Volume Based Technical Analysis
Concurrent Volume Signals
We have already discussed concurrent trading or "trading along the trend" in the "Using Several Charts" article where we showed an example of trading only "Buy" signals during the general up-trend that is defined by a longer time-frame.
In the examples below, the same principles are applied to a situation when a parent trend is defined as a down-trend. According to concurrent trading (also known as "trading along the trend"), when a price trend on the longer timeframe chart can be defined as a down-trend then on a shorter time-frame (time-frame you trade) you may trade by following the simple rules below:
- When a "Sell" signal is generated, a trader may consider selling short.
- When a "Buy" signal is generated, a trader may consider covering (closing) a short position without opening a long position.
- When the short position is closed on a "Buy" signal, the trader remains in cash until a new "Sell" signal is generated.
As an example, the 60-day (1 bar = 1 hour) S&P 500 chart below (chart #1) shows the period when the parent trend can be defined as a down-trend. In this example, two exponential moving averages are used to define the trend. This is the simplest way to define the parent trend. Even moving averages are lagging indicators (indicator that follows trend) and, due to the lag, it is difficult to use moving averages on shorter timeframes. On longer time-frame they still can be used to define the parent trend. On the chart #1, a fast exponential moving average is moving below the slow exponential MA. Furthermore, the parent trend during the period from October 26 until November 3 on this chart is defined as a down-Trend.
Chart #1: the S&P 500 60-day chart with two moving average
which define the parent trend as an Down-Trend
Now, by knowing the parent trend, a trader may adjust his/her trading strategy to a shorter time-frame. If the trend during the period from October 26 until November 3 has been defined as a down-trend, a trader may decide to trade only "Sell" signals generated during this period. On chart #2 (see S&P 500 chart below), a simple trading system of using an SBV Oscillator is modified to trade only "Sell" signals and use "Buy" signals to switch to "Cash" by simply covering (closing) a short position without initiating a long trade. This trading strategy is known in technical analysis as "Trading along the trend" or as "Do not trade against the trend." The basic rule of this strategy is to trade only those signals that support the parent trend.
Chart #2: the S&P 500 5-day chart with "Sell" signals only
to trade along the parent down-trend defined by the S&P 500 60-day chart
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