STS8 Trading Rules 5 and 6

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Rule 5: Indicators start up move from low levels

The following figure complies with rule 5. To open a long position, indicators must have started an up move from low (oversold) levels.

Ideally there are positive divergences visible between the lower bottoms in price (downward red arrow) and the higher bottoms in the indicators (upward green arrows), before the buying point (vertical green up arrow).

 

Rule 6: Price is far from Resistance

When buying signals are generated, while it looks like you are buying close to a resistance level, you are not complying to rule 6. This will typically be the case when price starts moving down after a medium to longer term uptrend. In the downtrend, buy signals are generally just smaller up corrections.

In the above figure, in the first yellow buy area there is resistance from a previous support and a bigger gap and the 50 periods average while the 50 and 100 average are slowing down.

The second yellow buy area finds resistance from the 200 periods average and close by more resistance from the 50 and 100 average moving down, and a previous support level. Too much resistance to start a long trade.

For all the basic techniques, please consult my book “Capturing Profit with Technical Analysis”, published by MarketPlace Books and available HERE

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