“When it’s not necessary to trade, it is necessary not to trade.”
This is one of my guiding principles. It’s also one of the most difficult for me to follow. Like most people, I want to make money. When I trade, I usually make profits. Therefore, my default thought is that more trading will result in more profit. Unfortunately, that is not always the case. For example, during the month of November, 2020, I made only two trades – far fewer than usual. The US Presidential election and other current events made that necessary.
From time to time, after I make a recommendation, people ask me the reason for the trade. I seldom answer. It could be one or more of several reasons. In this article, I’ll discuss some of the reasons I might buy or sell in no particular order.
- Trend I use the definition of trend originally postulated by Charles Dow and Edward Jones (of the well-known Dow Jones) in the late 1890’s. It is found by checking the high and low of the most recent daily bar vs the previous daily bar. A higher high and higher low signifies an UP trend. If there is a lower high and a lower low, it signifies a DOWN trend. If neither of these conditions is true, the trend remains whatever it was the previous day. If the trend changes from DOWN to UP, I will tend to buy the following day. If the trend changes from UP to DOWN, I will tend to sell the following day.
- Moving averages. If the 3-day simple moving average of the close crosses over the 5-day simple moving average of the close, I will tend to buy the following day. If the 3-day simple moving average of the close crosses below the 5-day simple moving average of the close, I will tend to sell the following day.
- Wicks and tails. If there is an exceptionally long wick on today’s candle, I will tend to sell tomorrow. If there is an exceptionally long tail on today’s candle, I will tend to buy tomorrow.
- Bar color. If there are two red bars followed by two green bars, I will tend to buy tomorrow. If there are two green bars followed by two red bars, I will tend to sell tomorrow.
- RSI. If the RSI(close,4) drops below 20, I will tend to buy tomorrow.
- Volatility. If the bars (no matter what color) are substantially bigger than usual, I will sell, and I won’t buy again until the bars are closer to average size.
There are several other factors that may come into play. I’ll write about some of them later.