Daily Archives: May 17, 2015

A three steps trading strategy

Today I will share with you a basic three steps trading strategy. The following will require a minimum technical analysis basis. I will try to explain everything in detail, but if I miss something, feel free to comment. The credits for this strategy go to my colleague and friend Yann. The strategy may be applied to any type of contract. Here we will use for an investment decision in the Apple’s stock price. So let’s start!

1. The first thing to look at, is the trend. The trend is the general direction of an instrument, so let’s have a look. An uptrend for all of them: monthly, weekly and daily charts is a concrete sign to go long.

Monthly Candles Chart

Apple Monthly Chandles

Weekly Candles Chart

Apple Weekly Chandles

Daily Candles Chart

Apple Daily Chandles

As from the charts above all of them confirm the uptrend, however I find the daily one very week, so in this case I would leave Apple aside and focus on a different contract. Here, for analysis purposes I will consider the uptrend confirmed and continue with the next step.

2. The next study to check is the RSI = Relative Strength Index. We will draw the RSI (14) on a daily candles chart and look for a divergence.

Apple Daily RSI

As from the chart above there is a clear evidence of negative divergence, because the  indicator (RSI) fails to confirm the new maximum made by the stock price. In fact the stock registers a decrease in value confirming the negative divergence alert. So, at this step I expect the value of the stock to decrease and wouldn’t take a long position in Apple anymore. Step 2 failed to confirm the buy signal.

3. Despite that, I will continue with the next step and draw the Short Term and Long Term Exponential Moving Averages: EMA (9) and EMA (21).

Apple Daily EMAs

We will use the EMAs here to identify current trends and trends reversals. We saw in the chart before that a negative divergence identified with the RSI occurred and this was confirmed by a fall in shares’ prices. However as the short EMA (9) crosses over the long EMA (21) this is a signal of a new beginning uptrend. Here again the message of the chart is to buy. So, if the short EMA is above the long EMA we believe in being in an uptrend and expect the prices to grow more. If the short EMA is below the long EMA we believe that we are in a downtrend, so we expect the prices to fall more. The cross of the two EMAs signals a trend reversal. So, what to do?

At this point, what to do with the information the charts provided you, depends only on your risk taste and investment horizon. For example if you would like to open and close the position within a 2-4 week period, you need a more recent and more detailed chart. So, let’s draw the hourly candle chart.

Apple Hourly Chandles

The hourly chart confirms the recent uptrend, there is no divergence and the short EMA (9) is clearly above the long EMA (21). So, from the point of view of the side to take, all the ways point to go long, but is this enough? Do we know when to buy and at what price?

The second most important principle in Technical Analysis is the timing. It doesn’t serve at anything to know that we have to buy if we do not know the right entering price. For doing this one of the most used tool are the Fibonacci Retracements.

Apple Fibonacci Retracement

After having drawn the Fibonacci Retracements we can see that the stock is in a critical position now, being right under the 50% line which plays the role of resistance in this moment. At this point, my strategy would be to wait until the 50% line gets broken and if this is the case to buy right over the 50% line with a stop loss at the 61.8% level, a first take profit at the 38.2% level and a second one at the 23.6% level.

Note: none of the above constitutes an advise to invest in the mentioned instruments. The contracts are chosen randomly and the strategy is not a guarantee of success.