Panorama actual de la violencia contra la mujer

Figure 6.18

shows a strong trending stock plotted with protective stops. Volume is plotted in the lower window.

FIGURE 6.18

Plot of protective stops indicated by black dotted line.

Average true range is commonly used in the calculation of protective stops (or stop losses).

Average true range is a volatility indicator that measures the strength of price reactions. That is, the price movements from low volatility to high volatility and from high volatility to low volatility. The formula for average true range is included in all technical analysis program packages. Protective stops may also be used as a guide for trade entries and exits. In a long position, a trade exit is triggered when prices close below protective stops. And when prices close above or remain above protective stops, a trade entry may be considered if other indicators are also showing support of the probable positive trend.

There are many stop-loss or trailing stops systems available, but getting the right parameters and settings of such stops can be difficult. When the market is choppy, trailing stops will always be triggered too soon if the stops are set too close to the price bars. And on the other hand, if the stops are set too far apart, traders will probably not be able to lock in their profits as their stops will never be reached.

The following is a simple formula of the protective stops indicator for reference only. It is not recommended to be used in trading.

{Protective Stops Long}

AtrX:=Input("ATR Multiple",1,89,1.3);

Period:=Input("ATR Period",2,89,13);

LookBack:=Input("Lookback",2,89,13);

Lng:=Close-AtrX*ATR(Period);

LngHi:=HHV(Lng,LookBack);

LngSignal:=If(Lng<LngHi,PREV,Lng);

LngSignal;

CONCLUSION

This chapter discusses five key indicators: momentum, moving averages, MACD, ADX, and protective stops, which will help traders to understand the purpose and use of indicators in a trading strategy. In planning a chart layout, traders should ensure that the layout covers different aspects of the market. A good layout should not be cluttered with indicators but should be neat and simple. Yet it should be meaningful and complete. Basically, the chart will have a trend indicator to show the probable direction of the trend, a momentum indicator to measure the speed at which price is changing, and a volume indicator to measure stock activities. Traders should avoid using multiple indicators that show the same type of information in the chart.

Momentum measures the speed of price change and is used in identifying price strength by the variance of the change in speed of price. It is the basic concept applied in most indicators.

MACD is also a momentum indicator. It consists of three plots. The first MACD line is derived from the difference of two different periods of exponential moving averages. Standard parameters are a 12-day period and a 26-day period. The second line, the signal line, is a 9-day exponential moving average of the first line. The third line is plotted as a histogram. The histogram is the difference between the MACD line and the signal line. The slopes of the histogram will often diverge with the price directional movement to alert traders to probable turning points in trend. A trader must take note that, when using momentum oscillators, the trend of the momentum does not always represent the price trend. Momentum oscillators are useful in identifying overbought and oversold conditions of the market. Overbought conditions reflect the underlying strength of the market, and oversold conditions reflect the weakening of the market. As a timing tool for buying and selling, momentum provides more reliable signals when traders use two different time frame momentums, daily momentum and weekly momentum. The objective is to trade when the daily time frame is in the direction of the weekly time frame, unless the momentum is overbought or oversold.

In the chapter, two methods of using moving averages have been described. The first is the popular method of using the crossing of price and its moving average as trading signals for trade entries and exits, which can also be applied to reading crossings of two different moving averages. The second method is a new concept, the Queuing Theory of Moving Average Crossovers. The theory is based on the assumption that when there is a trend, the price and its relative moving averages should move in a sequential order of alignment. In a bullish trend, price will lead and be above the shorter moving average, which will be followed by the longer moving average. In a bearish market, price will also lead the declining trend, but it will be below the shorter moving average, which will be below the longer moving average. Any change in sequential order of alignment of the price and its moving averages will indicate a weakening of the prevailing trend. A price rally or a price retracement that occurs when there is a disorderly alignment can be expected to be short-lived. The application of the theory will help traders to assess the probable risk and reward before making trade decisions, to determine trading time frames, and to form a better perspective of the market.

Two optional indicators have also been included in the chapter, ADX and protective stops.

ADX is used to identify whether a trend exists and to quantify the strength of the trend. The common practice is to determine a benchmark that serves to identify the trend; the higher the value of ADX, the stronger the trend, irrespective of whether the trend is up or down. Traders often get confused when applying this indicator. An easier application is to use a shorter period for the ADX and just focus on the turning points of its peaks. This method will greatly help to

catch the change in trend of the market.

Protective stops are used by traders as a last resort to get out of the market. There are many methods of formulating protective stops; many of them use average true range as a key component in the calculation. Protective stops are discussed in this chapter for traders who normally opt for taking greater risks. The application and the method of using protective stops are subject to the personality of each trader and his or her trading strategy. There are no hard and fast rules. If a trader has designed his trading system to take care of trade entries and exits, there is no need to use another indicator as a reminder.

CHAPTER 7

Applied Systems

There is not going to be any disagreement when it is said that the market is complex and chaotic. Sometimes the market rises dramatically and sometimes it falls drastically. A rising market is followed by a declining market that is again followed by a rising market, and the cycle repeats again and again. But these cycles do not happen or repeat in uniformity. There is no reliable way to predict precisely when the next direction of the cycle will take place or how long it will last. Prediction of a longer-term cycle is made even more difficult by movements of smaller cycles. Elliott Wave practitioners believe these cycles are the result of psychological reactions of market players. Economists maintain that all these movements and cyclical patterns are caused by economic factors. Financial astrologists believe these cycles are influenced by various planetary movements. Yet, in its chaotic behavior, the market seems to conceal elements of order, displayed at times in symmetrical and harmonic patterns.

These patterns become the catalyst for technical analysis, which is based on the premise that prices tend to move in trends. Simply put, this means that once a trend of the share price is established, the next move of the share price is more likely to continue in the same direction. In other words, if a share price is firmly established in a bull trend, the share price is more likely to continue increasing rather than decreasing in the next trading period. Most technical trading strategies are based on this assumption. Every trader needs a trending market to make money.

If there is no trend after a trade has been executed, there will not be any profit.

With today’s developed technologies and high-speed computers, more and more equity funds are turning to programmed system trading using superfast computers to catch the trend by employing complex algorithmic information to churn revenue and profits.

Having a trading system helps to alleviate fear and tension, reducing the burden of discretionary decisions and the anticipation of price reversals or breakouts. A good trend system is one that generates reliable trend signals most of the time. It will help us to respond quickly to price actions.

The trading method introduced in this chapter is not a fully automated trading system. It is a discretionary trend system. The method’s core system is based on crossovers of price and various moving averages and the synchronization of moving average crossovers to reflect trends in progress and probable change in trend. The trading method includes two additional indicators: a volume indicator for additional confirmation of trend breakouts, and a momentum indicator to depict the velocity of trend.