For many the time required to study charts each and every day for entry and exit points is just not available. VectorVest simplifies the analysis down to a few minutes but it takes focus and in a busy world that’s not always easy.
In a previous life I did a lot of training at the institutional level for many of the leading banks of the world. This was in an era where the banks had large proprietary trading floors which is not the case today. Over a few years I evolved four styles of trading and on each trading desk it was important that there were traders spread across all four techniques.
These trading styles were intraday, 2-3 days holds, swing trades lasting 5 to 21 days and longer term trades which last from 5 to 8 weeks. The objective was that the trading desk wished to diversify with respect to trading methodology. If the markets were trending the long term trades and swing trades would do well. If the market was consolidating then the intraday and 2-3 day holds would do well.
It’s the last style of trading which I call weekly zone trading (WZT) which I wish to detail here today. It makes an excellent style for those who can only focus on the markets at the weekend. The technique uses weekly charts and in theory the entries and exits need only be monitored once a week. Most trading platforms will allow resting entry orders to be placed with attached stops if they should be filled. Let the platform do the work.
The technique uses a weekly chart of LSE equities which can be easily found on VectorVest. When a chart is loaded the program defaults to a daily chart. There is a “dropdown” at the top of each chart where this can be changed. I normally load a weekly chart over 3 years.
The next step is to add two moving averages and save the layout as a template so it can be easily added to any chart in the future. If you right click on the blue header above “Price” on the right hand side of the chart there is a drop down where the averages can be added very easily. If you struggle with any of this detail please call support immediately and they will help. It’s a free call on 0800 014 8974 in the UK and 0800 981 891 in SA.
The averages used are 20 week and 40 week. If you apply 20 and 40 to the weekly chart then they are automatically 20 week and 40 week. If you apply the same template layout to a daily chart then they are automatically a 20 day and a 40 day average. Please remember this technique is ONLY applied to weekly charts.
In this article I will focus on buying shares although the technique can be as easily used to find short positions. As we are buying shares most of the candidates should have excellent fundamentals as defined by VectorVest. Putting the technical picture together with the fundamental position adds enormously to the reliability of the technique and the returns made. I wish to focus on undervalued shares with a high earnings potential which is RV in VectorVest speak.
Quite simply if the 20 week crosses above the 40 week then the trend is UP on the share. If the 20 crosses down over the 40 then the trend is Down. Using weekly charts clears a lot of the noise and finds some big trends easily and without much fuss.
If the trend is UP then the 20 will be above the 40. I call the area between the 20 and the 40 the “Zone” and this area is the crux of the technique. The technique does not try to find the start of a trend nor does it try to get onboard when the 20 crosses the 40. The technique looks for a BUY signal when the 20 is above the 40 and the price action (weekly) pulls back into the Zone between the 20 and 40 weekly averages.
At this point please stop reading, open VectorVest UK and load a weekly chart of Randgold Resources over the last 3 years. Apply the 20 and 40 week averages and save the layout. This is the time for that call if you are struggling. The strong silent type has only ever worked for Clint Eastwood.
On this chart the 20 crossed above the 40 in February of 2016. As stated the technique does not try to find the start of the trend but rather get onboard at the first pullback. My mentor MR Gann stated that the safest place to buy is after the first “rising bottom”.
Randgold ran strongly in to March/April 2016 and then pulled back into the zone. That’s where we get ready to get onboard after a positive confirming weekly candle or bar. All of the reversal candle/bar patterns are exceptionally accurate on a weekly chart in the direction of a major trend. In Randgold there was an outside week at the end of May which provided an excellent entry. The entry was the market breaking above the high of that week. The entry should have been placed as a resting order on the Monday morning after the signal fired and a stop placed at the low of the setup weekly candle. A simple sum should have been done to calculate the number of shares to be bought so that only 1% of the account would lost if the trade fails.
The weekly bar/candle reversal patterns are well known in technical analysis. I use just a few of them. These are outside bars where the range of this week (low to high) engulfs the range of the previous week or weeks. I also use weekly “hammer” candles. This is where the market opens, falls to a low and then reverses to above or close to where the market opened. The candle thus has a long tail which I suppose resembles the shape of a joiners hammer.
If you load a weekly chart of Dart and apply the 20/40 template there is a great example of a hammer at the start of February. Dart pulled back into the zone and then charted a bullish hammer. A resting buy order above the high of the hammer with a stop below the low would have produced a very successful trade. In November 2015 there is also an outside week which also produced a successful trade. The chart of Dart is shown below.
At present Dart has pulled back into the zone but no such reversal pattern has been charted. There is nothing at present to do in this share although I will be watching carefully for a reversal but only this time next week.
I also look for “Morning star” candle patterns to initiate a trade when the market in question pulls back into the zone. This is a 3 week pattern which includes a down candle, an indecision candle (open and close at the roughly the same price) and an up candle.
Technical Trader Stephen Bigalow adds an extra moving average to the candle reversal patterns and he argues that this increases the hit rate of the candle reversal pattern. The technique is simply an 8 period (week in this case) exponentially smoothed moving average. Bigalow calls the average the T line or the trigger line. Simply if the reversal pattern candle closes above the 8ema, then this increases the probability that a tradeable move will occur. If you add this rule to your trading plan and the 20/40 template, it frequently means that you have to wait for another week after the reversal pattern is charted before entering the position. Clearly this means that the stop will be higher in value and that means less shares traded so as only 1% of your capital will be lost if the trade does not work.
I think that the 8ema as a filter has considerable merit and it removes the sometimes subjective analysis of the reversal pattern.
Several weeks ago I highlighted the Admiral Groups, BATS and several others as potential buys. This was done using the 20/40 technique and those shares have fared well. During the past week I did an interview on Tip TV with Zak Mir where I identifies five Ft100 shares that looked good. They were all spotted with this technique and all 5 have had a very good week indeed. The interview with Zak is on the blog at www.vectorvest.co.uk/blog and all of the shares discussed look capable of further gains in the weeks ahead. Admiral looks particularly strong.
I am looking at JD Sports and Cranswick in the Ft250. Both shares have great fundamentals on VectorVest and have pulled back into the 20/40 weekly zone. Both shares have charted reversal patterns last week. JD Sports has charted a hammer and Cranswick a morning star. Neither share have closed above the 8ema. I feel that conservative traders should add the 8 ema into the mix.
Targets are far from easy. In shares with good fundamentals as rated by VectorVest many investors will use the weekly zone trade (WZT) to finesse an elegant entry point and from there just sit. That’s probably the best thing to do in JD Sports for instance. Traders should learn to count. In my experience of this technique (which runs to about 20 years) the moves tend to last 5 weeks. If you were to exit and look for other opportunities after 5 weeks, or at least bank some and keep a fairly tight stop, I think you will be pleased. Some moves will last to 8 weeks and every now and then there will be a 13 week move. Staying in the position as long as the market is above the 8ema can keep you in these big moves but also give back a lot of profit if the move reverses after 5 weeks. There is no exact answer and it’s vital that you have decided on your exit technique in advance as a part of a written trading plan.
The 20/40 technique can also be used to initiate short positions and I will tackle that in another post during the week ahead.
I have covered a lot of ground in this entry and I hope it has given you some ideas to personalize into your trading plan.
July 2nd 2016
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