Buy Signals Sell Signals: Strategic Stock Market Entries and Exits pdfdrive com

“Trend followers are the group of technical traders who use reactive
technical analysis. Instead of trying to predict a market direction, their strategy
is to react to the market's movements whenever they occur. Trend followers
respond to what has happened rather than anticipating what will happen. They
strive to keep their strategies based on statistically validated trading rules. This
enables them to focus on the market and not get emotionally involved. ” –
Michael Covel
Traditional technical analysis is based on forecasting future price movements
based on past price action. This book is about reacting to current price action.
The best traders in the world stay flexible and can change their trades quickly.
They can also stay with a winning trade and allow it to trend as far as it will go,
capturing huge wins when possible. Reactive technical analysis doesn’t exit a
winning trade until there is a reason to exit, and it prompts traders to exit losing
trades when price action proves them wrong.
One of the worst things you can do is try to predict what will happen next. This
is a waste of time and energy, and a great way for a trader to sabotage months or
even years even of trading profitability. Traders and investors must have pre-set
price levels that they will adhere to, so they can realize they are wrong and
change their course, rather than losing more money or missing a trend. One of
the worst things you can be is a stubborn bull in a bear market or a stubborn bear
in a bull market. All traders must have the “I am wrong” signal.
How many times do we see a talking head on financial television or a trader or
investor on social media blinded by their own bias? They either have a theory
that a market crash is imminent based on some macro economic trends or other
outside influence. I don’t care what people say or predict will happen, my
question is what position do they have right now to prove their beliefs? The most
opinionated people you will find typically don’t have any current market
positions and they are only expressing their opinions. Ignore them. I have found
over the years that the profitable traders and investors carry their opinions lightly
and their stops tightly. It is easy to hold a bearish opinion about the markets and
then while you hold that bias the Dow Jones industrial Average moves 2,000
points up in a few months. If you are in cash, then you have missed a large
market move. If you are short, then you have lost a large amount of money. The

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point of having a signal is to have an external event that forces you to change
your position in the right direction.
What if in the summer 2009, a trader was bearish on the chart, and the initial
failure to breakout over the 200-day made him believe we were are doomed to
return to all-time lows. All he heard was bad news on television and online. He
was negative, saw no hope for a rally, and was ready to sell the market short.
This is what his chart might look like:
Charts courtesy of StockCharts.com.
What would he need to see to change his bearish bias? From the look of the
chart, he had some good reasons to be systematically bearish, and even short. If
he was short then, he should have a stop loss level where he would be proven
wrong. Maybe a close back over the 200-day moving average would have made
him exit his short position. If he was in cash, he would need to know what level
would get him short again. A failure at the 200-day moving average and a
reversal might make him sell short into strength again.
Here is what I would look for a reversal out of this downtrend and a potential

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uptrend starting:
- A bullish crossover of the MACD the black line crossing over the red line
signaling upside momentum.
- The RSI crossing over the 50 RSI and getting back on the bullish side of the
chart.
- Price closing over the 200-day simple moving average showing that the bulls
are willing to buy over that line, and that selling could be exhausted below it.
- These are momentum buy signals. We are looking for the market to confirm the
beginning of momentum and the start of a new uptrend before we enter.
Here is what happened next:
Charts courtesy of StockCharts.com.
I tried to keep this chart as simple and clean as possible so you can see how the
signals we were already looking for played out, and how the chart evolved after
the entry signals were triggered.

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Entry signals are just step one. Managing the trade through position sizing,
trailing stops, and targets are part of the bigger picture. We will cover these
signals in depth in future chapters, but I wanted to give you your first glimpse of
how everything can change in a market, and how you need to be flexible enough
to go with the flow.
The quote at the beginning of this chapter is from my friend and trend following
expert Michael Covel. He has spent many years studying what makes Trend
Followers successful in the markets. Trend Followers create systematic ways to
capture trends in financial markets through technical trading rules for entries and
exits that put the odds in their favor. This school of thought had the biggest
impact on my development as a trader.
While I have evolved my trading for different market environments and shorter
time frames, Trend Following principles of reacting instead of predicting has
been at the core of my profitability. I have always been adverse to risk, so I had
no problem cutting my losses short because I hate to lose money. And because of
the bull markets in equities in 2003-2007, it was easy to let my winners run and
become very profitable. Most people have little trouble in bull markets, it’s when
asset values start going down and stay down when the trouble begins.
As technical trader, it is our job to create systematic ways to capture trends on
our trading time frame, and we have to let price guide our entries and exits. We
are attempting to go with the flow of capital into and out of the market, and
develop signals that get us in at the right moment to capture a trend. Our exit
signals will get us out when we are proven wrong for a small loss or allow us to
lock in profits when it appears the trend is at an end and ready to bend. We aren’t
trading our emotions, beliefs, or predictions; price action will be our guide on
our journey to profitability.
Analyzing a chart to predict what will happen in the future is not the same as
looking at current conditions and setting buy and sell signals targets if a price
level is reached. Your signal has to be based on the current reality of price and
not the future expectations of price.
A systematic approach may not always work in the short-term, but it is designed
to keep the odds in your favor so that over the long-term you will be able to
capitalize on profitable trends. A price trading system exposes your capital to the

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opportunity to capture a trend while limiting your losses when wrong. Your
position sizing and stop losses will be just as important in your trading system as
your entry signals. Your ability to follow your signals will be just as important as
the quality of the signals that your create.

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Different types of markets
(range bound, volatile, trending)
"There is only one side of the market and it is not the bull side or the bear side,
but the right side." - Jesse Livermore
Many new traders will pick up a book titled Buy Signals, Sell Signals and want
to go straight to the signals and trade them. I will share some key signals in this
book and how to use them, but there are a few things traders need to understand
about signals before they rush into trading.
Please understand that no signals are magic and work at all times, in all markets.
This is called the “Search for the Holy Grail” in trading circles, and it is a
complete waste of time. No trading signals are profitable in all markets at all
times because markets change from trending to not trending, and from not
volatile to very volatile. Markets can go from smooth uptrends supported by
ascending key moving averages, to range bound with price levels that provide
upper resistance and lower support. Markets can trade in a very tight price range
day after day and then the daily price range can triple or even quadruple.
Trading is not about magic signals but about putting the odds in your favor with
the best entries for the market that you are currently invested in. First, you create
valid entry signals that have the potential for putting you on the right side of the
trend in your time frame. Then you take your signal when it occurs with the right
position size to control risk, and then there is nothing else you can do but let the
next market move make you profitable or unprofitable.
Here are the different market environments that a trader and investor will
experience.