Monday, January 29, 2018

How to Trade Profitably in a Sideways Market

From the desk of Sagar Nandi and Superior Profit:

Superior Profit traders using CUE Systems follow a step-by-step systematic approach that is fast and easy at the same time.

The first question they ask themselves is "what state the Market is in?". We have identified four distinct Market conditions. One of them is Sideways Market. In a Sideways Market the instrument moves sideways (duh!) where the peaks and troughs are at approximately the same level.

The other three Market States are Trending, Reversing, and Exhausting. You may learn more about these from this and other videos on our YouTube channel.

For now, we focus on the Sideways Market.

Once Superior Profit Traders identify the Sideways Market, next step is to see if there is a valid Sideways Market Trade Setup on the chart. We call this Setup Box Setup as if the Stock is contained inside a box and not able to break out.

It helps that for the Sideways Market we have defined only one trade setup. Not three or seven or twenty-one. And if you are curious, I am happy to share that for each of the other Market Conditions also we have established only one trade setup. This simplicity makes a trader's life easier.

A trader needs to make decisions at the right edge of the chart. Superior Profit Traders do that using Unambiguous Checklist for each Trade Setup. You may refer to the Entry Checklist page for the setups and their checklists.

Applying this, you could identify a Long or Short Box Trade Setup instantly. We came across such a trade in Apple Inc. (AAPL) a few days ago.

Before delving into the trade, have a look at what Analysts were suggesting at that time. They were subtly telling you to Buy AAPL.

It may be worthy to note that as of the Trade Signal Days (16th and 19th Jan 2018) or even today (25th Jan after Market Close), average Analyst Recommendation on AAPL is a Buy. And consensus Price Target is 10% higher than the price as of 25th Jan Market Close (source: Metastock Xenith or Thomson Reuters EIKON).

In fact, if you see the recommendations, the Price Target was going higher every month from Oct 2017 to Jan 2018 (this current month).

Not the time you would consider taking a Short Trade unless you had a robust systematic approach that was telling you to take a Short and not Buy AAPL at that time. Superior Profit Traders are confident on their own disciplined and data-driven systems and don't go by analysts' recommendations. In fact, they avoid looking at those as it sometimes influences a traders' decision, for the worse.

Below is a CUE Chart that is used by Superior Profit Traders to decide Box Trade Setup. This chart showed possible Box Short Trade Setup on AAPL, and one of our traders executed the trade elegantly.

The Unambiguous Checklist for the Box Trade Setup is available on the Entry Checklist page.

All the conditions of Box Short Setup were met on the two days 16th Jan and 19th Jan, these are the days that displayed the Bear Release down arrows. The Candle Shape of 19th Jan was Indecisive with both upper and lower tails. That might lead the trader to enter the Short the next day (22nd Jan) when the Candle color turned Bearish (red).

Note also that these two Bear Release signals formed False Upside Breakout - a situation where the Stock tried to go above Sideways Resistance but failed and reversed inside the range. These False Breakouts tend to be more apt times to take a Box Trade.

While mentioning the color, you may see that all the CUE Charts use red/magenta for Bearish signals, green/cyan for Bullish signals and yellow for Neutral signals.

Furthermore, even the CUE Systems for Industry Rotation Analysis and Fundamental & Peer Analysis uses the same color coding. This consistency allows you to respond intuitively to the facts you see on the charts or the Scorecards.

CUE Traders don't just use Technical Charts. They like to perform a complete 360° Analysis before placing any trade. Our trader did the same. Here is the Vital Fundamental and Peer Analysis Scores of Apple Inc. as of 25th Jan Market Close. 

The CUE Vital Fundamental & Peer Analysis as shown above pointed to a potentially lucrative trade in Apple using Put Options.

What about the Industry Analysis? Was Apple's Industry going up or down? You could know that instantly from CUE Edge Industry Analysis, as described below.

The Industry was weak - and the color Scorecard showed that unambiguously within seconds.

We, therefore, had a Stock that was giving a CUE Box Short Trade Setup on the CUE Chart while its Industry was weak. Fundamentally it was in the middle. The trader decided to take a Put Options trade. As of 25th Jan, the trade gave more than 100% profit. For the Box Trade, Initial Profit Target is the Lower Range. That target was approached on 25th Jan. With discipline, the trader exited enough Options Lots so that the entire trade is risk-free from now onward.

This trade was a real-life example of Box Short Trade in a Sideways Stock following one's systems and not looking into others' (Analysts) views. The trade was entered based on unambiguous signals on Charts and also based on Fundamental and Industry Analysis. The comprehensive 360° Analysis could be completed in minutes using Visual CUE Systems.

There are many such Box Trade Examples in the Market. This setup allows for very Low-Risk Entry and sizable Profit. You can search for such Box configuration on CUE Global Technical Trading system. The CUE Sonar program can go through thousands of Stocks and shortlist those with potential Box Trade Setup in a matter of minutes.

The Unambiguous Checklists, Vital Fundamental Scorecard and Industry Rotation Table helps you to make your trades the truly Highest Probability Trades. You may know more about these systems from the Product page.

I end with another Stock (Littelfuse Inc., LFUS) that gave a similar Box Short Trade Setup on 23rd Jan and is working out beautifully.

CUE Chart gave a Box Short Setup. CUE Vital shows LFUS was and is Overvalued. And CUE Edge shows its Industry (Electronic Components) is weak. You could probably figure all these out in minutes from the color-coded CUE Systems. And take another profitable Sideways Market trade with confidence, Shorting the top with a Low-Risk Entry and Trading Profitably using 360° Analysis