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Part
I: Visual Confirmation
Your looking for
trade candidates. You've collected your
data and run your To Do List. You take a
look at your Focus List and there it is - a brand
new "buy" signal! Great, now you
just enter a market order, right? Wrong!
OmniTrader has presented you with a trade candidate.
But before entering a trade, we need to confirm
the signal. Today's lesson is part one of
a two part series on confirmation techniques using
OmniTrader.
Ed Downs has written
a book called The 7 Chart Patterns That Consistently
Make Money. This book outlines the most
consistently successful chart patterns.
Hopefully you have ordered this book. If
not, I would highly recommend that you order a
copy now. It is inexpensive and we will
refund the price to you within 30 days of purchase
if you do not find it useful.
The chart patterns
that I will discuss in this lesson are all covered
in the 7 Charts book.
While OmniTrader is a good
prospecting tool, visual chart confirmation is
essential to finding a winning trade.
Confirming
a Trade with Chart Patterns
The
7 Charts book lists the following chart patterns
as reliable confirmation techniques: Consolidations,
Support and Resistance Levels, Trendline Breaks
and Reversals, Saucer Formations, Volume Climaxes
and Trends and Gaps. These are all proven
patterns that time and again show a consistent
ability to predict the direction of a security.
Let's divide these into more useful categories.
Regardless of what
you are trading, there are only two types of trades:
Reversals and Continuations. The following
table shows the type of trade and which chart
patterns can be used to confirm that trade:
|
Reversal
Trade
|
Continuation
Trade
|
| Support
and Resistance Levels |
Consolidations |
| Trendline
Breaks |
Trendline
Reversals |
| Exhaustion
and Breakaway Gaps |
Breakaway
and Measured Gaps |
| Saucer
Patterns (at bottom of pattern) |
Saucer
Patterns (at resistance level of pattern) |
| Volume
Climaxes |
Volume
Trends |
Let's look at an
example:
CTXS shows a double bottom, trendline break,
breakaway gap and volume climax.
The
chart for Citrix shows four of the five patterns
that are good reversal indications. The
more patterns that confirm a move, the better.
When we look for good trade opportunities, we
want to find charts with the least technical
risk.
The
definitions of the patterns and the market mentality
that creates these patterns are explained well
in the 7 Charts book. There are obviously
more patterns that help discern direction (i.e.
cup and handle patterns, support and resistance
patterns, candle patterns, etc.) that you can
learn as well. However, remember that some
patterns are more significant than others, and
the 7 Charts book outlines the most significant
patterns.
Confirming
a Trade with Indicators
Another
tool you can use to visually confirm a trade is
the indicators in OmniTrader. There are
many users that will plot a favorite indicator
with every chart and once they receive a signal
from OT, they will look at the indicator for confirmation.
The example below shows a MAC-D system plotted
that confirms a good trade signal from the Default
Profile. It crossed the trigger line (dotted
line) and the 0 line in time to realize a nice
gain.
MAC-D confirms a good buy
signal from OmniTrader
Given
an OmniTrader signal, look for the chart patterns
we have mentioned as well as your favorite indicator
to help confirm a good trade candidate.
I hope
that this lesson on visual confirmation has been
helpful. Next week we will continue our
discussion on confirmation by looking at some
of the automated tools you can use in OmniTrader.
Best
of luck with your trades.
Jeff
Drake
Director of Education
Nirvana Systems
jdrake@nirvsys.com
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