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Markets in Which SP Works Well

In my experience, SP on an intraday basis works well in highly volatile markets. Naturally, this includes most of the currencies, crude oil at times, S&P most of the time, and T-bonds at times. Perhaps SP's most consistent performance is in S&P futures. Since market characteristics will change over time, I urge you to watch the markets closely in order to allow the use of SP signals in other markets which are not currently active or volatile but which may become so in the future.

Hit-and-Run Trading Using the SP

One of the characteristics of the SP method is that it lends itself readily to the application of my "hit-and-run" technique. What this amounts to is simply entering a long or a short position consistent with the signals, staying with that position for a fairly brief period, and exiting the posiВэtion at the market in order to grab a quick profit on the long or short side. The advantage here is, of course, that you will find it possible to take many quick profits. The disadvantage is that in so doing you will sacriВэfice larger moves which may occur once you have exited the position.

In order to have the best of all possible worlds, I suggest trading sevВэeral units as opposed to one unit. Here's how it would work in practice. Assume that an SP buy signal has occurred. Instead of entering just one contract, you enter two or four, preferably in even units. As soon as the market has moved in your favor by a predetermined amount (100 points in S&P futures for example), you exit one unit. You hold the remaining unit long until the stochastic lines have crossed at the end of a 5- or 10-minute segment, which is where your ideal exit would have been. In so doing, you will trade one unit for hit and run, the other unit according to the rules.

Variation on the Theme of SP

Because markets can continue to run in their existing direction once an SP signal has occurred, I have developed yet another application of SP which is a more aggressive one. By aggressive, I mean one which tends to hold a position longer than the original SP application once the signal has occurred. Examine Figure 5-9. It illustrates a situation where an SP signal occurred subsequent to which a number of crossovers developed which would have caused you to exit your SP position according to the rules I gave you earlier. If, however, you did not exit when the percent K and percent D lines crossed but rather maintained your position, the potential profit would have been significantly greater. This is a more aggressive method because it allows you to hold your original SP posiВэtion for a longer period of time. To exit the position use a close trailing stop which will follow up your position preferably every half hour or more frequentВэly in order to lock in your profit and protect you in the event of a quick reversal in trend.

A good illustration is provided in Figure 5-10, which depicts an SP signal followed by a continued uptrend, an exit indication on the origiВэnal SP method, but a maintenance of the long position beyond the origiВэnal SP exit with a detailed follow-up stop procedure as suggested. See also Figure 5-10 for similar illustrations of the aggressive SP technique.

As you can see, using this technique allows you, in most cases, to parВэticipate in the larger moves subsequent to an exit on the original SP method. The aggressive SP technique is not recommended for conservaВэtive day traders, assuming that there is such a thing as a conservative day trader. For those interested in the technique, I strongly recommend following it closely for several weeks before deciding to pursue this approach.