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All,
This week I want to complete my discussion of trend channels by
telling how I use them to determine if it is OK to enter the market
and what direction, long or short, I should enter. To do this, I go
back to the old thesis that the trend is your friend. I used to
always have long and short positions simultaneously and would weight
the ratio from even for flat markets up to 3 to 1 in the direction of
the trend for trending markets. However, over time, I found that I
was better suited to just trading with the trend.
My first rule is that I always trade in the direction of the
intermediate term trend. When the intermediate term trend is up, I
only open long positions and when its down, I only open short
positions. I use the Dow Jones Industrial Average as my indicator for
large cap, nifty fifty type stocks, I use the S&P 100 as a
confirmation for the DJI and the S&P 500 as an indication for mid to
large caps. I use the NASD OTC index as my indication for tech and
INet stocks. I use the Russel 2000 as my indicator for small cap
stocks. I feel better when the intermediate term trends of all are
going in the same direction, but can and sometimes do limit my trading
to stocks represented by one index. For the last couple of months
I've been in the process of changing my portfolio from all large cap
stocks to a mix of large and small cap stocks as the RUT broke out of
its Intermediate Term Down Trend in mid Oct and gave a Trader Vic type
trend reversal signal in early November. I'm currently experimenting
with applying trend channel analysis to sector charts and am limiting
my stock selections to strong sectors only, but that's another story.
I've used this rule of trading only in the direction of the
intermediate term trend for quite some time now. I've recently
experimented with some fine tuning, that I'm in the process of
adopting. I use Short Term Trend Channels within the Intermediate
Term Trend Channel for further guidance. I'll describe what I do for
long positions within an Intermediate Term Up Trend Channel (ITUTC).
I won't describe short positions in Intermediate Term Down Trend
Channel, but the strategy is just the mirror image.
If we have a Short Term Down Trend Channel (STDTC) within the
ITUTC I won't enter any new positions and will just sit on the cash
when I close any positions that have hit targets or stops. If the
stock breaks out of the STDTC I'll start entering new long positions
at the rate of one per week. If a Short Term Up Trend Channel (STUTC)
is formed (confirmed by a Trader Vic type trend reversal signal) in
the bottom half of the ITUTC I'll enter new long positions rapidly
until my cash is all committed. As long as the STUTC holds I'll enter
new long positions when I have the cash. When the STUTC is still in
the bottom half of the ITUTC, I'll replace a closed position with a
new position on the day I close the position. When the STUTC is in
the top half of the ITUTC, I'll slow down on entering new positions
and build cash by only entering one new position per week. Hopefully,
that way I'll be fully committed to long positions for most of the
short term up trends and mostly cash for most of the short term down
trends. Right now I only exit positions when my targets or stops are
hit as I described last week. An option I'm considering, but haven't
adopted yet, is to close all long positions associated with a
particular index when the STUTC is broken in that index. I'm in the
process of looking back over my trades for the last few years to see
if this option makes sense. When the ITUTC is broken, I start opening
short positions using the mirror image of the ITUTC strategy.
That's about it, any thoughts or suggestions.
JimG
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