A big question many traders ask is… why do buy and sell signals fail sometimes? My answer is this…most auto-signals usually fail in a heavily range-bound, and sideways market. It’s easy to spot a trending market but not so easy to spot/predict a sideways market before we are into it for a substantial amount of time. However, it’s all the more important to spot a sideways market so that we can stay away and avoid making losses. One way to spot this kind of market is by plotting 5 minute/day Exponential Moving Average (EMA) and 20 minute/day EMA on the chart. If it’s intraday chart then plot minutes EMA and if it’s daily chart then plot day EMA. Now, in a trending market, the two averages will be separated for a reasonable number of time/days. In a sideways market the averages will cross each other up and down frequently in a short duration. For example, if you find that the 5 minutes EMA line crosses the 20 minutes EMA line from below, and you get a buy signal as well, but in the next few minutes, before making a substantial move up, the price corrects down thereby making the 5 minutes EMA line to cross 20 minutes EMA line from up, then this indicates a sideways movement for the underlying stock.
I have two charts showing these cases. The first one, an intraday chart, showing clear trends. The second one, a daily chart, depicting a sideways market (see highlighted portion). See how the 5 EMA and 20 EMA lines cross over each other from up and down in a short duration. This is very useful in intraday trading. I promise to post a sideways intraday chart as well...
No comments:
Post a Comment