Trading volatile securities

This article discusses how to trade stocks and leveraged etfs, that have a fairly large ATR and can move by a good amount over a week or even over a day.

Keep it simple.
After trying out various technical indicators, I have narrowed down to the following.

Use the 60 minute chart V/S the Daily chart
Granted, that the daily chart is the best and most reliable for an overall view, however, one has to wait for a whole day, till the end of day to generate a signal. Albeit, this would be fine for regular securities, it produces too much delay for fast moving and highly volatile securities.  There are 6.5 hours in a trading day, so the 60 minutes chart is 6 .5 times faster than the daily chart. In an attempt to speed things up we are going with the 60 minutes chart.

RSI on 60 minutes chart
Enter when RSI rises above 50
Exit when RSI drops below 50

On the 60 minutes chart the RSI is very sensitive to price movements and can whip around the 50 line producing false signals. To reduce this chop, add a 5 RSI points margin. So exit/get out when RSI drops below 45 and enter/get in when RSI rises above 55.

8 ema/21 ema on the 60 minutes chart
Enter when 8 ema crosses above the 21 ema
Exit when 8 ema crosses below the 21 ema

The ema crossover lags the RSI. This gives you a slightly less better price than the RSI strategy, but helps reduce whiplash by keeping you in the game longer.

Conclusion
So is the RSI or the moving average system better?
RSI gives you better prices but more whiplash.
The moving averages reduce the false signals at a slight expense of price.
Since the in and out dance created by the whiplash can cost you significantly, I prefer the moving averages cross over system.

One further thing to realize is that the moving averages  are a lagging system and waiting for a cross over produces even further lag. This lag can be significant on a daily chart, but the 60 minutes chart helps to speed up the process and produces a good combination of lag and price, particularly for fast moving, volatile securities which have a significant ATR and can move a significant amount during a trading day.

Dance
Once the RSI goes above 50 or the 8 ema crosses above the 21 ema, there is no telling how high the security can rise. Similarly, once the RSI drops below 50 or the 8 ema crosses the 21 ema to the downside, we do not know how far the security will fall.

So the trader should stop guessing the high or low, rather they will have to learn to dance to every buy and sell signal.


Happy trading!