The search for the perfect trading strategy: Part II

Yesterday’s article focused on an intermediate term trend following trading strategy that makes use of both trend channel analysis (TCA), and moving averages. Today’s article applies the same trend following principals to shorter-term market movements, and looks at possible trading opportunities that exist right now.

As before, the system uses a combination of parallel trend lines (trend channels) and moving averages that generate buy and sell signals. However, on this timeframe the system makes use of the 9-day EMA (exponential moving average) and the 20-day SMA (simple moving average).

A buy signal is generated by a strong bounce off the lower blue trend line, however it must also be confirmed by the 9-day EMA (green line) being above the 20-day SMA (blue line). A sell signal is generated by the 9-day EMA crossing below the 20-day SMA, however, on this timescale the moving averages have a tendency to get whipsawed, therefore a decisive break of the lower trend line must also be seen to trigger a sell signal.

Trading opportunities that exist right now

The first candidate is the Japan iShares ETF (EWJ) which offers exposure to Japanese stocks such as Toyota, Mitsubishi and Honda.

As the chart below shows, the fund has been in an uptrend since late February, and since early April it has been trading in a well defined price channel. A bounce off the lower blue trend line (circled) would likely represent a decent entry point.

A 3 month (2 hour) chart of the Japan iShares ETF (EWJ) (Click on the chart for a larger version)

A 3 month (2 hour) chart of the Japan iShares ETF (EWJ) (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Another market that has begun to perform well is the German stock market. The chart below shows the Germany iShares ETF (EWG) which is in a steep, narrow uptrend. Again, a bounce off the lower blue trend line would likely provide a good entry point.

A 3 month (2 hour) chart of the Germany iShares ETF (EWG) (Click on the chart for a larger version)

A 3 month (2 hour) chart of the Germany iShares ETF (EWG) (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The iShares MSCI ACWI ETF has also formed a steep, narrow uptrend. The fund, which aims to provide investors with access to a broad range of global, developed and emerging markets stocks, holds names such as, Exxon Mobil, Apple, Microsoft, Nestle, and Chevron.

A 3 month (2 hour) chart of the iShares MSCI ACWI ETF (ACWI) (Click on the chart for a larger version)

A 3 month (2 hour) chart of the iShares MSCI ACWI ETF (ACWI) (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The Switzerland iShares ETF (EWL), which counts Nestle, Roche, and UBS among its holdings, is another market that is currently in the buy zone. A strong advance from the current levels would likely provide a good entry point for those who wish to trade the fund.

A 3 month (2 hour) chart of the Switzerland iShares ETF (EWL) (Click on the chart for a larger version)

A 3 month (2 hour) chart of the Switzerland iShares ETF (EWL) (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The Vanguard European ETF is another popular fund that is currently bumping up against support and may offer a buying opportunity. The fund holds companies located in countries right across Europe, such as Royal Dutch Shell, HSBC, Vodafone, GlaxoSmithKline, and Unilever.

A 3 month (2 hour) chart of the Vanguard European ETF (VGK) (Click on the chart for a larger version)

A 3 month (2 hour) chart of the Vanguard European ETF (VGK) (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

This trading strategy uses the prevailing market trend to its advantage. It lets profits run, but cuts losses quickly. The system can also be tailored in terms of the amount of leverage used.

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