Knowledge
 
Strategies
 

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In this page we will discuss some strategies which are present in our software Trend Analyser. The strategies discussed are :  

Trend Energy  
Chaos Alligator  
TA Alligator  
Support Resistance Lines  
Escala  
C9 Reversal  
TA Forecast  
 
Strategies & Related Information
 

Trend Energy

How to trade using Trend Energy strategy ?
 

1. When you have a bullish view on a stock ?

The first green bar after a 'blue' bars is a buy signal. It is an indication that a short-term weakness is over. Buying may be done above the high of the last bar. A stop should be placed slightly below the low of the preceding down move. The appearance of a 'blue' bar is a signal to close all long positions.

The first 'brown' bar is also a buy signal. This suggests that the security is gaining momentum. Stop placement is a bit difficult here. If you can find a chart based stop, fine. If not, use the Parabolic SAR, the Alligator Red line or the 34 period Linear Regression line as a stop. When the 'brown' bars stop coming, it may be time to tighten stops or even close the position.  

2. When you have a bearish view on a stock ?  

The first 'blue' bar is a sell signal. This suggests that the security is losing momentum. Stop placement is a bit difficult here. If you can find a chart based stop, fine. If not, use the Parabolic SAR, the Alligator Red line or the 34 period Linear Regression line as a stop. When the 'blue' bars stop coming, it may be time to tighten stops or even close the position.

When stock is in downtrend, then the first red bar after 'brown' bars is also a sell signal. It is an indication that a short-term strength is over. Selling may be done below the low of the last bar. A stop should be placed slightly above the high of the preceding up move. The appearance of a 'brown' bar is a signal to close all short positions.

 3. When you do not have a view on a stock ?  

Trend Energy is very effective when you have a sense of direction for the stock. Yet, sometimes the stock may not be on your radar screen, thus you do not have a view on it. Even in such cases, the buy and sell rules discussed here remain useful. If the stock has seen a big up move with many 'brown' bars, then the first bar which is a 'normal' bar is a signal to initiate short positions. If the stock has seen a big down move with many 'blue' bars, then the first bar which is a 'normal' bar is a signal to initiate long positions. All such positions should be protected with proper stops. All such positions should be protected with proper stops. If the stock has seen a big down move with many blue bars, the first bar which is a normal bar is a signal to initiate long positions.


 

Chaos Alligator

The Chaos Alligator is a trading strategy based on the Alligator and Fractals concept explained by Bill Williams in his book – The New Trading Dimensions. The basic theme is to develop a robust method of trading that should withstand the pressures of different types of market conditions. The Chaos Alligator strategy hopefully meets these requirements.

Basic Rules
When the three lines are aligned a trend exists. The three Alligator lines together determine the trend.
1. No Trend : When the three lines are intertwined or mixed with each other, traders should avoid trading in this situation.
2. Up Trend : An uptrend is signified when Green line is on the top, then Red line below it, and Blue line at the bottom.
3. Down Trend : A downtrend is signified when Blue line is on the top, then Red line below it, and finally Green line at the bottom.

Concept of Fractals
Up and Down Fractals determine the point at which buying or selling should be done.
1. In a Non-Trending market, we take both buy and sell signals.
2. In an Uptrend, we take only Buy Signals. The latest up fractal acts as a buy level.
3. In a Downtrend, we take only Sell Signals. The latest down fractal acts as a sell level.
The Up Fractal is a series of at least five successive bars, with the highest high in the middle, and two lower highs on both sides. Given below is an example of Up fractal.  


The Down Fractal is a series of at least five successive bars, with the lowest low in the middle, and two higher lows on both sides. Given below is an example of Down fractal.


The fractal can be identified two bars after the highest bar or the lowest bar was formed. This should be obvious. This information is available only after the current bar has been made - that two bars ago, a bar was formed which is higher/lower than the current & the previous bar.

