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[sharechat] Anatomy of a Trade

From: Phaedrus <>
Date: Sat, 1 Dec 2001 18:57:02 -0800 (PST)

 This trade, while being more successful than most, nevertheless demonstrates 
well the ways in which different technical indicators can be combined to give 
clear unequivocal trading signals.
The stock is UAXS (USA Nasdaq)
UAXS had been in a downtrend for many months, but had recently closed above its 
trendline. Because of this, I was watching for a new uptrend to begin. Prices 
had started to rise, but were meeting resistance at about $1.32. When prices 
clearly broke through this level, I bought, placing an "at Market" order just 
before the close. This was the third day in a row with rising prices and rising 
volumes. The trend indicator Directional Movement (DMI) and the Chande Momentum 
Oscillator (CMO) had both given Buy signals. 5 different types of indicator all 
agreed - a near perfect set-up. The only thing possibly lacking was a clear 
volume climax at around the lowest point. Prices climbed for a few days, and 
then began to retrace. I was hoping that the broken resistance level of $1.32 
would now become support. This is what happened, and the uptrend continued. 
 Before long this trade was showing substantial paper profits, which I did not 
want to give back to the market in the event of a retracement. With fast-moving 
stocks like this, I often use a 5 day simple moving average as a trailing stop. 
I would sell if the close fell below this. Even steep uptrends have the 
occasional down day, when prices close below their open, and/or below the close 
of the previous day. One day like this is acceptable, but should the day after 
the down day close below the low of the down day, again, I would sell. 
 The first real sign that the uptrend might be in trouble was at the 
candlestick marked A. Note the very long upper shadow - keen sellers had pushed 
the closing price a long way down from the high of the day. Notice also the 
very heavy volume - higher day after day. This was starting to look like a 
price/volume climax. Remember that it takes volume to stop a trend. The next 
day (B) carried the close still higher, and ended on its high - normally very 
bullish signs. But look at the volume - barely one sixth of the previous day. 
This was another clear warning that the trend was running on empty. The 
candlestick at C is a bearish Dark Cloud Cover, opening above the high of the 
previous day, but closing well below it, and on increased volume. The uptrend 
appeared to be over. The next day (D, a Doji candlestick) the candles B,C and D 
formed a pivot-point reversal, prices fell below the 5 day moving average, and 
also fell below the low of of the prior down day, on still higher volume. With 
both of my stops hit simultaneously, I exited the trade with a Market order at 
the close.
 A more active trader would have sold at least one day earlier on the strength 
of the candlestick signals alone. A less active trend trader would hold until 
the DMI and/or the CMO signalled a sell. Neither is anywhere near a sell at 
this point. Only time will tell which approach will turn out to be the most 
profitable in this instance.
 The important thing is to combine indicators of different classes. The trading 
decisions here were made on a combination of a trend indicator, an oscillator, 
candlestick patterns and support/resistance levels, all being confirmed by 

This was written 2/12/01 for the "Learning to Invest" series by Phaedrus.

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