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TRADING SIGNALs discussed on this Web Site******
OF PROFIT FROM PRICES SIGNALS
such, the Open, High, Low and Close prices for a day are just plain figures/numbers.
Most people are unable to extract any useful information from them so
it is not surprising to see them totally ignore Open prices and also High
and Low prices often times. As I will show you in next few chapters, the
four daily/weekly prices and trading volume numbers contain tremendous
amount of information and it is not a complex science or math to extract
and use it for trading stocks.
this book, I am going to show you how simple it is to read between the
lines when you compare today's four daily prices and trading volume to
that of previous two or three days. Though the modern investment world
has started ignoring Open prices, it is a very important number when it
is compared to previous day/week's Closing price or with the current day/week's
Closing price. For me Open price is a valuable number to assess overall
sentiment when market opens. Similarly High and Low prices tell me how
sentiment behaved during the session. Throughout my trading signals, I
refer to two primary tests. I run these tests daily to monitor how the
market sentiment and Demand and Supply are changing. Then I add some more
tests to these two basic tests to quantify strengths of such changes and
to figure out trading implications. Here is my two main tests:
- What happened while the market was closed, or the stock was not
trading? To answer this question, I compare Today's Open price (TDO)
to the Previous Day's Close (PDC) price. If Today's Open price is higher
than Previous Day's Close price, it tells me that there is a change
in investor sentiment, and the change is for better. Whatever happened
overnight, while the market was closed, it has resulted in positive
implications for the stock prices today: It has caused Demand to increase
and/or Supply to dwindle. Why would buyers pay higher prices today for
the same thing that was available previous day for less? No one in the
market system wants to pay a penny more for the same thing! This is
even more true for stock market. This happens only when someone is convinced
of a bigger profit down the road than the additional amount he is paying
in terms higher price! For this reason, I take a strong Open price in
a stock as an indication of improvement in investors' sentiment toward
it. (The reverse is true when Today's Open price is lower than Previous
Day's Close price).
There is one caveat: Only a strong Open is not sufficient reason to
buy any stock. It does indicate improved sentiments but it is only half
of the story. Improved sentiment has to result in higher demand and
hence higher prices. This can be confirmed only after watching the full
day's trading. So for this, I have a second test.
- The second test is: What happened today during the entire market
session? As an answer to this question, I compare a day's Open price
to that day's Closing price. If Today's Close (TDC) is higher than Today's
Open (TDO), I conclude that, during the entire session today, buying
in the stock has been more powerful than selling. The sentiment at the
close was at a level higher than where it was when the market opened
or the stock started trading today. A comparison between the Open and
the Close price for any day gives us the net summary or the outcome
of the war in the marketplace between buyers and sellers. If the stock
closed at a price lower than where it opened at the start of the market
session, it means that the sentiment in the stock deteriorated during
As I said earlier, these two tests though they provide useful information
are not sufficient for entering into any trading position. So I have
few more tests to help us be more confident. When I explain various
signals in the following chapters, I will show you these supplementary
tests/conditions that take us few steps further and give us some quantitative
information: how significant is the change in sentiment, how long it
is likely to last, and what we should do to take advantage of it.
FROM PRICES TRADING SIGNALS- AN INTRODUCTION
this book, a signal is an indication to buy, sell, book profit or book
loss. There are various signal as we will see in the next chapter: U-TURN,
FREE FALL, REVERSE etc.
signal in this book will have typically following components:
- Versions- Buy Versus Sell: As we know, there are two types
of trends in stocks- Bullish or Bearish. Similarly, a stock can be traded
in two different ways- Buy or Sell. Hence every signal in this book
will be discussed in these two opposite circumstances- to generate a
BUY signal or a SELL signal. First, we will see how to apply the BUY
version of the signal to capture stock trading opportunities by going
long (buying the stock). Such version of the signal will be labeled
with suffix (BUY) because it gives a Buy signal. Then we will discuss
the same signal in the reverse market conditions to identify 'Sell'
signals. We will suffix them with (SELL). (BUY) signals can be used
to close/cover existing short positions and/or to initiate fresh long
positions. Similarly, (SELL) signals should be used for closing existing
long positions and/or to initiate fresh short positions. As an example,
U TURN is one of our signals. It will have two versions: U TURN (BUY)
to give us buy signals and U TURN (SELL) to give us sell signals.
