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 arrow 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 share price has, for the majority of the time, stayed below the 20day EMA (the blue line) since last August, when price 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 part of my 'trend filter' to ensure that I only go long on a position if price is above that EMA, and vice versa.

NOTE: The original chart posted here was lost, so this is a reproduction. You will see from subsequent charts that I do not show the moving averages on my charts, as the logic checking for the price/MA relationship is one of the criteria in my scans.

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