At the weekend we review and display the charts for the six symbols we are tracking. We use only basic tools and one simple method. I am flavouring that a little as we go – but not much. As trades occur, they are detailed in terms of our risk process, etc. As they are closed out, the profit or loss is duly reported and our theoretical portfolio updated.
Let’s start, as we usually do with the S&P 500.
S&P 500: Let’s start with the chart…
Our method uses the three moving averages. Moving averages smooth things such as price movement. We can determine certain things by the way they interact. The idea is for the beginner or struggling trader to start with a simple method and risk management system. Your success rate will improve by following a process. Part of our process is to follow only six symbols. Professionals define the pond into which their lines will be dropped. There are different ways of doing this. Right now our pond has six fish in it.
As you examine the chart above you will note three thin lines: the red is 8 period, the blue is 21 period and the brown is 55 period. We start by determining the trend. For us, we accept that if the blue EMA (exponential moving average) is above the brown we are looking at an uptrend. If the blue is below the brown, a downtrend. We will mix in support and resistance as part of our trend determination as warranted.
You can see quite clearly that the blue is below the brown = downtrend. If our set up is down, we will only trade with the trend by using short trades – explained as we go. We use a stock market proxy so you don’t actually have to short anything – most of the time.
Our trigger is the price movement or the red EMA. If the set up is down, we need the price and or the red EMA to cross below the blue. We are currently waiting and watching.
As with the S&P, the chart above is of the futures contract. You can see at the start of April that gold had closed below the blue EMA and the closed above it. Since the blue EMA was already above the brown conveying to us an uptrend set up, we were ready to enter a trade. Let’s take a look at our stock market proxy UGL.
The lower arrow is where we were triggered into our trade at $56.65 for 170 shares per our capital allocation rules. The protective stop was placed just under support to the left of the trigger point $5.18 below. This is important because we made it a trailing stop. As the price moved up so did the stop.
At the second arrow we were stopped out. The high price had anchored the trailing stop at $60.24. We ended up with a profit of $3.14 per share X 170 shares = $533.80.
Our updated theoretical portfolio is now: $ 110,620.80.
Oil has been playing around with the $20 support area for a few days now and finally broke through. The bulls defended that support valiantly, but finally the bears wore them down: there were no more buyers. So since this was our trigger to enter a short trade, we turned to the symbol SCO which is our stock market proxy for oil going down. As oil declines, it rises. This means you can use this symbol in retirement accounts and accounts that wouldn’t normally allow you to benefit from declining prices. SCO was reluctant to follow suit. So, while we have a stop-buy in for SCO, we are still waiting for it to be triggered. Updates coming next week.
You can see that the price has closed below the red EMA, so we turn to our stock market proxy GBTC. We have placed a stop-sell at $6.23. The trade has not triggered yet. Details to come.
USD/EUR is a currency pair. At the beginning of April we were triggered into a trade for EUO, our worthy representative on the stock market. Our trailing stop almost took us out of the trade, but as of writing we remain in it. For now we just let it do its thing knowing that we have a protective stop in place.
Apple is displaying all the signs of an uptrend except, based on our conditions, it is not. While the price is above the red ema and the blue ema – great! The problem is that the blue ema is still below the brown ema. The problem that many students have is waiting for the conditions to be met fully. At this moment ‘it looks like’. These are perhaps the most dangerous words in trading. They don’t have to be those words, it is the mindset. If you have rules, you have to adhere to them or you just turned your objective process into subjective one. The weakest link in the process YOU (and me) just took the wheel – YIKES! Don’t do it. Patience is just as an important factor in trading as any other component.
As an aside, there is resistance at the $300 level to be aware of. We started this adventure just using the moving averages. I have decided to temper that with support and resistance awareness. I actually wouldn’t be in the currency trade if I had introduced this aspect into our process sooner. As you will discover if you look at my book, you can trade from an understanding of support and resistance alone.
If you have any questions or comments, please drop me a line at: firstname.lastname@example.org.