Sunday, March 04, 2007

RSI ATR - A Practical Example

Revisiting that filter I spoke about yesterday here is a good example of what I was talking about. This is IMCL and you can see quite clearly that there were two occasions in the last month and a half when you could have taken this stock off the RSI/ATR set-up.



And at least one occasion when you shouldn't have. You can see on that occasion what I was talking about yesterday when I said that you had to wait for both conditions to be met to be able to say that the stock is bottoming with about a 65% assurance. If you had just taken this stock from the RSI(2) < 2 flag you would have been two days early.

Note that on both of the true flags the stock went on to post a blow-off bottom and that is just one more indicator to watch for - it isn't required but it makes for a good confirmation.

And confirmation is the most important thing of all - on this chart to the left you can see one more spot where the criteria were met but the stock didn't turn. Remember this business is all about confirmation and without confirmation we don't do anything foolish. No confirmation - no trade. It did finally confirm but didn't follow through - that's why you use a stop loss. On the next flag it followed through and then some.

In a previous post this morning the one about the past being prologue I said we needed to wait for the ATR to turn around and come down before we could be sure that the index had bottomed. This is not inconsistent with how I use the ATR as a proxy for volatility. In the ATR/RSI filter I am using it to look for low volatility because low volatility begets high volatility and if the stock is at the bottom then it should go up when volatility goes up. But both tops and bottoms are marked by volatility changes. If it is high it will go low if it is low it will go high.

For those of you not in possession of a capability such as being able to draw a moving average of the ATR note here's a tip. Just look and see where the ATR is in relation to its recent past and price bottoms. If it is anywhere near where it was the last time the stock turned and went up then it is probably at a bottom.

And finally - this chart is a screen print of stockfetcher.com's new charting interface, SF2 and it is a beauty. It is still in Beta but when they get it finished it will be a joy to behold.

I don't get anything from them for the endorsement so it doesn't bother me if you don't want to improve your trading ability.

10 comments:

Shawn said...

Do you have an email available?

shawn@vitalstocks.com

Woodshedder said...

I've never used the ATR that way. I scanned over nodoodahs's stuff and I think he might use it too. Very interesting. Thanks for showing the relationship.

Red Hue said...

Hey Marlyn,

On the IMCL chart there is a great example of a set up I scan for...at the end of December...very low RSI2...a big up day...then a close next day down within the body of the up day...I then play the break out of the up day...sort of a 123 pattern as I hate going to early and getting caught by false break outs.

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QUALITY STOCKS UNDER 5 DOLLARS said...

Great example