As a techie trader, there are multiple ways to do technical analysis to determine entry and exit points for a trade. Flat Line trading strategy is a very old and effective strategy that works very well to determine the entry/ exit points and when combined with ATR, it allows you to confirm your exit strategy ( at what price should i exit out of the trade).
The contents of this post will be
What is a flat line
What is ATR
How to draw a flat line
Entry criteria
Exit criteria
video showing an example
What is a flat line
Flat line is a horizontal line that can be drawn through at least two ( recommended 3 ) closing prices on the time line ( daily, weekly) considered. These flat lines drawn can be considered as support if the price is above and can be considered as resistance when the price is below. Moving averages 10, 20, 50, 100, 200 can also be used in conjunction with the flat lines as support and resistance
What is ATR
As per investopedia, Average true range (ATR) is a technical indicator measuring market volatility. It is typically derived from the 14-day moving average of a series of true range indicators. It was originally developed for use in commodities markets but has since been applied to all types of securities.
I plot 14 day ATR as a line chart on my charting tool. When I look at the line, it gives me an idea about volatility. When ATR is rising, the range of the stock will be rising and the premium for the options might also increase.
How to draw a flat line
I prefer candlestick as my plot style when I am drawing flat lines. As mentioned above, flat line is a horizontal line connecting at least 2 closing prices. The line can be horizontal only if the closing prices are pretty close . Most charting tools have horizontal line tool that can be used to draw flat lines. I personally use TC2000 as my charting software and will show you below in the video how I draw flat lines.
Candlesticks represent 4 prices – opening, closing, high and low. A candle stick is green when the closing price is greater than open price and candle stick is red when the closing price is less than the opening price. Closing price is bottom of the body for red candlestick and closing price is top of the body for green candlestick. Flat line can be drawn with both green and red candle sticks as long as the closing prices are aligned horizontally.
I prefer to have at least 3 months of data visible for the timelines considered ( I use daily mostly but sometimes weekly). I start with the candlestick next to current candlestick (today at the right end of the chart and see if I could draw a horizontal line that is aligned with the closing prices to the left. I identify as many supports and resistances as possible and leave it on my chart. The good news is these support and resistances created by flat lines can be used any time.
Entry Criteria
I consider options/ stocks for the upside when the price of the stock breaks out and closes above the resistance created by a flat line previous day and stays above the resistance next day. For the downside, I consider stocks/options whose price breaks and closes below the support created by a flat line
Exit Criteria
When a stock breaks and closes above the resistance, there is a very good possibility that it would move closer to the next resistance created by flat line. How much would that move be? It can be verified using ATR on the daily and weekly charts. For example, in the video below, I am looking at FB chart and it has a weekly move of 22.97 from the low of 269.42. This move is very close to MA 10 which is at 290.43. Whether it breaks the MA 10 depends on the overall market conditions but there is a good possibility that it can get touch MA 10 and there is a chance that it could touch the next resistance line at 293.20.
I use TC2000 for all my charting needs as well as for automated scans, alerts and journalig.
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