Technical analysts and traders believe
that certain chart patterns and shapes are signals for
profitable trading opportunities. Many professional and amateur
traders claim that they consistently make trading profits
by following those signals. In this chapter we introduce some
types of chart patterns and the corresponding trading strategies,
that, according to our extensive historical tests, give the
trader an advantage.
The Stochastic Combo trading
strategy is based on the rate satisfying a combination
of conditions of the various technical indicators. For the
buy signal, the chart will have to show a long-term up trend,
the momentum indicators will have to indicate that the contract
is oversold, the RSI will have to be low, and the rate will
have to be near the lower Bollinger Band, showing starting
signs of bounce-back. The figure shows such an example:
Figure 24(a). This is a buy signal from our Stochastic
Combo model. The chart is in an up trend and all the
indicators (RSI, K/D, MACD and Bollinger Band) show that
the stock is oversold. Furthermore, it
has already turned up.
For the sell signal, the
chart will have to show a long-term down trend. Momentum indicators
will have to signal that the stock is overbought, that the
RSI is high, that the MACD is favorable, and that the rate
is close to the upper Bollinger Band, showing first signs
of decline. All this is illustrated in the figure below:
Figure 24(b). This is a sell signal from our Stochastic Combo model.
The trading strategy is
to ride on a general trend and at the same time enhance
profits by capturing the likely short-term mean reversion.
If the rate moves as expected, one should hold until
it penetrates the center Bollinger Band (a 14-to-20-day
moving average), or even until the rate nears the opposite
Bollinger Band. If, however, the rate moves in the wrong
direction, one should cut losses shortly after it
goes beyond the prior day’s intra-day extreme.