Welcome! This is my trading note for my own reference. In this note, I will mainly cover my favourite candlestick, indicators used, as well as how I determine the enter and exit points. Feel free to give me any input that you think is valid :D
Reading the Chart
Normal Candlestick
Normal candlesticks are composed of a series of open-high-low-close (OHLC) candles set apart by a time series. A time series is a sequence of data points that occur in successive order over some period of time. The length of the series could be five minutes, one hour, one day or one month, ect.
Below is an example of two bearish and bullish patterns. High means the highest price of the stock at a time of that particular series. Low means the lowest price of the stock at a time of that particular series. Open means the open price of the stock for the length of the series. Close means the close price of the stock for the length of the series.
Heikin-Ashi Candlestick
The Heikin-Ashi technique shares some characteristics with standard candlestick charts but uses a modified formula of close-open-high-low (COHL)
The Heikin-Ashi chart is constructed like a regular candlestick chart, except the formula for calculating each bar is different, as shown above.
Normal Candlestick vs Heikin-Ashi
An example: Image by Sabrina Jiang © Investopedia 2020
Observations from the image:
- We can see that Heiken-Ashi produce charts with lesser noise.
- The continuous trend for Heikin-Ashi is longer and smoother, making it easier to identify the market movement.
- Downside for Heiken-Ashi is that it shows entry and exit points after the market has moved some degree, because it is the average of both previous and current bars.
Ultimately, I think that both candlesticks are fine. At the end of the day, it is depends on the users themselves to have their own preferences.
Trading Indicators
In trading, indicators are often viewed as tools for short-term positions, as they can be used to identify entry and exit points for trades. However, I believe that indicators can also be useful for determining entry points for long-term investments. While the intrinsic value of a company, its cash flows, management, and future prospects are important factors to consider when making long-term investments, indicators can provide valuable insights into the current market conditions and trends that can inform our investment decisions.
From my perspective, short-term positions(0 to Less than 5 years) is trading and long-term positions(More than 5 years) is investment. To survive in stock market, we need an intellectual framework to help us for making decisions and the ability to keep emotions from corroding that framework. My framework are the combination of different indicators.
Additionally, it’s important to keep emotions in check when making investment decisions. Emotions can lead to impulsive and irrational decisions, which can be detrimental to our long-term investment goals. Algorithmic trading can be a helpful tool in this regard, as it allows us to make trades based on a defined set of instructions, rather than our emotions.
Without futher ado, let’s voyage to the next part - indicators explained!
Short-Term View
Bollinger Bands
Bollinger Bands are a type of technical analysis indicator that are used to measure the volatility of a financial instrument. They are plotted two standard deviations away from a moving average, and the distance between the bands varies as volatility increases or decreases.
The Bollinger Bands consist of three lines:
- A Simple Moving Average (SMA) in the middle
- An upper band (SMA + 2 standard deviations)
- A lower band (SMA - 2 standard deviations)
Bollinger Bands consist of an N-period moving average (MA), an upper band at K times an N-period standard deviation above the moving average (MA + Kσ), and a lower band at K times an N-period standard deviation below the moving average (MA − Kσ). Typical values for N and K are 20 days and 2, respectively.
The basic interpretation of Bollinger Bands is that prices tend to stay within the upper and lower band. So, if the prices move away from the SMA and touch the upper band, it is considered overbought and if the prices move away from the SMA and touch the lower band, it is considered oversold. It can help us to identify potential buy and sell signal.
Chandelier Exit
The Chandelier Exit consists of only two types of line, either Chandelier Exit (Long Position / Buy) or Chandelier Exit (Short Position/ Sell). When the price of the asset falls below the Chandelier Exit (Long Position) or rises above the Chandelier Exit (Short Position) the trader closes their position. It is a tool to protect a trader’s profits and limit their losses.
The Chandelier Exit is calculated as follows:
- The Long Chandelier Exit is the highest high of a given period subtracted by a multiple of the Average True Range (ATR)
- The Short Chandelier Exit is the lowest low of a given period added by a multiple of the Average True Range (ATR)
The period is usually 22 days and multiple of ATR is typically set to 3.
- Chandelier Exit Long: n-day Highest High – ATR (n) x Multiplier
- Chandelier Exit Short: n-day Lowest Low + ATR (n) x Multiplier
ATR is calculated as the average of the true range over a certain period of time. The true range is defined as the greatest of the following:
- the difference between the current period’s high and low
- the difference between the current period’s high and the previous period’s close
- the difference between the current period’s low and the previous period’s close
The resulting value is an average of the true range over the selected number of periods.
ZLSMA - Zero Lag LSMA
The Zero Lag Least Squares Moving Average (ZLSMA) is a variation of the moving average indicator. It is designed to reduce the lag that is commonly associated with traditional moving averages.
The ZLSMA is calculated by applying a least squares regression line to a set of data points, and then plotting the predicted values of the line. This creates a moving average that is supposed to be more responsive to changes in the market, and therefore have less lag.
The ZLSMA can be used in a similar way as other moving averages, such as:
- Identifying trends
- Identifying potential buy and sell signals
- Setting stop-loss levels
In summary, ZLSMA is a technical indicator that’s calculated using least squares regression analysis and it’s used to identify trends and potential buy or sell signals in a market.
Long Term View
Simple Moving Average 50 vs 150
A simple moving average (SMA) is calculated by taking the average of a stock’s closing price over a specified number of time periods.
A 50-day simple moving average (SMA50) would be calculated by adding together the closing prices of a stock over the past 50 days and then dividing that total by 50. The resulting value is then plotted on a chart, creating a moving average line that is meant to track the general trend of the stock.
A 150-day simple moving average (SMA150) would be calculated by adding together the closing prices of a stock over the past 150 days and then dividing that total by 150. The resulting value is then plotted on a chart, creating a moving average line that is meant to track the general trend of the stock.
Traders and analysts often use the crossover of the SMA50 and SMA150 as a buy or sell signal. If the SMA50 crosses above the SMA150, it is seen as a bullish signal and traders may buy the stock, if the SMA50 crosses below the SMA150, it is seen as a bearish signal and traders may sell the stock.
How to determine entry and exit points
As I mentioned above, we need an intellectual framework to help us for making decisions and the ability to keep emotions from corroding that framework. I am currently in the process of constructing my own framework, which involves the integration of Bollinger Bands, Chandelier Exit, and Zero Lag Least Squares Moving Average (ZLSMA) in determining my entry and exit positions in the market. Details are as follows:
Long Position
- Buy Signal from Chandelier Exit
- Price action to above the ZLSMA (Yellow Line)
- Preferably price near the lower Bollinger Bands
- Stop Loss below the Swing Low
- Exit when the price crosses the Yellow line
Short Position
- Sell Signal from Chandelier Exit
- Price action has to be below the ZLSMA (Yellow line)
- Preferably price near the upper Bollinger Bands
- Stop loss is above the swing high
- Exit when the price crosses the Yellow line
Conclusion
Individuals will have varying trading strategies based on their personal preferences. My strategy may also evolve over time. However, it is crucial to remember the importance of backtesting in order to evaluate the effectiveness of your trading framework before entering the market. Backtesting allows you to simulate trading using historical data and can provide valuable insights into the potential performance of your strategy. It’s a necessary step to assess the robustness of your framework and to identify any potential flaws before putting real money on the line.
That’s all from me now, see ya!