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Disclaimer
Investing / trading in financial instruments involves risk. No representation is being made that
any information presented in this report will lead to profits. The past performance is not
necessarily indicative of future results. Advice should be sought from your broker or financial
adviser regarding the suitability of any investment product in relation to your investment
objectives and risk tolerance level.
The author and publisher make no representation or warranties with respect to the accuracy,
applicability, fitness, or completeness of this report. Further, the author, Asia Charts Pte Ltd,
Dynamic Date Pte Ltd, partners and associates shall not be liable to readers or participants for
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newsletters.
Traders, typically goes through 3 phases of growth in their quest for success in the market.
Initially, most traders approach the stock markets without a fundamental understanding of how
it works, as trading looks deceptively simple. They rely on tips, ‘insider’ advices and
mainstream news reports. They trade what is "hot" at the moment. Most lose money after a
period of time and begin to adopt a more serious approach to trading. Usually, it involves
looking for a trading methodology, investing in books and attending seminars. They learn to
apply common technical indicators such as moving average, relative strength indicator (RSI),
Stochastic and moving average convergence-divergence (MACD).
However, not all indicators work well all the times, and this led traders on a mistaken quest to
find a sort of ‘super indicator’. Often, they combine whatever indicators they were using with
more indicators, like Bollinger Bands, Directional Movement Index, Parabolic SAR, Elliott Wave
and Fibonacci ratio, Ichimoku, etc. They have a misguided belief that a more sophisticated
system is more likely to be successful. As a result, they receive mixed signals from the
combination of various indicators, which leads to confusion and poor overall decision-making.
Indicators by themselves are not the holy grail to trading. Most of them have an accuracy range
of about 60%, but combining them with other indicators can result in diluted effectiveness and
an overall drop in reliability due to their incompatibility. Thus, what is known as ‘analysis
paralysis’ sets in, where over analysing obscures the trader’s perceptions of market realities.
The third stage is where the trader, having sufficient understanding of the market as well as
their own personal strengths and weaknesses, finally realise that the "holy grail" lies within
himself. Successful traders trade their personality in the market. They use strategies that
match their lifestyle and temperament. They are humble, patient and disciplined. They
achieve success after gaining an insight of the market as well as themselves, and approaching
the market with an edge.
The intention of this book is to show you how simple technical indicators can be used
effectively to design a trading system for trend trading. Most traders tend to use technical
indicators "as they are" and often end up with disastrous result. I hope this e-book will provide
you with the proper perspective.
I am confident my book will point you in the right direction and provide guidance on the use of
common indicators in developing a solid trading plan that give you the edge.
The reality of the market is that security price movement is determined by changes in mass
psychology. This psychology is relevant and prevalent across any market. The basis of technical
analysis is that the constant emotional swings cause by changes in mass psychology tend to re-
appear time and time again which provide trading opportunities for those with a keen eye.
To the inexperienced traders, market moves in seemingly random and haphazard. In fact, at
any point in time market movement can be classified into one of two distinct modes of action.
They are:
Fig 1 - Uptrend
3 Asia Charts Pte Ltd, Copyright 2017
TREND TRADING MADE EASY
Fig 2 - Downtrend
b. Ranging - price oscillate between a defined support and resistance levels. This is
where market goes sideways.
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Fig 3 - Ranging
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Fig 4 - Ranging
Technical Indicators
Definition
A technical indicator is used to evaluate price activity for the purpose of making trading
decisions and is generally seen as a signal that provides additional information about the stock’s
price behaviour. It also smoothens out the data for easier overall analysis.
Classification of Indicators
In general, it’s important to know that there’s no ‘perfect’ indicator. Rather, it is crucial to
understand each indicator’s characteristics and what it is designed to do, as indicators from
different groups often contradict each other.
A good rule of thumb is to trade from the left side of the chart, but take your signals from the
right side. Good traders work off technical information that the market is relaying, rather than
attempt to predict trends. Remember that trading is a form of guerrilla warfare, and it is very
important to remain flexible regardless of market conditions or personal beliefs!
• Trending Indicators
Trending indicators are lagging indicators suitable for identifying market trends over the
long term. Like the tail of a kite, they follow the market with no attempt at forecasting, and
help to expose a significant portion of a trend before it changes direction. Examples include
MA, MACD and Average Directional Movement Index (ADX).
• Oscillators
These momentum-based indicators are used as a counter-trend indicator. They catch
turning points in flat (ranging) markets by focussing on short-term price reversal points.
