Written by:
Patrick Mikula CTA
Mikula Forecasting Company
www.MikulaForecasting.com
patrick@MikulaForecasting.com
Copyright © 2008 by Patrick Mikula All Rights Reserved
The chart below is the 5 minute bar chart for the Dow Jones Average symbol INDU for April 1, 2008. This chart has two indicators added to it. First is a 2 line moving average setup as a stop and reverse indicator. This indicator was added using the template available on the MarketWarrior owner’s page and the settings for this indicator have not been changed from the template settings. The second indicator is a simple 50 period moving average. The Dow average opened with a large gap upward on April 1. The letter “A” on the chart below identifies the first bar of the day for April 1 which is a large upward bar. This represents the opening gap upward. When trading using these two indicators there is only one rule which is, trade the stop and reverse indicator but only in the direction of the 50 period moving average. After the gap open the market stabilized in the price area identified by the letter “B”. At this time the stop and reverse signal is “long” and the 50 period moving average is up. This indicates that after the market opening volatility passed, you would go long somewhere in area “B” which would have been around the price 12440. This trade would have ended at point “C” at the price 12514. You would not go short at point “C” because the 50 period moving average is sloping up. This shows a trade profit of approximately 74 points.
After point “C” the stop and reverse indicator signaled another “long” trade at point “D”. The 50 period moving average is sloping up so this trade would be entered around 12529. Next at point “E” the stop and reverse indicator signaled an exit at point “F” around 12568. You would not reverse short because the 50 period moving average is sloping up. This would have been a trade profit of approximately 39 points. The final trade started when the stop and reverse indicator indicated a “long” trade at point “F”. The 50 period moving average was sloping upward so the trade would be entered around 12577. This trade moved through the end of the trading day. The last half hour of trading in the stock indexes during the main trading session is often very volatile so I always recommend looking for a place to exit the market as the last half hour approaches. There was a lot of trading around the price 12633 as the last half hour approached so I selected this as a exit price. This final trade would have made approximately 56 points profit.
