First the brutal disclaimers: What follows is NOT a trading “system.” It is merely an “idea.” Even more brutally, I can’t even claim that it “works”. All the testing I have done so far is more anecdotal. Also to an extremely huge degree, the actual entry trigger and exit trigger that trader might choose to use will have – as always – at least as much if not more impact on overall trading results as the actual “alert” signal detailed below.
Got that? OK, then let’s proceed.
The Debate
The ongoing debate in trading is always – trend-following or countertrend? Which is the way to go? There are (conservatively) at least a bazillion and one ways to argue one way or the other. Figure 1 displays ticker TXN with upper and lower “Acceleration Bands” (code for AIQ TradingExpert appears after disclaimer at end of article) drawn.
Figure 1 – Ticker TXN with Acceleration Bands (Courtesy AIQ TradingExpert)
Want to start a debate? Ask this question: Is it better to buy when price hits the upper band or the lower band? Sometimes price hits the upper band and just keeps going. Sometimes it hits the upper band and the move peters out and reverses fairly quickly.
Going with the trend can lead to some big winning trades along the way, but typically involves a lot of whipsaws as well. Trading countertrend can lead to some great, quick profits – expect of course for when the initial trend never quite reverses and quick losses accrue instead.
What to do, what to do?
So the “idea” I mentioned at the outset generally goes like this:
*In an uptrend (which we will define in a moment)
*Wait for price to hit the Upper Band
*Then wait for a pullback
*Then wait for the uptrend to reassert itself
Got that? OK, me neither exactly. So let’s try to define things a little more clearly.
1. As long as the closing price remains above the 200-day moving average, we will call that an “uptrend”
2. Within an uptrend wait for the high of a trading day to reach or exceed the Upper Acceleration Band.
3. Following #2, wait for the 4-day RSI to drop to 32 or lower with the following caveats:
*If price touches the Lower Acceleration Band OR closes below the 200-day moving average
*Then the setup is invalidated
This is the “Setup”. For sake of example I will add an entry trigger as follows:
4. Following a valid #3 Alert Signal, buy when price exceeds the previous day’s high
I am going to purposely NOT add an exit trigger – just so that no one decides to “try it out” without at least giving it some thought on their own.
So Figure 2 shows the “Alerts” and “Entry Triggers” for the chart in Figure 1.
Figure 2 – Ticker TXN with Example “Entry Triggers” (Courtesy AIQ TradingExpert)
So Figure 3 shows the “Alerts” and “Entry Triggers” for ticker EBAY
Figure 3 – Ticker EBAY with Example “Entry Triggers” (Courtesy AIQ TradingExpert)
So Figure 4 shows the “Alerts” and “Entry Triggers” for ticker CSCO
Figure 4 – Ticker CSCO with Example “Entry Triggers” (Courtesy AIQ TradingExpert)
So are these signals any good? Well, like a lot of trading methods, some look pretty good and others do not. As I also mentioned earlier, a lot depends on the method or methods you use to exit each trade.
Summary
The reality is that there is a chance that the “idea” contained herein is just no darn good.
But also remember that there are other “trend filters” (besides the 200-day moving average), there are other “bands” (besides Acceleration Bands”), there are other oversold indicators (besides 4-day RSI) and there are other entry and exit triggers.
As such, this piece is essentially for people who are willing to do a little digging on their own and, a) become comfortable (or not) with the idea, and b) develop some position sizing, stop-loss and profit-taking criteria.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
Acceleration Bands Code
a is ([high]-[low]).
b is ([high]+[low])/2.
c is (a / b).
d is (c*2).
e is (1+d).
f is (1-d).
g is ([high]*e).
h is ([low]*f).
AccelUB is Simpleavg(g, 20).
AccelLB is Simpleavg(h, 20).
I coded up and tweaked for my purposes and found that it’s a decent mean reversion strategy.
Went with a 4 day RSI > 64 as an exit to keep it simple.
Cheers,
Ryan