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This showcase is basically a continuation of last week's discussion about the Cycle Forecaster. Now that everyone understands the turning point method of using the Cycle Forecaster, we've decided to give a few examples of recent trading opportunities to help make this as clear as possible. Aside from the setups we will be talking about, keep in mind how many bad trades were filtered out by using this strategy. Everyone is always excited about finding tools that get them into the market right before a big move. It is our opinion that more money would be made if traders focused more attention on obtaining tools that kept them out of the market instead. If we can avoid overtrading and streaks of losing trades, we are in a pretty good position to make profits. Below is a 15 minute chart of the S&P 500 market from the last week:
This should now be a very familiar setup to those who have been following these pages on a regular basis. Before we discuss the yellow arrows on the chart, lets go over what we are looking for in a trade setup. First we want the Cycle Forecaster (white line) to be at a clear turning point. Although we would prefer to trade in the direction of the forecast, we are mostly concerned with timing and should pay more attention to when the forecast turns rather than what direction. Once we have found a turning point, we will use our other tools to get us into the market. The oscillator at the bottom of the chart is our genetically adaptive momentum curve (light blue) overlaid on top of the original 13 bar MA_Momentum line that it is based on. We look for divergence signals, as highlighted by the purple trendlines, and crossover signals. Lastly we will watch what the Exhaustion Bars are doing. These appear as red and blue dots above and below the price data.
There are four interesting areas on the chart, and we have marked them with yellow arrows. We will discuss them in order starting from the first arrow at the right.
1) This is a nearly perfect setup. We are at a cycle turning point, have a confirmed Exhaustion Bar sell signal, and notice a bearish divergence signal. Sell this one when the adaptive momentum crosses below the original or off of the exhaustion bar. This was worth 10-15 points depending on how long it was held and how quickly we could have jumped in.
2) The next arrow is a little messier, but would still qualify as a good setup for aggressive traders. We had a cycle turning point and exhaustion buy the middle of the 9th, but momentum confirmation only came on the morning of the 10th. Since everything is not happening all together, we need to be cautious around this one. Our momentum crossover happened on the large range bar the morning of the 10th. If we weren't in by the close of this one, it would be best to pass as the stops were too large to warrant the trade. Aggressive traders who jumped in at the beginning of that second bar could have made another 10-15 points.
3) Our third arrow comes on the afternoon of the 10th. We've got a cycle high, an ExBar sell at the top, and momentum divergence. Our blue MA_MomGA has been below the red original for about an hour, so the stage is set for a short trade. If we held this one to the close it would be a wash trade, but we could have gotten out earlier with a nice profit if we kept moving our trailing stop. The result is a trade worth 0-5 points.
4) Our last arrow comes Friday morning after the big slide. Prices bottomed 1 bar before our cycle forecaster said they should and took off for the rest of the day. The original MA_Momentum gave a divergence buy, but the adaptive version did not. There was no Exhaustion Bar here, and since price had already moved quite a ways before the momentum crossover occurred, we would have sat this one out based on these particular tools. If you felt lucky it would have been worth it in the end, but in our opinion its best just to hang back and protect your capital rather than plunge into unclear trades.
So after a week of trading we took three trades for a combined profit of 20-40 points. Of course this was the most conservative approach, which kept us out of the market most of the time. There were many other opportunities for those who were more experienced and familiar with these tools, but it is not necessary to worry about profits that could have been. It is not necessary to catch every move. As long as a profit is made in the end and capital was protected then trading has been successful. Stay tuned...