On Monday 14/5/2012 I tweeted a trade to sell Bunds. I was greeted with sympathetic well wishes as the Bund was on a rampage to record highs. The trade was based on a simple custom indicator I use, the creatively named “Distance from 200 MA”. The idea is that when price moves a certain distance away from the 200MA then a reversal is likely. At the very least, the advance usually pauses. I produced the following chart.
After about half an hour where the trade was looking promising, the Bund went on to make one final push higher and the trade failed. I took my 10pt loss and moved on to the next chart/trade. Below describes what happened.
You’ve probably noticed that price did in fact retreat. Following that high, price moved down about 80pts after which my indicator produced a buy signal. I wasn’t at the screens at the time but the 200MA indicator made an overextended low matching previous lows. It was a definite buy signal, and it came about 2 1/2 hours prior to the news of new Greek elections.
I use the above indicator on both 5min and 1hr charts. Naturally the signal is stronger when both timeframes produce it. It’s not particularly new only that I haven’t put it out in public before. It’s a replacement for the MA envelopes that I used to use to gauge reversals. For simplicity I like to call it a rubber band trade (should I call it #RBT on twitter LOL). This kind of trade idea is nothing new and I’m sure it is known by many other terms.
It’s not a trade I like to share often as I know I’d get many cries of knife-catching and counter-trending and anti-momentum. That is true to an extent, but markets don’t move in a straight line and have to turn at some point. And it’s particularly true that in bear markets volatility is higher meaning both down and up moves are greater. So after a kerplunk/rally a nice reversal
always usually follows, and it’s my intention to either a) close an existing position or b) cash in on the new direction.
As with any system, trades can and do fail so know your risk and limit your losses. On a knife-catching counter-trending anti-momentum trade such as this, it is especially imperative. 🙂