- A set of tests/conditions: A signal can have from two to up
to ten tests (conditions). When all or most of the tests are fulfilled
(are true) for a given signal, we have a trading signal. An example
of a condition or a test is- Today's Open price is lower than Previous
day's High Price. Another example is- Today's Low price is the lowest
price over last three to five days.
- Action: Every signal has some specific implied action- to
buy, to sell short, to cover a short position or to sell a long position.
- Stop-loss: Every signal has a stop-loss. This is like an expiry
date printed on most of the perishable items we buy in grocery stores.
As time decays most of the food items, it also decays a signal. However
unlike expiration on a specific date for a food item, a signal expires
at a specific price level. This is called stop-loss about which we have
already seen in the previous chapter. Our signal few days back might
be a powerful one, but subsequent developments may have adversely affected
the stock price. If there is some news or some people are suddenly dumping
the stock, our trading has to consider this. Because our signal told
us to buy, we should not blindly stick to a position. So when the stock
price crosses the stop-loss level, we take it as a failure of our signal.
Every signal we will discuss will have this component.
IS OUR SIGNAL?
the next chapter, we are going to look at individual signal. Some of them
are very powerful for short as well as long term trading and some are
good mostly for taking advantage of only the next few days' price movement.
Every signal I use is unique- it has specific set of tests, prerequisites
and implications. Before we get into individual signal, let us look at
the factors that make a signal weak or strong.
- Strength of the Current Trend (existing market conditions):
Strength or power of a Trend reversal signal significantly depends on
the strength of the current trend. When a reversal signal takes place
after a sustained trend, it is likely to mark the end to the current
trend. As a general rule, the powerful the current trend is, the more
powerful the reversal signal is going to be. If a stock has been consistently
going down for the last few trading days and then we have a reversal
signal, this signal is usually a very strong signal.
- Volume: PFP (Profit From Prices) signals attempt to fathom
market sentiment by looking at various prices. Prices tell us if the
current sentiment is continuing or changing. In most situations, prices
alone are not sufficient to determine the magnitude of the changes (or
no changes) in sentiment. So for this, we will use Volume figures (number
of stocks traded). They will supplement prices in our signals. For changes
in sentiment to occur, it is important to have the counter force demonstrate
significant power. This means for a stock that is going down, an emergence
of decisively strong buying interest is essential if the stock price
has to really reverse its course and go up. Hence one should look for
increase in volume on the day a trend reversal signal takes place. Personally,
as a rule, I expect at least 30% jump in volume over the average volume
of last three to five days. The higher the jump in volume, the better
it is. On the other hand, if a trend reversal signal occurs with no
jump in volume, one should take that signal cautiously or even discard
- The Stock: When there is a buy or a sell signal in a stock,
it helps to take into consideration following things before we actually
take any position.
- High Volume Big Company stocks are better for trading:
Price based trading signals work best with high volume large market-capitalization
stocks. Such stocks are widely followed by individuals as well as
institutions and hence they have an orderly market. In some small
stocks, insiders or people close to management may be trading with
some material private information and there action is sometimes
likely to cause abnormal price movements. Also in small volume or
small company stocks, sometimes some buyer's buying of few thousand
or few tens of thousand stocks may alter the price of the stock
disproportionately. So it helps to prefer high volume large cap
stocks for trading than small volume stocks.
- Avoid small or low-volume stocks in short-selling: It is
true that a stock has limited room to go down (it can go down at
most to zero) but has unlimited room to go up. So it makes sense
to avoid small cap stocks or low volume stocks in short-selling.
Other reason is that many times some hidden news is not reflected
in thinly traded or small company stocks. Personally I do not like
to short sell a stock that is quoted below 20$ or has average daily
volume less than 1 million.
