In this showcase, we will take a look at how to trade the S&P 500 market using a very simple trade selection strategy. We will only use three indicators in this approach: Exhaustion Bars, MA_Momentum, and our S&P forecast. We will look to take a trade when these indicators fire at the same time. It does not take a huge computer and a pile of mathematically complicated indicators to successfully trade. All it takes is a few good tools and some patience to wait for good setups. Here's a chart of this last week with these indicators applied:
Before we get into the details, let's go over each indicator to make sure everyone's on the same page. The Exhaustion Bars are the red and blue dots found at turning points. These important overbought/oversold indications and appear in real time as the exhaustion patterns are detected. The SP Cycle Forecast is shown by the red and blue lines. The blue line is the normal forecast while the red is the inverted. This forecast is known ahead of time, and tells us the best places to look for turning points. Lastly, the pink line at the bottom is MA_Momentum. Divergence signals have been marked with trendlines to make things easier to see.
There are five areas of interest on this chart. We will discuss each in turn:
1) This is a perfect setup according to our system. Momentum divergence, an Exhaustion Bar, and a nice fit between price and the forecast. Everything is working together. This turned out to be the bottom for the day.
2) No Exhaustion bar, but we have momentum divergence and we are at a forecasted turning point. Notice how at this point we are following the red forecast quite clearly. It shows a drop to come, so it is in harmony with the momentum signal. It was a little late in the day, but you could have taken this if you were aggressive.
3) Like #1, a great setup. All three indicators are working together to tell us to sell. You would have had to be quick to take your profit, but you sure wouldn't have lost any money on this one.
4) We've got a double Exhaustion signal plus momentum divergence. The forecast doesn't show anything, but it was early in the day and the main trend was not yet established. You could have taken this if you were aggressive.
5) All three indicators signal together here. It turned out to be a blip in a downtrend, but it moved far enough in your direction that you wouldn't have gotten hurt with a decent stop strategy.
Those were the main trades for this week. Not too many for spending all that time watching the market, but that is not necessarily a bad thing. If you had taken all of the trades, you would have had 2 big winners (1 and 4), 2 small wins (2 and 3), and one small loss (5). Conversely, if you had taken only the "perfect" trades, you would have had one big win (1), one small win (3), and one small loss (5). The important thing to take away from all of this is the need to have patience in waiting for the good setups. More next week. Stay tuned.
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