Last updated: 8-JUN-2018.
Caveat: this indicator works best with indices and highly liquid stocks. It is not recommended for stocks with poor liquidity (for that matter, any indicator).
When any stock has to rally, it has to cross some levels. This can be prior resistance, last week's or month's highs etc etc. Here I have chosen 20 days high as the reference level as there are 20 trading days in a month.
For fewer and longer signals, you can also choose say quarterly breakout by using 60 days as reference level. Using less than 20 is not recommended due to high number of signals and whipsaws.
A feature of markets all traders must understand... a market is either trending or rangebound. Some traders look at a trend as nothing but a series of range breakouts. Now a stock will show fantastic move only when there is a breakout from a range.
The outcome of any trade is random. This means for a large number of trades, there will be a uniform distribution of trades giving small profits, small losses, big profits and big losses. The trades with small profits and losses will cancel each other and you are left with trades with big profits and big losses. So how do you make money?
You can make money only by (a) cutting losses fast and (b) let profit making trades continue as long as possible.
The KPL swing indicator helps you ride the trend and lock in profits via a trailing stoploss.
Losses are inevitable in trading. As a trader, your primary objective is loss minimization (and not profit maximization).
Risk management defines your maximum loss in any trade. My personal experience is you should limit your maximum loss per trade to under 1% of your trading capital.
Quantity to buy = (1% of trading capital) / (Purchase Price - Stoploss) .
Further, do NOT invest more than 5% of your capital in any single trade.
All indicators give whipsaws and the KPLSwing indicator is no exception. But it is easy to know when a signal is likely to generate a whipsaw.
The first warning will be where the stock is trading in a small range for a long time. Here it is possible to get a buy signal today followed by a sell signal in next few days.
The second is where a buy signal is generated near a known/ significant resistance.
When you get a whipsaw or 2 loss making trades for the same stock, then it makes sense to ignore further signals until the stock breaks out from the range.
Another way to identify rangebound stocks is to just see the price movement over last 5-6 months... if the stock has not gained or lost much then it means it is directionless and hence rangebound.
Ditto for the sell side.