Examples of these include RSI, Stochastic, rate of change (ROC) and ADX.
Different groups of indicators often give conflicting signals. Trending indicators may turn up,
telling us to buy, while oscillators become overbought, telling us to sell. A trader must
understand the characteristics of the indicators he uses and set up a system that take them into
consideration.
When a trader set out to analyze and trade a market it is important that his analysis approach is
built around 3 core components. Any good analytical system must take into consideration :
Because market trends offer the best profit opportunities. The most basic goal of chart analysis
is to define and identify price trends.
Trend also implies price change and it is where profit can be realised. Moreover, a trend, once
established, is more likely to continue than it is to reverse, thus allowing traders to realise their
largest gains.
Defining Trend
An uptrend is marked by a security that makes higher highs and higher lows, while a security in
a downtrend makes lower highs and lower lows (Fig. 5)
Without any reference time, trend is ambiguous and can be confusing, as stock can exhibit up
and downtrends simultaneously across varying timeframes.
Daily charts, unless stated will be used in this book and the focus will be on mid to long term
trend.
Getting Started
Our objective is to trade trend, one of the modes of market action. Two simple actionable
strategies will be introduced in this book.
In the first strategy, I will be using Relative Strength Index (RSI) to design a simple trend trading
system for mid-term trading.
For the second strategy, I will be using Simple Moving Average for the longer-term investing.
To provide an adequate understanding of the indicators, I will also discuss their common
applications as well as their shortcomings.
Section1
A Look at Relative
Strength Index
This momentum oscillator was developed by J Welles Wilder in 1978 and introduced in his
book, New Concepts in Technical Trading Systems. It takes a single parameter of the number of
time periods in order to calculate its index. RSI can be calculated for any period, and the
common parameter used is 9, 14 and 21 periods. The default value for most charting software
is 14. This will be the parameter we adopted in our strategy.
50
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A stock is considered overbought if RSI is above 70. A stock is considered oversold if RSI is
below 30.
According to conventional wisdom, most traders wait for the indicator to move to these levels,
acting only when the indicator reverses positions.
Overbought
Once RSI rises above 70, it indicates that the security has overextended to the upside, and a
short-term top is near. The actual ‘sell’ signal occurs once RSI falls below 70. By virtue of the
term, there’s a tendency for people to think that the stock is expensive and it’s a time to
sell, even though this might not always be the case.
Once RSI drops below 30, it indicates that the security has overextended to the downside,
and a short-term bottom is near. The actual ‘buy’ signal occurs once RSI climbs to any point
above 30. Conversely to being overbought, people assume that oversold stock is cheap and
are tempted to buy.
A trader using an oscillator, such as RSI, Stochastic, ROC, etc would have observed that what is
overbought tends to stay overbought (Fig 10); and what is oversold tends to stay oversold (Fig.
11)
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As seen in Fig 10 and 11, stocks that are overbought or oversold can remain so for an extended
period of time during strong trending markets.
2. Divergences
One of valuable applications of RSI is identifying divergence between the security price and the
indicator. Divergences usually warn of an impending trend reversal.
Divergences occur when the price of a stock and RSI move in opposite directions. Divergence
may be bullish or bearish. Bullish divergences occur at the market bottom while bearish
divergences occur at the market tops.
Bullish divergences occur when the price of a security makes a new low while the indicator
climbs upward, with both variables out of sync. The fact that RSI is showing a higher low
implies the odds of an upturn are higher, thus aptly referred to as a bullish divergence.
October November December 2014 February March April May June July August
Bearish Divergence
Bearish divergences occur when the price of a security reaches a new high, while RSI closes
lower than the previous high. The fact that the indicator is making a lower high increases the
odds of the price turning down.
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The interpretation of divergences is highly subjective, and are very affected by the time period
separating the divergence.
At time, divergences do not follow through in an orderly fashion and may even be negated by
subsequent price action creating a divergence trap situation.
In Fig 15, a bearish divergence appears to be developing only to see the stock price rises
subsequently.
This is of paramount importance to take your signal from the price rather than the indicator.
Simply selling a stock because ‘the price is too high’ and you ‘can only expect it to come down’
is not a wise move. Despite the already high price, prices can move even higher.
Centreline Crossover
The centreline for RSI is 50. A RSI value above 50 is deemed bullish, while a value below 50 is
bearish.
Buy and sell signals are given by crossing above and below the 50 line.
