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Determining Trend, Support, and Resistance

Determining Trend, Support, and Resistance

In order to use the MAC technique for day trading, the following rules will be used:

Вц Determine if the market is in an up trend or in a down trend. This is achieved as follows.

Вц If, at any time after market opening or on market opening, the market develВэops two successive 5-minute price bars completely above the top of the chanВэnel (i.e., above the moving average of the high), then the trend is presumed to be up. (See Figure 7-4). Aggressive traders who wish to circumvent buying at support may buy immediately upon the development of this signal; however, this procedure entails considerably more risk. Once such a signal has occurred, the predisposition or bias will be on the long side. You can use 10-minute or 20-minute bars if you wish, or, depending upon your willingness to trade more actively and to watch the markets move actively, you may even use 3-minute bars in some markets (e.g., S&P futures and currencies at times).

Вц Presuming a bullish bias, the day trader will determine the specific price level of the MAL. This specific price level will also be called the lower buy point (LBP). Conservative day traders will enter orders to buy at the LBP or will be watching the market for declines to the LBP in order to buy at the market once this has occurred. Figure 7-5 illustrates this procedure. The moving average of highs (MAH) is also called the higher buy point (HBP). Aggressive traders will buy as prices return to. "test" the HBP. In practice, however, the HBP is often too high a level at which to buy. Most traders are better off calculating the midpoint of the MAC by adding the MAL and the MAH and dividing by 2. This yields the midpoint of the channel or the (MBP) mid buy point.

As the day progresses you will want to maintain resting orders at the MBP or, if you're a very conservative day trader, at the LBP. If you have a quote system that will track these points for you, triggering an audible alarm when these levels are hit, you can place orders accordingly. This is a procedure which requires time and effort; however, it can yield subВэstantial rewards if properly carried out.

Вц Presuming a bearish bias, the day trader will determine the specific price level of the MAH. This specific price level will also be called the upper sell point (USP). Conservative day traders will enter orders to sell at the USP or will be watching the market for rallies to the USP in order to sell at the market once this has occurred. Figure 7-6 illustrates this procedure. MAH is also called the lower sell point (LSP). Aggressive traders will sell as prices return to test the LSP. In practice, however, the USP is often too low a level at which to sell. Most traders are betВэter off calculating the midpoint of the MAC by adding the MAL and the MAH and dividing by 2. This yields the midpoint of the channel or the mid sell point (MSP).

Вц As the day progresses you will want to have resting orders at the MSP or, if you're a very conservative day trader, at the USP. If you have a quote system that will track these points for you, triggering an audiВэble alarm when these levels are hit, you can place orders accordingly.

As you can see from the illustrations, aggressive traders will have many opportunities during the trading day, and conservative traders won't have as many. Regardless of whether you trade conservatively or aggressively, you must trade with the trend as defined by the two-sucВэcessive-bar breakout. The number of times you trade during the day is limited only by your ability and your resources.