- It helps to avoid stocks with pending company news or announcements:
If there is an earnings release date scheduled over next few days,
one should avoid those stocks for trading. It is true that prices
capture actions of all participants and many times they are able
to tell us what the price is going to be. However earnings release
by a company can surprise or shock the market causing a large unexpected
movement in the prices. Such events if they happen in our favor
are always great but if they are against our position, we may not
even get time to exercise our stop-loss. My point is- if we know
some event is scheduled that could affect the stock price in a big
way in near future, it is better to stay away from such uncertainty.
It is true that we have to deal with uncertainty in trading all
the times but it is prudent to stay away when we know the timing
of the uncertainty.
- Take big price fluctuations with caution: Particularly
for small cap low volume stocks, it is quite possible for it to
open at a wrong price. Similarly during session sometimes the stock
trades at a too high or a too low price. So blindly applying our
conditions, we get a signal but the prices we used might not be
reflecting reality or accuracy of trading. To give an example, for
a stock that is normally fluctuating a dollar on a typical day,
if there is a fluctuation or two dollars or more, one will need
to check the prices to eliminate any trading accident or data processing
mistakes. This sort of price movement validation can be done in
the US markets by looking at intra-day or a five-day candlestick
chart on http://www.yahoo.com or in most brokerage websites. Any
aberration in trading will stand out there on such charts.
- It is more profitable to trade with the trend: If the overall
market trend is up, it helps to act on buy signals than on sell
signals. In other words, a slightly weaker buy signal in bullish
(good) market conditions is better than a stronger sell signal.
· Make sure you feel comfortable with the stock you are trading:
If there is a signal in a high risk Bulletin Board (BB) stock but
if you do not feel comfortable with such stocks, you should avoid
that trading signal. If you don't feel comfortable shorting technology
stocks, avoid sell signals in them. The primary purpose of our trading
is to earn money and the primary use of money is to make a person
happy. So it is fine to maintain peace of mind by skipping few trading
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- Stop-loss: PFP signals are very timely. They tell us on the
day a material change in sentiment or demand-supply is taking place.
However as you know, stock markets are not static. There is always something
happening- economical, political or company-related news or developments.
So even if there was an indication (signal) of powerful buying yesterday,
it is likely that something might have turned the battle in favor of
sellers again. It might be some negative comments or a downgrade by
some stock analyst, some news report or it could be a company press
release. Sometimes, the buying we felt may be just a spike- a one-day
event. Such things can cause the signal to fail. As you know, markets
are too dynamic for any person or system to make any perfect prediction.
So what do we do in such situations? Any Buy signal we get is good as
long as the stock price stays above the low price of the last one to
five days (we call it stop-loss level). Similarly a Sell signal is good
as long as the stock price stays below the high price of the last one
to five days (I will narrow down this range to a specific number when
we discuss each signal individually). So after buying a stock when it
goes below this low price (stop-loss), we should close the position.
Every signal is good as long the prices are in our favor. However when
the stock price crosses the stop-loss, it means just one thing: our
signal has failed. It is time to close the position and watch for another
trading opportunity. We listen to the prices; we do not argue with them.
After a Buy signal, when the stock trades below stop-loss, prices are
telling us that sellers are still ruling and are in command. It is time
we withdraw ourselves. It is okay to be on the losing side in a real
battle for some grand cause; but stock market battle is always for money
and we have freedom to switch parties. If we see buyers losing battle,
why should we stay with them?
ACT ON A SIGNAL
we get a trading signal in a stock based on current prices, when should
we trade? We have four choices as such but there is no science or an exact
answer. What works good for one might not work as well for others. So
one should take into consideration various factors, current trend, nature
of the stock, etc. to make a decision.
- Trade Now: This alternative tells us to make a trade as soon
as we have a valid signal in the stock. This is the normal thing to
do in most situations.
