Position Trading Account: CPU Example
From the chart cpu1.gif, we have plotted the bar chart on the top and a 3 and 7 period simple moving average on the bottom. The latest reversal occurred on Dec 28, 4 days from the end of the chart. Connecting the current lows since then (Rising Trend Line) and then creating a parallel line to touch the tops (Upper Trading Channel) we create a trading channel for the stock. For January 4th at least, the stock could oscillate between 12 5/8 and 14 and 1/8 and still be uptrending, regardless if it closes up or down. If the stock penetrates the lower trendline, then it is probably in another reversal and heading back down. If it penetrates the upper line, then it may signal the exhaustion of a trend (and we would expect a horizontal and then negative reversal to follow soon), or be on a short lived climb due to news, earnings, etc. In either case once we break out of a trading channel, we look for an exit soon.
Given that the trading channel is between 12.625 and 14.125, it is also a decent opportunity for day trading if it opens at or retrenches to the lower limit during the day. If it opens near the top and heads down, then we also know what the maximum potential short would be baring really bad news to cause a reversal (in which case its still a good short). If we are looking to enter, though, we know that in the next few days it should retrace back to the trendlining of around 12.625 on 1/4, 12.875 on 1/5 and 13.125 on 1/6. This is a general estimate, and as chart cpu2.gif shows, this stock can go for several days without touching the lower or upper trendlines.
Picking and entry point for 1/4, I would guess we could enter between 12.75 and 12.875 at some point during the day (2 ticks above the lower trendline minimum). If it never gets below 13 on 1/4, we would wait until 1/5 and try for the 13 limit to assure minimal entry cost. As long as we don't pay the high of the day, it usually a better psychological and financial move. That way, if you decide to exit the following day, you can also pick at least a somewhat profitable exit as long as its still trending up.
I would note here that the blue, yellow and red bars do not correlate to up or down closes, but rather for a trading strategy I employ for long and short (blue and red, respectively). The yellow is the transition day as I assume for end of day trading one cannot exit until data is received that night and plan for the next day's orders. the yellow bar day is the one for which the day's spread crosses the threshold of the trendline.
Also, I do not use moving averages in the trading method, but plotted them as they are usually useful for this stock, can be calculated with any spreadsheet simply, and does provide a leading indication(not that on the day before the crossovers occur, the shorter (3 day) moving average is already turning down). On more volatile stocks, this is not always telling, but is for CPU.
I will try to post similar charts for all 12 stocks in the next couple of days, and will update them as often as I can - particularly at reversal points.
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