Sample Bullish Reversal Trading Strategy with Market Scan for the iPad.
Filter 1: Bollinger Band narrowest in the last 6 months
The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.
Many securities go through periods of high volatility followed by periods of low volatility. Using Bollinger Bands, these periods can be easily identified with a visual assessment. Tight bands indicate low volatility and wide bands indicate high volatility.
See the yellow highlighted section on the screenshot below. [Click Screenshot to Enlarge]
A Couple of reminders
- The text color of the button will turn green to show that there is a selection made with that indicator (see button “BOLL”).
- Date selection is “0”, meaning we’re filtering the Last Trading Day.
Filter 2: MACD rises above the signal line
When the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid entering into a position too early.
[Click Screenshot to Enlarge]
Now, we have only 2 stocks to view for further analysis (data as of 12/02 – DHX: Dice Holding Inc., MEAS: Measurement Specialities Inc.). Please note that this number will change every day with the market condition. If you end up with a higher number of stocks, you can use a more rare filter criteria or add new filters to reduce the number of stocks to a manageable size.
[Click Screenshot to Enlarge]
Does this mean that these stocks will go up the next trading day? Of course not. This is just a scanning tool for you to filter the stock market so you can save time and find profitable investment opportunities.
One of the best reversal indicator is Parabolic SAR. It is a technical indicator that is used by many traders to determine the direction of an asset’s momentum and the point in time when this momentum has a higher-than-normal probability of switching directions. The Parabolic SAR is calculated almost independently for each trend in the price. When the price is in an uptrend, the SAR appears below the price and converges upwards towards it. Similarly, on a downtrend, the SAR appears above the price and converges downwards.
Here are the same charts with Parabolic SAR. [Click Image to Enlarge]
One of the most important aspects to keep in mind is that the positioning of the “dots” is used by traders to generate transaction signals depending on where the dot is placed relative to the asset’s price. A dot placed below the price is deemed to be a bullish signal, causing traders to expect the momentum to remain in the upward direction. Conversely, a dot placed above the prices is used to illustrate that the bears are in control and that the momentum is likely to remain downward. The first entry point on the buy side occurs when the most recent high price of an issue has been broken; it is at this time that the SAR is placed at the most recent low price. As the price of the stock rises, the dots will rise as well, first slowly and then picking up speed and accelerating with the trend. This accelerating system allows the investor to watch the trend develop and establish itself. The SAR starts to move a little faster as the trend develops and the dots soon catch up to the price action of the issue. The Parabolic SAR is an outstanding indicator for providing exit points. Long positions should be closed when the price sinks below the SAR line, short positions should be closed when the price rises above the SAR line. It is often the case that the indicator serves as a trailing stop line.
If you have any questions, please feel free to email us.