- Wait for a Pull-back: Most of the times, we will get a buy
signal after a very good last trading day or a sell signal after a bad
day. Sometimes it is possible that price may have gone up or down significantly
on the day of the valid trading signal. So we have a choice here: Instead
of taking an immediate action at the Open price of the next day, we
can wait for the stock to come back a little over the next day or two
(We call this Pull-back in prices). If you decide to wait, you should
be aware of the risk in this choice. It is likely that the stock may
not get as much pull-back as we might have expected. So for a trade
at a more favorable rate, we risk to miss the profit opportunity signaled
by our trading system. As always, there is no free ride or lunch in
When should we wait for a pull-back? In certain situations,
it does make sense to wait for a pull back. Let us look at certain situations:
(1) If we have a strong buy signal in a stock when most similar stocks
or the market as a whole is going down, it may turn out to be a wise
decision to wait for a pull-back in order to buy it little cheap. Similarly
for a Sell signal, if most other stocks or the market are in strong
up-trend, it makes sense to wait before we jump immediately in response
to the sell signal and short it. (2) Sometimes there is a significant
price movement on the day of the signal. Say a 10$ stock jumped 2$ today
and gave us a very strong buy signal. It is also likely that the next
day the stock could open up in a gap at 12.50 to 13.00$. So instead
of buying this stock at such a high price, we can wait the stock to
come back to around 11$.
How much pull-back should we wait for? So if you decide to wait
for a pull back, let me tell you my rule- For a buy signal, I go with
a limit order with the limit at the average of (low price of the last
two days, high price of the signal day). So if the low was at 10$ and
the high on the buy signal day was 12$, I would keep a limit order to
buy at 11.01$ (I like to buy at 1 cent above the round number and sell
at 1 cent below any round number). Similarly if I had a strong sell
signal for the stock which made a recent high at 22 dollars but made
a low of 20$ on the signal day, I would keep a limit to sell it around
- Wait for a confirmation: This is another valid alternative
that is quite opposite to the second alternative we just discussed.
Here instead of waiting for the pull back, we want the stock to pass
one more test of the strength. Instead of buying at a lower price in
a pull-back, we want the reversal to prove its strength and cross some
higher price level. If it passes, then we will buy at that higher rate.
As an example, let us say a stock ABCD gave us a strong buy signal today
with close at 11$ and the High price at 11.50$. Now instead of buying
this at a pull-back at 10.51$ or so, we will want the price to go above
11.51$ or even above12$ to prove to us that the reversal we are looking
at does look a reversal!
When should we wait for a confirmation? Many times, reversal
signals we get are due to one-day aberration in prices or a reactionary
trend in the main trend. Such signals often fail. So as to save us from
entering in and out at a loss, we can wait for the stock to demonstrate
favorable price movement over the subsequent two to three days before
we actually buy it. When does this waiting for another confirmation
is a good decision? In certain situations, it does make sense to pay
a higher price for what we are buying (or get a lower price for what
we are selling). Let us look at certain circumstances: (1) If we have
a strong buy signal in a stock when most similar stocks or the market
as a whole are going down, it may turn out to be a wise decision not
to immediately jump on. We can doubt the reversal given by our signal
unless we see higher prices over next two to three days. Similarly,
for a Sell signal, if most other stocks or the market are in strong
up-trend, it makes sense to wait before we jump immediately in response
to the sell signal and short it. Let us make sure the prices are really
How long should we wait for? So if we decide to look for another
confirmation for the reversal, how should we go for it? It is very difficult
to answer this question. Let me tell give some guidelines. For a buy
signal, we ca go with a STOP LIMIT order at 1 to 2% above the high price
on the signal date. So if the High price on the buy signal day was 12$,
I would keep a limit order to buy at 12.21$ (I like to buy at 1 cent
above the round number and sell at 1 cent below any round number). Similarly
if I had a strong sell signal for the stock which made the low of 20$
on the signal day, I would keep a STOP LIMIT order to short sell it
around 19.79$. What is a STOP LIMIT order? A buy Stop Limit order for
a stock currently quoting at 11 dollar is to buy the stock at say 11.45$
or lower ONLY AFTER it has traded above the Stop price of say 11.31$.
Please make not that the Stop price as well as limit price both are
usually higher than the current price. A sell Stop Limit order for a
stock quoting at 20$ might look like to sell the stock at 19.70 or above
only after it has traded below out Stop price of 19.79 or something
like that. Another version of STOP LIMIT order is a STOP MARKET order.
