The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
Defining Trend
We hear the comment over and over again that a trader should
trade in the direction of the trend. This is critical for Intra Day traders, short term
and even mutual fund managers.
But how does one define trend. The first requirement is to define
time frame. The trend on a 5 minute bar chart may be different than that of a daily bar
chart.
The time frame can differ between, but the indicators and studies
still work in most time frames.
For our example here, we are going to use the crossing of a 5
period exponential average and a 20 period exponential moving average on 60 minute bars.
Moving averages will never get you in at the bottom of a move, and will not get you out at
the top. It will help you catch the meat of major trends.
As a Day Trader, I always have my finger on the button. When I
see an indicator that says exit, I am out. There are no ifs, ands, or buts. You have a
plan and stick to it. Since I am in front of a machine all day, it is easy for me to enter
and exit trades. For others, an order in anticipation of a signal may be appropriate.
Let's look at an example in Qwest Communications, QWST
A Buy signal on July 6 placed a trader long in QWST. QWST has had
a nice run from that break hitting a high of 36 3/8 on Monday July 12.
Today QWST had a mid day reversal of trend. This occurred at noon
EST. Based on this definition of trend, I would exit QWST at this crossover. An aggressive
trader may consider a Short here in QWST. I would place my stop on a Short at 35 7/8.
Not all trades using this methodology work out this well. But for
a stock to take advantage of a run like this, you need a strategy in your toolbox that
allows for profits to run.
I am sure you have heard, let your profits run and cut your
losses. Moving average crossovers help you with the discipline if you follow the rules.
This method also works well with 5,15, or 30 minute bars. Have a plan and stick to it!
