Tuesday, August 5, 2008

Simple Trading Strategy

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Nice day. What can I say, see my last "Short-term Technical Analysis" post. Pressure of the longer-term oversold levels pushed the market strongly higher. Today, shortly after the market open all short term technical indicators were extremely bullish and the stock market (all indexes - DJI, Nasdaq 100, S&P 500 and other) recovered in the strong rally.

There is a golden rule "never play against a trend", yet, I have never seen anyone who would explain what does it mean and how it could be used on practice. In my understanding this rule could be used in building a simple trading strategy: ignore signals generated by shorter term indicators if they suggest to trade against the longer term indicators and trade only those shorter term signals which go along with longer term technical indicators.

If based on the technical analysis of 1-year chart a trader have made an assumption that this chart suggest that the market is heavily oversold, then this trader may say that all signals generated by the 60-day chart (shorter term chart) to open a short trade (signals to sell short) should be ignored, while any bullish indication (signals to buy) on the 60-day chart could be used to open a long position. This is my interpretation of the "never play against a trend" rule.

I could be wrong, yet I do not understand those traders who build their trading systems based on one timeframe only. For me it's walking in the "dark room". That is why I analyze several timeframes simultaneously.

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