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bullish divergence and on 2/23/96 there was a bearish candlestick indicating the rally was over. So I go short yen the following week on the open at 9576. Now that I am short I continue to examine a weekly chart to see if the trend is changing. Since I am also using the weekly chart to generate the exit strategy, I have to accept that I will leave a lot of money on the table, when the market changes direction. |
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What I have found in order for my exit strategy to keep more profits is that I need to go to a shorter time period. The next shorter time frame from weekly is daily (the common belief). I will continue to wait for the continuity of thought to change on a daily basis from bearish to bullish. Consequently I have to change my exit strategy to exit when there is a bearish divergence, on a daily chart. When it does change, I will now exit the short yen trade the next day. This was accomplished on 4/23/96 at a price of 9446, a $1625 gain. |
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Now after exiting the yen short I will focus my attention on two time frames: the weekly and the daily. I will go short if the weekly chart generates another short order. I will alternatively reenter the short yen trade, based on the daily chart, if it generates the same signal that the weekly chart generated previously (a bullish divergence and a bearish candlestick). In my example the weekly yen chart did not generate another sell signal. However, the daily chart on 6/11/96 had another bullish divergence; then on 6/20/96 there was a bearish candlestick following the bear rally at 9401. So I go short on the open the next day, 6/21/96, at 9354. My stop is based on the weekly chart, and I will now continue watching the weekly and the daily charts for my exit strategy to be exercised. It finally was. On 6/12/97 I exited following a bearish divergence at 8760, a $7425 profit. |
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This strategy of using a shorter time frame is not typically discussed in the vast majority of technical analysis books. This is a pity, because it is very effective. The purpose of this example is not to demonstrate some great methodology (it was profitable, but not that great), but to demonstrate how your methodology will be enhanced by deciding to use an exit strategy (with a reentry strategy) in conjunction with a stop strategy. Different time frames may be something that you want to consider. There is a significant amount of extra work required to do all the research involved in using different time frames. A lot of professional traders do not base their trading decisions on anything but one time frame; however, some use multiple time frames. A friend of mine in New York makes trades from a 5-dimensional representation of the market based on different time frames, ticks, and some fairly advanced math. The secret is that you must devise a methodology based upon the beliefs that you have faith in. |
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