Stocks & Commodities V. 26:9 (48-49, 52): Three Common Tools, One Protocol by Charles K. Langford

Stocks & Commodities V. 26:9 (48-49, 52): Three Common Tools, One Protocol by Charles K. Langford
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Three Common Tools, One Protocol by Charles K. Langford

Three common tools of technical analysis can work together to generate continuous profits.

Common technical tools can be used together to generate a steady profit flow by using a single protocol. To examine how this can be done, the price action is divided into three time sequences: exhaustion of a trend, advent, and birth of the new trend. Among the dozens of tools available in technical analysis, three represent this method in a simple way: relative strength index (RSI), moving average convergence/divergence (MACD), and exponential moving average (EMA). Used correctly, these three tools can generate continuous profits.

Heres an example using the wheat market. Figure 1 is of the December 2007 CBOT contract. The daily bar chart shows two EMAs (seven and 27 periods); the MACD (7, 27, 7), which I find to work more efficiently than the usual 12, 26, 9; and the 14-period RSI.

BIRTH AND DEATH OF THE UPTREND An uptrend is born when the two EMAs give a buy signal. The signal occurs as the EMA(7) crosses above the EMA(27). After several attempts, on May 25, 2007, the EMA(7) crossed above the EMA(27). The price at the close was 5250 cents. This was the birth of an uptrend, and as time elapsed, it accelerated that is, the EMA(27) became more convex. We had a first peak at 9070 on September 12, 2007, when the RSI was at 84.18. A second, and the last in the chart, was at 9616 on September 28, when the RSI was at 76.20.




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