n7 buy
signals.
0igh-Low Index - .he ;,-day -oving average o' the 5ecord 0igh *ercent Index, which is a
breadth indicator #see below&.
0igh Low *ercent - A breadth indicator that -easures the percentage o' new new highs within
a particular group, such as an (*D5 or index !.7.
6cClellan scillator - A 6ACD type oscillator o' Cet Advances.
6cClellan (u--ation Index - A cu-ulative indicator based on the 6cClellan scillator.
Cet Cew 0ighs - A breadth indicator showing the di''erence between new highs and new lows.
*ercentage, cu-ulative and s-oothed versions can be used.
*ercent Above 6oving Average - A breadth oscillator that -easures the percentage o' stocks
above a speci'ic -oving average.
*utICall 5atio - A senti-ent indicator 'ound by dividing put volu-e by call volu-e.
5ecord 0igh *ercent Index - A breadth indicator that shows new highs as a percentage o' new
highs plus new lows.
"olatility Indices - Indicators o' i-plied volatility designed to -easure 'ear and co-placency 'or
a range o' indices and !.7s.