The Complete Trading System | Trading Strategy


5- Indicator Trading System

As a trader basically what we will be searching for in the chart are, presence of a good TREND and good buying opportunity, that will hold the highest probability of winning.
  1. SMA TREND FILTER 
  2. STOCHASTICSOVERSOLD/OVERBOUGHT 
  3. CONFLUENCE OF SUPPORT/RESISTANCE 
These are “must have” criteria's for valid ENTRY set ups. Without having them we cannot proceed and lack of any one two, straight led us to cancel the set ups. 

If done correctly, this system is incredibly simple and extremely effective and it always keeps your risks low because you are looking for low, risk high probability trades with very little draw down in case things do go the wrong way. There are times when they will. But there will always be very little at risk. 

Lets study them in details...


100 Simple Moving average

One of the most important aspects of trend trading is knowing the trading bias. This is crucial to understanding when we are in a bull or a bear market – in other words whether we should be considering ‘buy’ or ‘sell’ opportunities. 

The big number moving average like 100 Simple moving average (Or 200 SMA) may be the granddaddy of moving averages. Simply put, a financial instrument that is trading above it is healthy; below it, anemic. The 100 Simple moving average measures the sentiment of the market on a longer term basis. This is where major players like Banks and hedge funds need to look in order to move a large amount of stocks. I display it on all my work proudly. 

I always interested in a stock's price movement in relation to the 100 Simple moving average - I also study the slope, the distance it is from price action, and its correlation to some other moving averages, particularly the 20 and 50 SMA. For instance, where the 50 in particular is in relation to the 100 moving average determines the phase of the overall market.

Longer moving averages like the 100 lag. They tend not to predict price direction, but rather reflect current direction. Therefore, when you hear "the trend is your friend," technically put it really means that the price over the last 100 SMA is indicating an upward trend, therefore look for buy opportunities; versus the price is below the last 100 days, therefore look for sell opportunities.

Moving averages are also good indicators for support and resistance. Since so many traders and investors watch the 100 SMA, once a price point reaches, fails or holds it, the collective psychology creates an immediate impact. Over the longer term, even psychology won't sustain the price action as the collective group is fickle. But, for a short term play, it works out amazingly well. 

Furthermore, if the price of an instrument is far above or below the 100 moving average, the reverse happens: a price way above could signal an overbought condition and way below - oversold.

One of the most important aspects of trend trading is knowing the trading bias. This is crucial to understanding when we are in a bull or a bear market – in other words whether we should be considering ‘buy’ or ‘sell’ opportunities.

The very first thing I look for on a chart is where price is in regards to the 100 simple moving average. 

If price is below the 100 SMA I will look for short/sell opportunities 

If price is above the 200 SMA I will look for buy/long opportunities 

In a nutshell this is all you need to know on this topic! But I know many readers are a little more curious and would like to know why this is the case.


Trading bias – the 100 SMA fail safe

Of course, a new trend can get started on the “wrong” side of the 100 SMA. When a bear market follows a strong bull market then price can come down for several weeks or months before crossing below the 100 SMA . And vice versa, of course. 

This is the 100 SMA fail safe – we may have to endure weeks of a new trend without being able to trade it (due to it being the “wrong” side of the 100 SMA ) but this is to protect us against the reversal being a temporary pullback. 

Some pullbacks can be deep and prolonged and this can tempt some people to the ‘dark side’ of trading – they want to trade against the overall trend. But until price crosses the 100 SMA we assume the bullish or bearish bias is still intact (although we won’t necessarily be trading it). When price is above the 100 SMA the bias is BULLISH When price is below the 100 SMA the bias is BEARISH So stick with the 100 SMA fail safe. Yes, it may look like opportunities are passing us by, at times, but we need to be more selective. We need to be aware of the trading bias and not get distracted.



Follow the market makers 

The other reason I adhere to the 100 SMA rule is because many large banks and financial institutions do. These organizations have massive funds they hold at their disposal and so have a lot of influence.

Some funds which trade long-term positions may start accumulating large positions the “wrong” side of the 100 SMA as they have the finance to do so. This can take them weeks or months. (They do it very slowly because they don’t want others to see what they’re doing – as this could result in them being unable to fill positions at the price they want). But the majority of institutional traders trade with the bias. For this reason retail traders, with our relatively small account sizes, only look to enter a trade on the “right” side of the 100 SMA as this is where the momentum is.

Note: the 100 SMA is only of relevance when ENTERING a trade. Trade management should get you out of a trade long before price retraces to the 100 SMA.

Slope of 100 Simple Moving average

Along with Trend identification, SLOPE of the 100 SMA also tells us Health of the current Trend.

If Slope of 100 SMA is in Up direction then it’s a strong and healthy Up-Trend.

If Slope of 100 SMA is in Down direction then it’s a strong and healthy Down-Trend.

If 100 SMA is in almost straight line (no slope) then we can see a Choppy Price action.







Moving averages are also good indicators for support and resistance. Since so many traders and investors watch the 100 SMA, once a price point reaches, fails or holds it, the collective psychology creates an immediate impact.

Over the longer term, even psychology won't sustain the price action as the collective group is fickle. But, for a short term play, it works out amazingly well.


Summary of the trading bias 

Always have the 100 simple moving average plotted on your chart. Regardless of what timeframe you trade, follow this rule: 
  • If price is above the daily 100 sma only look for, and trade, long/buy positions 
  • If price is below the daily 100 sma only look for, and trade, short/sell positions 
We call this the trading bias – it helps stack the odds of a successful trade in our favor. This applies to any and every market you can think of.

