How to Use Technical Indicators to Trade Volatile Assets - Part 1

How to Use Technical Indicators to Trade Volatile Assets - Part 1

Submitted by adil on Mon, 08/04/2014 - 20:00

Learn to Trade Volatile Assets!

In the first part of the tutorial, an indicator that can help gain profit returns by trading high volatility stocks will be reviewed.

Keltner Channels:

This indicator adds three bands on the stock chart in the upper, lower and middle portions surrounding the price action. This indicator provides best results in a very trending market, either when the price is experiencing higher highs and higher lows during an uptrend, or when the price is making lower highs and lower lows when following a downtrend.

When there will be an uptrend, the price action will be moving very close to the upper Keltner line with pullbacks reaching near the middle band but never passing through the lower band. In such a case, the middle band is a potential entry point. Place a stop half or two-third way down in the space between mid-band and the lower band. The exit should be placed a little above the upper band.

A similar scheme should be deployed during downtrends. The price often remains close to the lower band and pullbacks will be reaching near the middle band but never exceeding the upper band. The middle line once again presents itself as a short-entry point. The stop is placed just inside the upper band and the target is set below the lower band.

To successfully use Keltner channels, it is important to consider the previous 20 bars and keep the Average True Range Multiplier at 2.0. The reward to risk ratio is generally $1.5:$1 or $2.0:$1, which means with every dollar risked, the potential reward can range from $1.5 to $2.

The Keltner Channel lines move according to the price movements, this is the reason why the target is set during live trading and it is important to keep the target at the exact position.

Advantages:

• The middle band offers an order.
• There is no need to time market entry.
• Once all the orders are placed, the trader needs nothing to do except relax and wait for the price movement to do its work.
• If the trader wants some action, the trades can also be actively managed.

The most important thing when actively managing a trade is never to increase the involved risks. When the market is experiencing a very strong trend, the target position can be re-adjusted to gain more profits. As the position becomes more profitable, the trader should focus on reducing the stop and the risk.

Disadvantages:

When the market stops following a trend, the trades will start to end in a loss as the price will move more in-between the upper and lower bands.

Workaround: Filtering trades based upon the trend strength may help. For instance, during an uptrend, if the price doesn’t make a higher high before a long entry, refrain from trading because most likely a strong pullback will stop-out the trade.

In the succeeding parts of the tutorial, more technical indicators will be reviewed, answers will be found of questions such as how to find volatile stocks, and what other things to keep in mind about volatility.