Successful traders and investors have a trading edge. It might include such things as a market timing signal, Stock Analysis criteria, a certain price pattern, technical studies or special technique that is repeatable and delivers more winners than losers. A trading edge has clearly defined rules that can be tested either with historical data using the Backtester or paper trading with Portfolio Manager.
Rising EPS is a must for any trading edge. VectorVest is the only service I know that provides a forecasted EPS and allows you to track it on a graph. The Midas Touch 40-day Moving Average (MA) of RT could also be a central piece in anyone’s trading edge. I wrote about it last week. The rule is you only buy when the MA is rising.
At the top of your graph, price action is always key. Whether you plot price by itself or use a moving average or multiple moving averages, the rule is price should be rising when you buy. It could be a continuation pattern, a breakout or a reversal.
You have a lot of flexibility in VectorVest when displaying price action. One technique is to plot VectorVest’s Stop-Price which is a 13-week MA of price adjusted for the stock’s fundamentals. When you use the 10- and 65-day MA of the Stop-price, you achieve even more smoothing of price. You’ll recognize the set-up as the Midas Touch graph layout when you include the 40-day MA of RT.
Too many indicators on a graph are unnecessary and can lead to confusion or “paralysis by analysis”, so you don’t want to go that far. However, VectorVest offers several popular technical studies such as MACD, Support & Resistance and Stochastics. The nice thing is you can start with your main graph set-up and then toggle on and off any additional indicator you wish for a quick peek if you’re looking for technical confirmation.
THE IMPORTANCE OF VOLUME
Traders know that volume is an important measure of liquidity and trading activity. When price rises on higher than normal volume, it means more buyers are pouring in, usually for good reason. You can simply add volume to your sub-graph, however, an enhanced technical study in VectorVest Graphs is On Balance Volume or OBV (found in Add Parameter, Technical Analysis). It’s a momentum indicator that considers both price and volume, a nice complement to most indicators that focus solely on price.
Joseph Granville developed the OBV and wrote about it in his 1963 book, “Granville’s New Key to Stock Market Profits”. He said he believed that volume was the key force behind stock prices and designed OBV to predict major price moves based on volume changes. It attempts to detect when a stock is being accumulated by many buyers, referred to as “smart money”, or sold by many sellers.
Most often, traders will use an upward sloping OBV to predict or confirm an uptrend and a downward sloping OBV to confirm a downtrend. Traders also look for divergences. A potential new uptrend is signaled when OBV is rising while price is falling. Finding a downward sloping OBV while price of a stock is trending up can suggest that the “smart” traders are starting to exit their positions. A change in trend may be coming.
A one-year graph of BAD (Badger Daylight) shows the effectiveness of OBV and the 40-day MA of RT working together. In September and October 2018, price was falling. The MA of RT was below 1.0 and falling, but OBV was starting to rise ever so slightly. In November, both OBV and the MA of RT began rising with price following along. The “smart money” was moving in, giving the MA of RT the “thrust” it needed for lift-off. OBV continued to rise through April and May while the MA of RT started to lose momentum and flatten out. Price continued to rise, but more slowly. Then in June and early July, OBV began to flatten out and the MA of RT began falling more rapidly. It signaled a price decline that began in earnest around July 11th and didn’t stop until mid-August, a 14% drop.
If you have found your trading edge, great. Perfect it and profit consistently before you add something new. If you haven’t, consider testing EPS, OBV and 40-day MA of RT as pieces of YOUR TRADING EDGE.