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Using indicators to reduce whipsaws and risk
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Author Using indicators to reduce whipsaws and risk
SwingTrader
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Location: Hyderabad, India

Post: #1   PostPosted: Tue Jun 09, 2009 10:00 pm    Post subject: Using indicators to reduce whipsaws and risk Reply with quote

Example of using indicators to reduce whipsaw trades:

Attached below is today's 5-min NF chart with two EMAs and today's relevant levels plotted. EMAs are EMA(5) and EMA(34).

The idea here is simple. Whenever EMA(5) is above EMA(34), there is uptrend in place so we avoid taking short trades. Whenever EMA(5) is below EMA(34), there is downtrend in place so we avoid taking long trades. Now do understand that once you place these trade filters, your overall profitability of this trading system goes down but the added advantage here is that volatility of your account capital will also reduce which is a good thing. Volatility of your account capital can affect your decision making process so reducing volatility of your account capital is a good idea.

In addition to the above filters one needs to look out for CONFLUENCE of EMA(s) and LEVELS. A breakout above such a confluence can indicate strong up move and a breakdown below such confluence can indicate a string down move. Trades can be initiated when such events occur. Stop losses in such cases can be placed quite close reducing your risk significantly.

One other thing to look for is a big difference between the two EMAs. Trades taken in the direction of trend at this point is going to be risky (big diff between the two EMAs indicates that price has already moved too far to take such a late trade).

I will be posting such charts regularly to illustrate these techniques so everybody understands this clearly. Please post your questions here in this topic about these techniques.

NOTE: Your are free to add your own ideas to these techniques, do not be too inflexible/rigid in using these techniques. These techniques are just to give you an idea of how to reduce risk and help you make good trading decisions.

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RKM
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Post: #2   PostPosted: Wed Jun 10, 2009 8:38 pm    Post subject: Reply with quote

Dear SwingTrader,

Thanks for posting this example of using indicators for use along with your intraday levels. I earlier used to view yahoo finance charts of Nifty Spot with 20 and 50 period EMAs, but the TF was not adjustable and also I did not have access to your levels then.

I have two questions -

1. Why the choice of 5 and 34 EMAs? I was first going to ask why not 30 EMA but I suppose Fibonacci series comes into play here.

2. I plot 3 and 15 period EMAs on my charts because of the 315 strategy on this site. Do you think these can also be applied or these are both relatively fast?

It would be nice to have your views about my queries. We would all welcome more such suggestions on use of indicators for the 5 min TF. Thanks again for this one.

Best wishes,
Makhijani
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Post: #3   PostPosted: Wed Jun 10, 2009 8:59 pm    Post subject: Reply with quote

Dear SwingTrader,

I just saw your other post about today's possible trades. There you have shown the use of the 13 period EMA instead of the 5 EMA. Any special reason, or do you want to tell us the the choice of EMAs is discretionary?

Also, you have mentioned that one should have a good strategy for booking profits. It would be very helpful for novices like me if you could give some suggestions about this because my profits usually tend to slip away from my hands.

Could you please also elaborate about the use of DMI?

Best wishes,
Makhijani
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SwingTrader
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Post: #4   PostPosted: Wed Jun 10, 2009 10:16 pm    Post subject: Reply with quote

Makhijani,

Here are my clarifications:

1. Why the choice of 5 and 34 EMAs? I was first going to ask why not 30 EMA but I suppose Fibonacci series comes into play here.

Nothing special at all about the choice of EMAs. EMA(6) and EMA(20) also would work just as fine. A general rule is that the longer EMA should be atleast three times the shorter EMA.

2. I plot 3 and 15 period EMAs on my charts because of the 315 strategy on this site. Do you think these can also be applied or these are both relatively fast?

EMA(3) is a bit too fast, it could pose problems and introduce whipsaws itself. The idea of using indicators is to reduce whipsaws so it is better to avoid creating additional/different whipsaws. Try 5/34, 6/24, 8,34, 13/34 or anything else keeping the above (three times) rule in mind.

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Post: #5   PostPosted: Wed Jun 10, 2009 10:22 pm    Post subject: Reply with quote

Makhijani wrote:
Dear SwingTrader,

I just saw your other post about today's possible trades. There you have shown the use of the 13 period EMA instead of the 5 EMA. Any special reason, or do you want to tell us the the choice of EMAs is discretionary?

Also, you have mentioned that one should have a good strategy for booking profits. It would be very helpful for novices like me if you could give some suggestions about this because my profits usually tend to slip away from my hands.

Could you please also elaborate about the use of DMI?

Best wishes,
Makhijani


I think my post below and also the additional post I made in today's levels post should clear your doubts about choice of EMAs.

About stops, the ideal ones are EMA(5) or EMA(Cool or high/low but these cannot be plotted in JCharts. You would have to use Live Charts for it until we bring in our own tool that would provide these.

DMI usage - it is a big tropic...one of the best indicators I know once you know how to use it properly. We will discuss more later. I don't want to introduce too many indicators and confuse everybody.

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Post: #6   PostPosted: Wed Jun 10, 2009 10:31 pm    Post subject: Reply with quote

Dear SwingTrader,

Thanks for your clarifications. They do clear many of my doubts. But I think there is perhaps a typing mistake in your reply here -

'About stops, the ideal ones are EMA(5) or EMA(Cool or high/low'. A smiley has taken the place of an EMA, and the high/low reference is also not clear.

