Tuesday, June 10, 2008

The discretionary part of my system

I do not blindly follow the signals my trading software gives me. The chart of Travis Perkins (LSE: TPK) below gives a good example.

A sell signal was given near the end of April, however I did not enter the trade. The reason is that the previous low from mid March could act as support (I've drawn a red line on the chart to show this level). As you can see, the share price did indeed bounce off that level. I would have waited for that support level to be broken before entering the position.

I did not trade this, nor the subsequent sell signal once that support level was broken in mid-May (much to my annoyance!), however this is a good example of when not to blindly follow a signal.

One other thing to notice on the chart is how the SP has stayed below the 50day EMA (the blue line) since last August, when the SP was at almost 1,900p. Apart from a couple of days at the beginning of April, this has acted as resistance all the way down. This EMA is my 'trend filter' to ensure that I only go long on a position if the SP is above that EMA, and vice versa.

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