Here, there is no limit but just a Stop price. As soon as the stock
trades above (below) the Stop price, our Buy (Sell) order becomes a
- Don't Trade: This is another alternative that one needs to
consider. If one has last three (or number as per his trading rules)
in losses, he should not act however strong the trading signal he has.
Also, if one has more than 5 (or allowed as his trading system) positions
open, he should ignore any subsequent trading signals or he could close
one of the existing open positions to get into a new one. One should
always limit oneself within maximum number of open positions allowed
or within maximum number of open positions in losses.
The first character is optional and assumes T for Today, P for Previous,
Q for the day or week before previous.
- 1. The first character
is optional and assumes T for Today, P for Previous, and Q for the day
or week before previous.
- The second character
assumes one of the following values: D for Day, W for Week and M for
- The last character
takes a value based on what price it is: O for Open, H for High, L for
Low and C for Close.
is a list of acronyms that would be used throughout the book. They are
easy to remember.
TDO = Today's Open price
TDH = Today's High price
TDL= Today's Low price
TDC= Today's Close price
PDO= Previous Day's Open price
PDH= Previous Day's High price
PDL= Previous Day's Low price
PDC= Previous Day's Close price
TWO= This Week's Open price
TWH= This Week's High price
TWL= This Week's Low price
TWC= This Week's Close price
Previous Week's Open price
PWH= Previous Week's High price
PWL= Previous Week's Low price
PWC= Previous Week's Close price
replacing P above with Q would give us respective prices for the day or
week before previous. So QWO means the Week before Previous Week's Open
Previous to Previous Week's Open price
QWH= Previous to Previous Week's High price
QWL= Previous to Previous Week's Low price
QWC= Previous to Previous Week's Close price
see in the weekly price table above, what these symbols mean. These symbols
are put next to weekly prices.
DAY: A day in which a stock has the Closing price higher than
the Opening price is called a BULL DAY. What is the importance of this?
It is a quick method to know what happened during the day. A Closing
price higher than the Opening price does indicate that the Demand was
more aggressive during the day than the Supply. This fact taken by itself
does not give solid information but when combined with other tests, it
is powerful supporting evidence.
DAY: A day in which a stock has Closed lower than its Opening
price. It indicates that during the trading day, the Supply was more powerful/aggressive
than the Demand. It is a negative indicator for a long position. Like
a BULL DAY, this assumes greater importance when it is used with other
indicators. Nonetheless it is important to know what a BULL DAY and a
BEAR DAY mean.
charts: While explaining various signals, I am going to
use Candlestick charts. So let me take few moments to show you how to
read various daily prices on a Candle Stick chart. Unlike traditional
stock charts that are either a line chart of the Closing stock prices
or a bar chart, a Candlestick chart has all four prices, Open, High, Low
and Close, reflected.
candle (a day or a week's prices) has two parts: It has a body and two
lines attached to it. The high point of the UPPER LINE is the High price
for the day or week or the month depending on the chart you are looking
at. Similarly the low point of the LOWER LINE is the Low price. The upper
and lower points of the BODY reflect Open and Close prices depending on
the type/color of the candle. The body is either filled (dark) or empty
(white). Please see the chart below. When the body is filled (dark), the
upper edge of the BODY (and not the line) is the Open price and the lower
edge is the Close price. In other words, when the Closing price is lower
than the Opening price, the body is dark to indicate that it was a BEAR
day. Similarly when the body is empty (white), the upper edge reflects
the Closing price and the lower edge reflects the Opening price. So such
empty (white) bodied candles mean a BULL day, reflecting the fact that
the Closing price was higher than the Opening price.
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a Candle Stick chart below for better understanding:
you are ready to explore some of my signals. These signals are divided
into two groups: Trend Reversal
signals and Short term
reversal signals have long term price implications but they can also
be used for short-term trading (3 to 10 days). Short-term signals
are mostly for short-term trading positions lasting from 3 to around 10