Basic Understanding of STOCHASTIC

The stochastic oscillator was first introduced by George Lane in the 1970s. This indicator consists of two lines—the %K and %D lines—and compares the most recent closing price of a security to the price range in which it traded over a specified time period. The following formula shows you how to calculate the latest point on the %K line:

 %K = [(Close – Lo) ÷ (Hi – Lo)] × 100 

 Where: Close = Last closing price Hi = Highest intraday price over the designated period 

Lo = Lowest intraday price over the designated period Therefore, if you were calculating a five-day %K line, the first point would be calculated using the highest price over the last five trading days and the lowest price over the last five trading days as well as the closing price for day five (the last day of the five-day period). The %D line typically is a three-point moving average of the %K line, and serves as a “trigger” line for generating trading signals. In other words, you add together the last three %K values, divide this sum by three, and continue this over a rolling three-day period. You can use any type of moving average you wish when calculating the %D line, including simple, weighted, or exponential moving averages.

Like virtually all technical indicators, you can calculate stochastic over any time period you wish, depending on your trading style.

The shorter the time period used to establish the high-low comparison, the more responsive the indicator is to price changes which, in turn, will increase the number of signals the indicator generates. 

Alternatively, as you increase the time period used in calculating an indicator, you increase the time in which it takes to respond to current price movements. This lowers the number of signals the indicator generates. 

Also, keep in mind that you can use any time increment as well—minute, hour, day, week, month, etc. The same principles apply no matter the time period or increment you use.


You can see in the figures that the stochastic oscillator fluctuates between zero and 100. A stochastic value of 50 indicates that the closing price is at the midpoint of the trading range for the specified period. As values reach above 50, it indicates that the price is moving up into the higher trading-range for the period. The opposite is true when values fall below 50— the price is moving into the lower levels of the trading range for the period. At the extreme, a value of 100 signals that the price closed at the absolute highest point for the period, while a value of zero means that the price closed at the lowest point for the period.

The two to use the stochastic oscillator are, 
  • Divergences 
  • oversold/overbought.

Stochastic Divergences

When Lane first introduced stochastic, he believed that the only valid signal occurred when a divergence developed between the price and the stochastic oscillator, more specifically the %D line. Divergences between price and an indicator occur when the behavior in the price is not mirrored by the indicator.

A Bullish divergences occur when the price is making new lows while the oscillator is making new highs—or failing to make new lows— below the 20 line. Here you can expect prices to bottom out and begin to rise, matching the behavior of the indicator. 

A Bearish divergence, for example, takes place when the prices are making higher highs while the stochastic is making new lows (preferably below 20), or is failing to also make new highs. This occurs because, while prices are reaching new intraperiod highs, the closing prices are falling. When you see this, you can reasonably expect the price to fall in line with the indicator—which means prices will reverse course and begin to fall.

Stochastic divergence is one of the main confluence among other.









Stochastic Overbought & Oversold Zones

The horizontal lines at 20 and 80 mark overbought and oversold areas for a given security.

A security is considered overbought when the stochastic lines rise above 80. Likewise, It is viewed as oversold when they cross below 20. 

These levels represent points where one would expect prices to reverse—the extreme price levels are not sustainable over time. 

There is no indication as to how long the security will remain at the price extremes, meaning that the security could become even more overbought or oversold.




Stochastic measure the momentum, not the range of the price movement. This is a very important distinction.

This oscillator is more robust when aligned with the current price trend, in most cases. 

An up trending stock will generate a larger price move on buy triggers and shallower price move on sell triggers. 

A down trending stock will generate a larger move on sell triggers and a shallower move on buy triggers. 

Stochastic like all indicators work best when used in combination with other indicators to generate a cumulative effect. We use our moving averages in conjunction with stochastic.

Support and Resistance

Support is the price level at which demand (Demand is synonymous with bullish, bulls and buying) is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.

Support does not always hold and a break below support, signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. Support breaks and new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. 

Resistance is the price level at which supply ( Supply is synonymous with bearish, bears and selling )is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance. 

Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices.

The Importance of Support and Resistance

  • Support and Resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level. 
  • Support and Resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example, if prices moved above the resistance levels of an upward trending channel, the trend has accelerated, not reversed. This means that the price appreciation is expected to be faster than it was in the channel.
  • Being aware of these important Support and Resistance points should affect the way that you trade a stock. Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support. Refer the image below for Support and Resistance points.

How to draw a trend line
Wait for first 2 points, and connect a line through them, very basic !


Watch for these trendlines


Previous high and low at support and resistance



Round Numbers as Support and Resistance

One type of universal Support and Resistance that tends to be seen across a large number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend to be important in support and resistance levels because they often represent the major psychological turning points at which many traders will make buy or sell decisions.

Buyers will often purchase large amounts of stock once the price starts to fall toward a major round number such as 1000 Rs. (in the image below), which makes it more difficult for shares to fall below the level. On the other hand, sellers start to sell off a stock as it moves toward a round number peak, making it difficult to move past this upper level as well. It is the increased buying and selling pressure at these levels that makes them important points of support and resistance and, in many cases, major psychological points as well.



Smaller Moving Averages such as 20 or 50 SMA act as Support and Resistance


The Complete Trading System | Trading Strategy The Complete Trading System | Trading Strategy Reviewed by Admin on July 19, 2019 Rating: 5

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