During a correction in an uptrend, RSI often find support at the 50 line before turning back up
again. Similarly, during a throwback (bounce) in a downtrend, RSI tends to halt near the 50 line.
Using a non-extreme number such as 50 often results in more whipsaws. This method relies on
the occasional big move for profit, encountering frequent small gains and small losses. This may
be both emotionally and psychologically exhausting for traders. Often after a number of
whipsaws, most traders tend to skip the next trade, which could end up a big winner.
In order to trade effectively, whether as a short-term trader, position trader, or investor, you
will need to follow a specific set of rules. This set of rules must be embodied in the trading
system that you use.
A trading system identify the stocks that meet your requirements. It also contain specific entry
and exit signals.
Using a trading system helps to development the discipline required to trade well and over time
trader develop confident. Other benefits include :
Trend Trading
Using RSI
The Uncommon Way
Trend is a series of rallies punctuated with pullbacks. If trend is strong, we are likely to see a re-
test of previous high / low after pullback / throwback. In such instance, RSI will likely to re-
enter overbought / oversold position.
The price of a security tends to pop like a champagne bottle at the right pressure once RSI hits
an overbought or oversold level, signifying a possible price development.
We establish a long/short position when RSI enters the overbought/oversold territory. RSI
POP® suggests traders to enter a position when many would have thought that the security is
unlikely to go higher / lower.
The first ‘pop’ functions as an alert signal. RSI has to remain above / below 50 since the first
‘pop’ for long / short respectively. Open position at the second ‘pop’.
Centreline serves as a demarcation between the bull and bears. During a correction in an
uptrend, the RSI will often find support at the 50 line before turning back up again.
Similarly, during a downtrend, bounces in the RSI line tends to meet the resistance at the 50
line before resuming downward.
The first ‘pop’ in early Apr is invalid as RSI subsequently went below the 50 line (marginal). The
'pop' in late Apr is valid as RSI stayed above the 50 line during retracement.
In late Sep, RSI went into overbought making the 1st 'pop'. This was followed by a retracement
which immediately recovered and re-entered into the overbought position, triggering a buy
signal.
Look at the small ‘pop’ in the above two examples. RSI stays below 50, so it remains valid.
Selling short and covering your position at the arrows demonstrate how successful trades are
made.
Obvious Drawback
RSI POP® gives a lot of small gains and losses, occasionally delivering a large gain. It also
requires a lot of discipline to judiciously follow signals. The key is to be there for every move.
Fig. 28 - Illustration of draw back -Small gains and losses but occasional big gain.
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Fig. 29 - Illustration of draw back -Small gains and losses but occasional big gain.
Instead of using 70/30 line as signal to exit a long / short position respectively, 50 line is used
instead. By using 50 line, we can hang on to a winning trade without having to get in and out of
the market too frequently.
Effectively, this becomes a position trading method and is simple to follow without the need to
closely monitor market. It is highly suitable for traders who prefer a more hands-off approach.
As seen in the above examples, many of the short-term signals are ignored. We exit the trade
when RSI crosses the 50 line.
Other Considerations
Taking Partial Profit
Exit half position when RSI crosses down/up 70/30 line respectively
Market Sentiments
Sometime, it may warrant selling an extremely strong stock on an earlier signal given by
crossing of 70 / 30 for long / short position respectively.
An extremely strong stock, RSI is likely to stay above the 70 line for period of time. Crossing the
70 line helps to lock in greater profit.
Similar, for an extremely weak stock is likely to stay below the 30 line for substantial period. It
is prudent to exit when RSI crosses above 30 line.
RSI POP system works fine in ay timeframe : weekly, daily and intra-day. It is trend trading
technique. As are any sound trend trading method, it helps to capture large part of the trend.
It is not effective for trading ranging markets.
Section 2
A Look at
Moving Average
Moving Average
Introduction
Moving Average (MA) is an indicator that shows the average value of a security’s price over a
period of time. While it is possible to plot MA from the Open, High and Low data points, most
MAs are created using the closing price.
For example, a 10-day simple moving average (SMA) is calculated by adding the closing prices
for the last 10 days and dividing the total by 10.
Formula
𝑃1 + 𝑃2 + 𝑃3… + 𝑃𝑛
SMA =
𝑛
Where P = price to be averaged, and n = number of days
Common Applications
Trend Identification
MA is very good at identifying trends. By monitoring MA, we can make the trend our friend. It is
a lagging indicator, which means that it does not predict new trends, but rather confirm trends
that have already been established.