Will be looking forward to your discussions on DMI.

Best wishes,
Makhijani
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Post: #7   PostPosted: Wed Jun 10, 2009 10:53 pm    Post subject: Reply with quote

Yes, the EMA( 8 ) got changed to a smiley.
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sandew
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Post: #8   PostPosted: Thu Jun 11, 2009 9:12 am    Post subject: Reply with quote

Good Morning to all.

This post by ST is turning into must-read full of ideas -novel and elementary but critically essential wihch we should always remember but tend to easily forget.

I am a die-hard convert to this strategy now. I have narrated how I use it in the post of June 5 levels by ST in this forum. In addition I use

a. PSAR - very effective in giving me the broader direction, I always keep this on.
b. Bollinger Band - I occassionally refer to it when markets get into narrow range or explodes. A look of BB gives me anticipatory movements. I use BB(20); there is a post here suggesting BB(17) which I am trying too - nevertheless BB can be a supplementary tool at best for intraday.

And finally, I have stopped chasing trades, only when they come on the screen only then I enter.

Thanks
Sandew
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Post: #9   PostPosted: Thu Jun 11, 2009 4:45 pm    Post subject: Reply with quote

Sandew,

Good going!!! I am glad you are adding your own ideas. Eventually every trader will have to do this so he becomes independent.

Good Luck!!!

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Post: #10   PostPosted: Thu Jun 11, 2009 10:48 pm    Post subject: Reply with quote

Hello Sandew,

Your post in this topic as well as the one on 5.06.09 are both full of useful ideas. I will have to try them out gradually to see how they can be most effectively used. As far as I can make out, PSAR is available on livecharts only, so do you have to switch from RT every now and then during the day - or maybe you just open another window.

I shall try to assimilate some of these ideas so that I can also make better trades. Although I have not been actively engaged in day trading I have started using the Elder-rays along with moving averages to guage the market direction.

I would welcome your inputs on how you make use of PSAR, Force Index and ADX ( sometimes the ADX values can be quite high and there seems to be no sign of flattening out).

Best wishes,
Makhijani
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Post: #11   PostPosted: Fri Jun 12, 2009 9:05 am    Post subject: Reply with quote

I am grateful you found something of value what I have written.
1. I use the indicators I have narrated, note NOT TOGETHER all the time. It is a diferent set when market is trending and a diferent set when market is range bound. For range bound I have found STS / FI with ST Levels very effective + PSAR for reference. For 20 point play I add CCI(3).
2. PSAR and FI are too simple. Just put them on and you will know immediatley how they operate. ( I am not interested in their origin nor their formulae)
3. ADX / DMI - this requires lot of time and study to get this right. I suggest 'google' and 'you-tube' ADX to begin.
Thank You
Sandew
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san77s
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Post: #12   PostPosted: Fri Jun 12, 2009 9:32 am    Post subject: Reply with quote

Hi Sandew,
Is it possible for you to post a chart with your additional input along with ST level? if help all of us to understand.

Thanks & Regards,
S.Saravanan
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Post: #13   PostPosted: Fri Jun 12, 2009 3:54 pm    Post subject: Reply with quote

Thanks, Sandew, for your response. You mentioned the indicators you use for range bound markets, but forgot to mention what you like to use on trend days.

Another thing -while FI is available on RT Charts, I find PSAR only on livecharts, and so far I haven't referred to them during market hours. How do you combine the two on a single chart? I think I shall have to read up on use of PSAR and CCI.

Didn't understand your reference to 'google' and 'youtube' for ADX. Do you mean for technical literature on its application?

Would like to have your views.

Cheers,
Makhijani
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Post: #14   PostPosted: Fri Jun 12, 2009 5:07 pm    Post subject: Reply with quote

For trending market like today June 12 from 11.30- to 14.00 I switch to ema 5-13-34 primarily , supplement with FI + CCI (3) on tf 15, 30, 60 minutes. This cci could be a crude way of usage but it serves me well here. When cnadle on 5 minuite tf tends to touch the falling 13/34 ema i choose to add another short. Important, All along I keep an eye on ST levels for targets to begin , and when broken then as resistance - step by step. Swing high, Low break also needs to be looked into when adding the trades. On such trends I go on high alert and try to run my profits.

2. For ADX Indicator best is that you search on 'google' and on 'you tube' over the weekend. You will get very interesting literature. Please compile them in a word file (cut and paste) for repeated future reference. If you want you can share with me . Thanks

3. Today June 12, Bank-NIfty, I found gave good results on tf 5 minute with TRIX + RSEX + Bollinger + ema 5-13-34. Bank Nifty responds best to these indicators in my trade intraday only basis.

I like members of Icharts to share their experiene with individual scripts and what all indicator- combination work best with them. Different scripts respond differently and the trick is to locate which indicator works BEST with which script.

Thanks
Sandew
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SwingTrader
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Post: #15   PostPosted: Fri Jun 12, 2009 5:14 pm    Post subject: Reply with quote

Sandew,

Kindly start a new thread for these discussions (other member's strategies) in "Futures & Options" or "Market Direction" forum and post a link here.

Thanks.

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