Anatomy of an Unsafe Alert
As discussed in the manual, we consider a trade to be a 3 step process: direction, safety and trigger.
The automated alerts provide us the direction and trigger in one shot. We know if the alert is drawing our attention to a potential long or short (buy or short-sell) based on whether it is positive or negative. Also we know the price at which the alert was triggered.
A quick aside about alert price: We may not be able to capture this exact price of the alert in the market because of the delay in getting the alert. Remember that our system updates only every 15 minutes, so faster price movements of higher frequency are not captured. However, from the alert, we know the expected average profit per trade of the strategy. So if we see an open alert, we can still check if it is worth taking at the current market price. For example if a negative alert was issued for a stock at price $50 and the average profit for the strategy is 2%. Then by the time we become aware of the open trade, if the price hasn't moved down by more than 0.5% ($49.75), it is still fine to take it. Also if we see an open alert, we can use the time-line to load historical charts to find out when the alert was issued and what the average trade duration is before making a decision to take it or pass it.
Now going back to the 3 step trading process, because the alerts take care of both direction and trigger, only safety check needs to be performed by us. The alerts have only three basic safety checks built into them as mentioned in the manual. Though we are continuously improving the quality of alerts with more built-in safety conditions, our charts make it easy to perform a quick, visual, safety analysis. This blog gives such a sample analysis.
The chart below shows an alert issued for CAT at noon yesterday (7/14). We can see from the TR*PR of the alert that it is just a little over 3. The price at which this long alert was issued is $66.59. The price appears on the title of the bottom right chart alongside the DTI/Alert number. It may not be visible in the 4-panel layout as shown below, but if we enlarge the bottom right chart, it becomes visible.
From the above figure it is clear that the alert was issued because of the upward turn of the Pink oscillator. So let us consider the oscillators slower than it for safety. In the next figure, we can see that slower oscillators, Black, Blue and their combination, the Red, have all turned down. The gray residue is also on a downward path. The yellow DTI line (4-day trend) is dropping. That means there is not much support for a buy coming from the end-of-day chart. We can also notice from the above figure that the fast oscillators are turning down, so it would be prudent to wait a while on this alert anyway. In the title of the enlarged chart below, we can notice the price now.
The slow oscillators above definitely don't bode well for the safety of the alert. Also keep in mind that momentum passes from the faster oscillators to the slower ones. The next figure that shows a zoom in of the bottom left chart to see the price, daily model (gold), intra-day model (brown) and the Pink, Black and Red oscillators. We can see here that Pink's recent downswing correlates well with the price but now its momentum seems to have transfered to the slower oscillators and they are on a downward path. This opposing movement of Pink and the slower oscillators has pretty much flattened the intra-day model (brown).
Sure enough, the unsafe nature of the alert is in full displace in the chart below from today (7/15). We can see that Black, Blue, Red and Residue have continued their downward movement relentlessly pulling the price along with it though the Pink traveled up. Remember that the price is ultimately the sum of the oscillators.
So as the quick safety analysis showed, this was indeed an unsafe alert! Around a dozen alerts are issued every day at the site, so we can always find safe ones to take! This was just a sample safety analysis from the manual, we know about consulting the NASDAQ Composite (COMP) charts for overall direction of the market and other tips to enhance the safety analysis.
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