Monday, August 11, 2014 9:55:58 PM
***BY ART HILL.......TREND, SETUP AND TRIGGER FOR IWM... I presented a basic trading strategy at ChartCon this year. Today I would like to review this system and apply it to the Russell 2000 iShares. Overall, I think a trading strategy requires at least three parts: trend, setup and trigger.
First, and foremost, trend is used to identify overall direction. We want to look for bullish setups in an uptrend and bearish setups in the downtrend.
Second, a setup is used to identify a price level with reduced risk. This would be a pullback within an uptrend or an oversold bounce within a downtrend.
Third, we need a trigger to indicate that the bigger trend is resuming. During a pullback within an uptrend, a security can become oversold and remain oversold. This is why we need a bullish trigger to indicate that buying interest is returning. Next, let's look at the indicator details.
Chart 3 shows the Russell 2000 iShares with the 125-day TRIX, RSI(14) and StochRSI(14).
TRIX is used for trend identification. TRIX measures the 1-period Rate-of-Change of the 125-period triple smoothed exponential moving average (TEMA). TRIX is positive when TEMA is rising (uptrend) and negative when TEMA is falling (downtrend).
14-period RSI is used to generate the setup by identifying a pullback within the uptrend. A move below 40 signals a slightly oversold condition that warrants our attention. I used 10-period RSI for SPY, but changed to 14-period RSI for IWM because it is more volatile.
StochRSI is used for the trigger. A move to 1 indicates an upthrust in momentum that signals an end to the pullback.
This three step process is certainly not infallible, but it does provide us with a framework for trading in the direction of the bigger trend.
As far as stops are concerned, a quick move below .20 in StochRSI would signal a momentum failure or chartist can set a trailing stop using the Chandelier exit.
The current IWM chart shows a long-term uptrend because 125-day TRIX is firmly positive. Keep in mind that we are not concerned with the immediate direction of the TRIX oscillator. We just want to know if it is positive or negative. 14-period RSI moved below 40 to become oversold in mid July. The first two pieces of the puzzle were in place three weeks ago, but we did not get the trigger until today when StochRSI surged to 1. IWM became oversold twice as RSI did a double dip. Though certainly not fool proof, waiting for a StockRSI trigger would have prevented a whipsaw. There are no guarantees that Monday's signal will work. Frankly, it will work until its does (i.e. it is proven otherwise). And finally, notice that this indicator signal has triggered before a breakout signal on the first chart. Momentum indicators often trigger before a price breakout.
First, and foremost, trend is used to identify overall direction. We want to look for bullish setups in an uptrend and bearish setups in the downtrend.
Second, a setup is used to identify a price level with reduced risk. This would be a pullback within an uptrend or an oversold bounce within a downtrend.
Third, we need a trigger to indicate that the bigger trend is resuming. During a pullback within an uptrend, a security can become oversold and remain oversold. This is why we need a bullish trigger to indicate that buying interest is returning. Next, let's look at the indicator details.
Chart 3 shows the Russell 2000 iShares with the 125-day TRIX, RSI(14) and StochRSI(14).
TRIX is used for trend identification. TRIX measures the 1-period Rate-of-Change of the 125-period triple smoothed exponential moving average (TEMA). TRIX is positive when TEMA is rising (uptrend) and negative when TEMA is falling (downtrend).
14-period RSI is used to generate the setup by identifying a pullback within the uptrend. A move below 40 signals a slightly oversold condition that warrants our attention. I used 10-period RSI for SPY, but changed to 14-period RSI for IWM because it is more volatile.
StochRSI is used for the trigger. A move to 1 indicates an upthrust in momentum that signals an end to the pullback.
This three step process is certainly not infallible, but it does provide us with a framework for trading in the direction of the bigger trend.
As far as stops are concerned, a quick move below .20 in StochRSI would signal a momentum failure or chartist can set a trailing stop using the Chandelier exit.
The current IWM chart shows a long-term uptrend because 125-day TRIX is firmly positive. Keep in mind that we are not concerned with the immediate direction of the TRIX oscillator. We just want to know if it is positive or negative. 14-period RSI moved below 40 to become oversold in mid July. The first two pieces of the puzzle were in place three weeks ago, but we did not get the trigger until today when StochRSI surged to 1. IWM became oversold twice as RSI did a double dip. Though certainly not fool proof, waiting for a StockRSI trigger would have prevented a whipsaw. There are no guarantees that Monday's signal will work. Frankly, it will work until its does (i.e. it is proven otherwise). And finally, notice that this indicator signal has triggered before a breakout signal on the first chart. Momentum indicators often trigger before a price breakout.
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