Understanding The Dot Colors
Green Dots signify buy signals in an 'Up Trend'. When we are in an uptrend, there are no sell signals. There is one exception. When a V shaped reversal is detected, you will see a brown dot appear which gives a selling level. This sell signal comes even though the Alligator is showing an uptrend.
Brown Dots signify sell signals in a 'Down Trend'. When we are in a downtrend, there are no buy signals. There is one exception. When a V shaped reversal is detected, you will see a green dot appear which gives a buying level. This buy signal comes even though the Alligator is showing a downtrend.
Blue Dots signify a 'Non-Trending / Sideways' market. When the market is sideways & the Alligator lines are intertwined (mixed up), we can take both buy & sell signals. This is the period when Alligator is sleeping. We buy above the last up fractal if the fractal is above the red line. We sell below the last down fractal if the fractal is below the red line. Thus, you will usually see two blue dots, one for buying & one for selling. Sometimes, only one dot is visible, since there may be no valid fractal for the other trade.
 

Remember
DOT's which appear above price highs are buy levels.
DOT's which appear below price lows are sell levels.
Often, the Market experiences V shaped reversals. In such cases, the direction of prices is opposite of the direction in which the Alligator is moving. The Chaos Alligator strategy takes care of such reversals. This is a significant improvement over the traditional Bill Williams strategy.
 

TA Alligator

The Alligator is a set of three smoothed moving average lines, created by Bill Williams) and described in his book – The New Trading Dimensions.

Bill Williams describes the Alligator as being like a compass which keeps your trading in the right direction. The Alligator helps you spot a real trend and stay out of range-bound trading, which always result in losses. The Alligator is the combination of three balance lines viz., the blue line (alligator's jaw), the red line (alligator's teeth) and the green line (alligators lips).

Uses of TA Alligator Indicator
1. TA Alligator identifies trending & non-trending markets.
2. It also specifies the direction of the trend.

Basic Rules

1. If all three lines are intertwined, the Alligator is asleep and the market is range-bound. The longer it sleeps, the hungrier it gets. When it wakes up from a long sleep it chases the price much farther, therefore price movements are much stronger.

When the Alligator is asleep, stay away.

2. If the Alligator is not asleep, the market is either uptrending or down trending. If the prices are above the Alligator's mouth then its an uptrend and if the prices are below the Alligator's mouth then it's a downtrend.

Once the Alligator wakes up, it opens its mouth (the three lines diverge) and starts hunting. Having eaten enough, it goes to sleep again (the three Lines converge), so it's time to take profits.  

Advanced Ideas

Divergent Bar – The First Wise Man

A sharp up trend will often see prices moving up steeply. The Alligator lines are slow to catch up, and they will be far below prices. Such conditions result in divergence between the momentum in Prices and momentum in the Alligator. Price rise is steep while the Alligator movement is less steep or sometimes flat. When this happens, look for a reversal bar to signal at least a short term reversal (A reversal bar is a price bar which makes a new high but closes in the lower 50% of the day's range). Once a reversal bar is identified one can Sell below the low of the reversal bar with a stop little above the high of the same bar. 

Support & Resistance Lines

Daily Pivots (DP), support and resistance are based on the prior day's high, low, and close. These values suggest where the stock will pivot up or down and hit levels of support or resistance.

These can best be understood using the analogy of jumping up and down in a high-rise building. The floor beneath your feet is your "support" and the ceiling above is the "resistance." You would encounter resistance as you hit the ceiling and support as you landed back on the floor. If the floor gave way, the next lower floor would be the next support level. If you continued jumping, the ceiling above you, which used to be the old floor (prior support), would now be resistance.

For instance, suppose a market trades between 90 and 100 for some time. At 90 buyers would be expected to come into the market as prices are perceived to be cheap. By the same token, at 100, sellers would be expected to come into the market as prices are perceived to be expensive. Once the support (90) is broken decisively, the target for the stock then becomes the next level of support. Also, the former support level becomes resistance (and vice versa). This is only natural because those who bought the stock at the original support level (90) may be looking to get out at breakeven.

Support and resistance levels are normally found through chart analysis. If a market trades at a certain level for some time (i.e. bases) and then begins to rally, that level will provide support should the market come back in. On a smaller scale, pivots, support and resistance levels attempt to project where intraday support and resistance will likely occur based on the prior day's range and close.
On a smaller scale, pivots, support and resistance levels attempt to project where intraday support and resistance will likely occur based on the prior day’s range and close. This is only natural looking to get out at breakeven.

