Sharpening your Trading Edge

 

Date: 1/11/2023
Author: Chris Hood

 

 


The Alpha Waves and Power Trend indicators (among others) used in Trade Command give lots of buy and sell signals.

Do I trade every one?

Definitely not.

I have strict rules about going long or short…and each indicator signal must be analyzed and vetted before I place a trade.

Long and short signals on any indicator must be confirmed by a structure that supports the signal.

So how do we determine structure?

Here are three guidelines I use to keep me out of low-probability trades.


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First, never take a long signal when the stock price is directly below a key resistance level, or a short one when the price is just above support.

I’ve coded tools that automatically determine levels of support and resistance.

However, you can determine this yourself visually, with Fibonacci analysis, or using other widely used methods.

A bullish entry beneath strong resistance means it has little room to run to the upside.

Directional plays like long calls and call debit spreads could easily get slapped back down as the price moves into an area of supply. Sellers congregate at these levels creating a supply zone.

Even if a ticker does manage to break through, there will likely be considerable chop or sideways movement. As your long call spends time in chop zone limbo, its value can get eaten by time decay.

Second, an entry signal should have corresponding upward momentum.

I’ve developed a powerful tool I call the Four Squeeze here. It lets me clearly visualize both the direction and amplitude of the stock price.

Most indicators are lagging.

Signals such as moving average crossovers tell you where the price has been, but not where it’s going.

On the other hand, this tool is forward-looking and predictive.

If you don’t have my Four Squeeze, I would suggest keeping an eye on the oscillators like the TTM squeeze, RSI, and fast/slow stochastics.

A short or long entry MUST be backed up by momentum.

When the two align the probabilities increase dramatically in your favor.

And finally, all trades should avoid binary events.

Short-term trades through earnings can go horribly wrong. No one knows how a ticker will react to an after-hours earnings report.

It could work for or against your position.

But there’s no way to know that beforehand, so it’s a complete gamble. And I prefer to trade when I have an edge.

No retail trader has an edge through earnings.

Your likelihood of success in trade comes down to the flip of a coin. An overnight gap up or down against your trade might kill it. Just don’t take the chance.

I’ve mentioned some of my own tools but these rules apply regardless of your entry and exit signals.

Evaluate each one in context before you jump blindly in.

 

Cheers,
Chris Hood

 

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