People familiar with Private Trader will know that I spent 2010 working with a scatter-gun approach, with several binary signals as primary tools, plus a confirmation tool or two, plus three moving averages for spice.
My goal was to get a sense of how these signals worked relative to each other.
Going forward, I'm selecting a single binary signal, with a confirmation signal viewed in two ways. The new methodology is scalable. It will be used on all of my analytical postings, for both fast trading and slow trading, whether the vehicle be stocks, currencies (forex) or exchange-traded funds (etf).
I'll note at the outset that technical analysis, in my world, is a screening tool, the same fundamental analysis is.
A technical bull phase on a stock that has passed financial muster signals only that it's time to look at a trade. Whether I take the trade depends upon support and resistance levels, relative positioning of several moving averages, recent news reports, and frankly, intuition: Whether the chart feels right for the trade.
"Intuition" is another way of saying that I've been doing this stuff for 30 years, and although I may not always be able to explain it rationally, I know the sort of chart that I like.
Under the new scheme, I'll be using a familiar tool, Person's Proprietary Signal (the pps) as my binary signal, and the polarized fractal efficiency line (the pfe) for confirmation. I'll look at the pfe in two ways: Its immediate slope (up, down or sideways) and its location on a scale from +100 to -100 (plus change -- it tends to over- and under-shoot slightly).
See the end of this posting for some background on these tools.
Here is an example of the new analysis bar:
| pps | pfe trend | pfe loc | |
|---|---|---|---|
| SPY |
And here are keys to the columns and colors:
Abbreviations:
- pps - Person's Proprietary Signal.
- pfe trend - Trend of the polarized fractal efficiency line.
- pfe loc - Location of the polarized fractal efficiency line.
Key to the PPS/PFE tables
| column | color | meaning |
|---|---|---|
| pps | bull phase | |
| bear phase | ||
| pfe trend | uptrend | |
| no trend | ||
| downtrend | ||
| pfe loc | above +50 | |
| 0 to +50 | ||
| below 0 to -50 | ||
| below -50 |
A bull or bear signal -- a phase change -- on the pps triggers a look at the pfe line on the stock, etf or forex pair.
If the pps signal bull phase, then confirmation (and a potential buy signal) occurs when the pfe trend turns up. Note that the trend in this case is the direction of the immediate move in the current period, not a series of directionally biased highs and lows.
A more cautious approach would be to wait until the uptrending pfe crosses above the -50 line, or even more cautious, crosses the zero line into positive territory. The cautiousest (is that a word?) trader will wait for the pfe to cross above the +50 line.
The degree of caution I embrace depends heavily on the look of the chart: How close is the resistance, and how dense is it? Do I have a rising volume upon the signal change? Is there outside motivation for the change?
For a change to bear phase, turn everything on its head: A buy signal confirmation occurs when the pfe turns down, cautious traders wait for a drop below +50, and the more cautious for a drop below zero into negative territory, and the most cautious, for a drop below -50.
I use the concept of potential: A rising pfe below zero has more potential to signal a price rise than does a pfe that has flatlined at +100. The low but rising pfe gets the trader in earlier in the price increase, but there is also greater chance of the price increase being cut short, or not happening at all.
Look for the new methods beginning with the Weeklies filing today, and continuing with the Morningline, Forex and Watchlist filings on Monday, and also, of course, in my analyses of individual trades.
Below, more detail on the pps and the pfe, and a statement of the trading rules I'll be using, initially at least, in working with this technical analysis system.
PPS/PFE Analytical Tools
The analysis uses the daily Person's Proprietary Signal (pps), developed by John Person.
This is a black box signals -- the "proprietary" means that Mr. Person knows how it works under the hood, and I don't. But it has shown a fair degree of success in identifying good entry and exit points, and I find it useful.
For confirmation, the analysis uses an indicator called the polarized fractal efficiency (pfe) technical tool. It uses the fractal math of Benoit Mandelbrot to measure how efficiently move between levels. The higher the efficiency, the more directional the price trend.
The math for the pfe is public knowledge, but it is well above my math knowledge, and so to me is also a black-box signal.
This is a relatively new technical tool, based on fractal math. Investopedia has only a cursory explanation. Wikipedia is silent on the subject. ThinkOrSwim has a fuller explanation.
PPS/PFE Trading Rules
These rules are very preliminary. I’m still trying to figure out how the polarized fractal efficiency signal works.
When Person’s Proprietary Signal (pps) is in bull phase, enter when the polarized fractal efficiency (pfe) line crosses the zero line in an uptrend trend) A pps signal and pfe uptrend have less strength but greater upside potential when the pfe location (pfe loc) is below +50, and greater strength but less upside potential when the pfe location is at or above +50.
When the pps in in bear phase, enter when the pfe trend crosses the zero line in a downtrend. The set up has less strength but greater downside potential when the pfe loc is above -50, and greater strength but less downside potential when the pfe loc is at or below -50.
How should the pfe line be treated when it has flatlined at either end of its range, around +100 or -100. My preliminary observations are that the price by then has had a large run and tends to present a picture of exhaustion. However, by the description of the pfe, a high level should indicate a continued strong trend.
This is something that I’ll figure out as I go along.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
No comments:
Post a Comment