For an uptrend to be identified, the prices should be above MA, and MA should be sloping
upward. You should never sell short a stock during an uptrend.
Conversely, for a downtrend should prices should be below a downward sloping MA. You
should never buy stock during a downtrend.
Each time period can provide valuable insight into different types of momentum. Different time
frames will give you different insights. Most fund managers will look at the long-term
momentum.
A strong upward momentum is indicated when shorter-term averages are located above
longer-term averages and they are diverging. Conversely, a strong downward momentum is
As you can see from the chart above, the three MAs are properly stacked and diverging. In this
case, 20 SMA is greater than 100 SMA, and 100 SMA is greater than 200 SMA, signifying
increasing momentum.
Another common use of MA is to determine potential price supports. The falling price of a
security often stops and reverses direction at the same level as an important average, for
example the 200 SMA seen above. Many traders will anticipate a bounce off of major MAs,
using other technical indicators as confirmation of the expected move.
Once the price of a security falls below an influential level of support (e.g. 200 SMA seen
above), it often acts as a strong resistance. This resistance is used by traders as a sign to take
profits or to close out any existing long position. Short sellers will use it as an entry point
because the price often bounces off the resistance and continues moving lower.
200-day MA is widely followed by many financial institutions and thus provide great validity as
support and resistance.
MA Crossover Strategy
This strategy uses two MAs of different periods to indicate a trend’s direction. A ‘buy’ signal
occurs when the shorter (faster) MA crosses above the longer (slower) MA .
Problems with MA
MA works best in trending markets and often used by traders to identify the direction of the
trend. However, it performs poorly in a sideways market giving rise to whipsaws.
Trend Trading
Using Moving Averages
Dual Moving Average (DMA) System is designed as a long term trading technique
As mentioned, the most popular moving average is the 200-day (40-week). This moving
average has an excellent track record in timing the major long-term market cycles.
In DMA, we utilise the 40-week SMA to identify the long term trend, and a short 10-week SMA
for timing signal. This is unlike the moving average crossover method discussed earlier.
A buy setup is established when price rises above the 10-week SMA and a sell setup is
established when price falls below the 10-week SMA.
Violation is defined as a close below 10-week SMA, followed by a move on the next bar below
the low of the 1st bar.
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Violation is defined as a close above 10-week SMA, followed by a move on the next bar above
the high of the 1st bar.
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Other Considerations
Exit trade when price is over-extended above / below the 10-week SMA for long / short
respectively.
Benefits
Double cross-over method often encounters whipsaws. A lot depends on the manner of the
cross-over. With the DMA method, whipsaws are minimized.
Double cross-over method has a tendency to return a large portion of the profit during severe
sell-down. The cross-over exit often comes too late. DMA helps to mitigate this problem.
When used correctly, DMA enables traders to capture a large portion of the major trend.
A moving average is like any tool. It is essential to know its capabilities and its limitations
before its potential value can be determined.
Conclusion
I hope this book will give you some perspective on using indicators. Take the ideas that appeal
to you and adapt them for your use. There is no canned solution to one's trading need as no
two traders are exactly the same - beliefs, values, personality, temperament, etc. It is
important that trader continue to learn as it is really an endless quest.
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Contact Us
CK Ee’s Profile
Co-founder of Asia Charts Pte Ltd. Chief Operating Officer and Chief
Trainer of Asia Charts.
Focuses in trading growth stocks that have potential for big gains and
using derivative instruments like , CFD, options and warrants for better
returns. Also an active trader of the forex and futures markets.
• CK has conducted seminars and talks at leading financial institutions like CIMB Securities,
Phillip Securities, Am Fraser, Economic Development Board (Ministry of Trade and Industry),
Singapore Press Holding (Shareinvestor), HomeTeamNS (Ministry of Home Affairs), National
University Singapore Students Investment Society, Nanyang Technological University
Investment Interactive Club, Singapore Management University E.y.E. Investment Club,
Singapore Institute of Management Investment & Networking Club, Singapore Polytechnic
Graduate Guild, Ngee Ann Polytechnic Library, Brunel University Alumni, Singapore Micro-
computer Society.
• Featured in television, major newspapers and magazines – Bloomberg News, Channel New
Asia, Singapore Channel 8, The Straits Times, Business Times, Borneo Post, Sin Chew Daily,
United Daily News, Kwong Wah Yit Poh, Oriental Daily News, Share Investment, City Portal,
and Storm.
www.srtrader.com
www.facebook.com/asiacharts