The last two showcases have dealt with techniques on how to properly apply the Cycle Forecaster to timing trades in the futures market. This showcase will wrap up the discussion with a recent day trading opportunity in the S&P 500. Below is a chart of Friday's action:
We have applied basically the same suite of indicators that we have been using during the Cycle Forecaster discussion the last 2 showcases. This setup consists of Exhaustion Bars, momentum (in this case our genetically adaptive version - MomGA), and of course the Cycle Forecaster. This is all that is really needed to trade the markets. Anything less and there are too many false signals due to a lack of confirmation tools. Add one or two favorite indicators and a trader should be able to use this to find some good opportunities in the markets.
There was really only one trade that stood out on Friday and it was a sell signal right at the top. This was not a difficult trade to find, but you had to understand these tools and what they were telling you. Basically, the market took off sharply in the morning and kept this up until around 11:00 EST. The reason we knew to look to sell is that MomGA crossed below the original MA_Momentum line early on and declined into the peak. It actually gave us a bearish divergence signal when compared to price, which made the sell indications even more apparent.
This indicator has set the stage, but we need more to be able to actually place a trade. That's where the Exhaustion Bars and Cycle Forecaster come in. Notice at the peak we had an Exhaustion sell signal and Cycle Forecaster turning point within 2 bars of each other. This is at the same place as the completion of the bearish divergence signal, so everything happened cleanly at once. This is the kind of situation that a trader needs to be looking for. All that was left was to place a sell stop below price. The market moved down for the rest of the day, and a sensible trailing stop should not have taken anyone out until very late in the day. That's an easy 5-10 points per contract reward for listening to the indicators.
There is one point that we would like to make. It is very important to sell using a stop below price action rather than market orders unless you are the kind of trader that will bail out quickly to keep losses at a minimum. Notice the first Exhaustion sell signal of the day that occurred around 10:00 in the morning. This happened at the same as MomGA crossed below MA_Momentum and at a minor Cycle Forecaster turning point. Although we like to see divergence as well, this could easily be interpreted as a sell signal and it could have gotten ugly if we would have just jumped in at the market. A sell stop below price would have saved us, as it never would have been hit. We would then have been free to try again the second time at the high. The best analysis is still just analysis. Make the market confirm the analysis by moving the proper direction to get you in. Do this by using stops to get into and out of positions. Although you won't sell the high or the low tick, you'll avoid costly losses and premature entries like the one just described.
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