 

Escala

 

Escala Strategy depicts the market direction.  It is a trend follower and, because all the well-known rules of support/resistance, trend-lines, time frames, double or triple tops/bottoms, ascending/descending triangles and retracements apply, the trader will quickly and easily grasp the messages the market conveys.
 
Escala is both a charting style, an Indicator and a trading system in itself. It embodied the thinking found in the modern-days trend following systems.

The basic concept is to buy on the completion of a green line and to sell on the completion of a red one. Buying or selling after the market turned is the preferred choice of trend followers who avoid trying to pick market tops and bottoms, while going with the market flow once a new trend is visible.

The exit signal comes in one of the following ways :

  • when there is a signal in the reverse direction, i.e. when a trader is long with green lines and a red line appears. This is the real exit signal.
     
  • when a profit target is being arrived at or,
       
  • on a trend-line violation, making it unnecessary to wait for a real exit signal to be flagged or,
     
  •  when the market fails to move according to expectations.

Escala designed seperately for IntraDay

For intraday trading, the Escala chart is setup to calculate the trend from today's open. This prevents the previous day from influencing today's analysis. Intra-day rule: on a 5-minute chart, if green lines outnumber the red ones by 10:00 a.m. the day will have a (strong) bullish bias implying that only long positions must be entered into throughout the day whenever bottoms occur. Conversely, if red lines outnumber the white ones by 10:00 a.m. the day will have a bearish sentiment, implying that only short positions must be entered into throughout the day whenever tops occur.

C9 Reversal

This strategy is designed specifically to predict potential price exhaustion and likely price reversals.

It is based on an indicator called 'Sequential' developed and trade marked by Tom DeMark. The C9 Reversals strategy differs in many ways from Mr. DeMark's Sequential indicator.

This strategy provide signals not only on a daily, weekly, and monthly basis but also intraday and has an impressive record of identifying and anticipating turning points in equity and commodity markets.

Often, a completed C9 is the best way to identify buyer or seller exhaustion zone.
 

How it works ?

The C9 indicator consists of a set of numbers from 1 to 9 and the letter 'C'. The numbers and the letter 'C' are displayed on the price chart at specific locations. When series of number from 1 to 9 appears below prices then selling may be getting exhausted and when they are appears above prices then buying may be getting tired.

Sometimes, the letter 'C' comes in the next bar after the number 9. The letter 'C' tells us that the exhaustion process continues. 'C' stands for 'Continued'. It is important to note that in a strongly trending market it is possible for the trend to move a lot further before finally getting exhausted. That means many bars can appear continuously with letter 'C'.
 

How to trade using C9 Strategy ?

When the number 9 appears (or the letter 'C' ) it means that prices are ready for reversal. Whenever the subsequent bar appears without the number 9 or the letter 'C' then traders may want to book profits on existing positions.

For a bullish trader, the 'bulls are exhausted' signal comes when 9 numbers appears above the bars and for a bearish trader, the 'bears are exhausted' signal comes when 9 numbers appears below the bars. When this happens, traders should either close their positions or tighten their stops.

C9 Confirmation

The C9 signal becomes more powerful when there is additional technical evidence, such as :

• A C9 top 'bulls exhausted' is made where there is earlier resistance

• A C9 bottom 'bears exhausted' is made where there is earlier support

• C9 'bulls exhausted' signal comes with an indicator breakdown like Stochastics sell.

TA Forecast

 

TA Forecast examines previous price movements to make a forecast of the future price. The TA Forecast has two components : Price and Time. Since, this is a forecast, the accuracy depends on future market behavior which is unknown.

Guidelines:

Expect either Price or Time to be correctly forecast. It is difficult to forecast both the elements.

If prices exceed the forecasted box, then a trend of some kind has started. In that case just follow the trend and ignore the forecast.

Interpretation:

TA forecast paints the candle with two colors : Blue and Dark Violet.

Blue Candle : Blue candle indicates the end of the downward movement in prices and gives the upside target which is marked by blue rectangle.

Dark Violet Candle : Dark Violet candle indicates the end of the upward movement in prices and gives the downside target which is marked by Dark Violet rectangle.