Looking at the chart above, you can see how these moving averages create focus. The green lines identify times when the 10 sma is above the 30 ema. The red lines identify times when the 10 sma is below the 30 ema. This part of your market timing strategy answers the question of
what types of trades to focus on.
Moving averages are trend following indicators. As such, they will only work well in trending markets - not when they are the market is trapped in a trading range.
Ok, now we know whether or not we will be trading on the long side or the short side. Now we need to answer the question of when to buy and when to sell. That is where Williams %R comes in…
Market Timing Using Williams %R
I’m not really a big fan of technical indicators but Williams %R is useful to get a general idea of when the market has reached a short term extreme and is likely to reverse. It calculates the close in relation to the range over a set period of time.
The default setting in most charting packages has it set at 14 periods, but we would like it to be a little more sensitive than that so we will use a 3 period setting. Here are the rules for timing your trades using Williams %R.
- When the 10 sma is above the 30 ema, we will look to go long when Williams %R is less than -80 (over sold).
- When the 10 sma is below the 30 ema, we will look to go short when Williams %R is greater than -20 (over bought).
The more over bought or over sold Williams %R gets, the more likely a reversal will take place. Look for those times when Williams %R gets to -90 or below for long positions, and -10 or above for short positions.
Here is an example:
In the chart above of the S&P 500, notice how we ignore short positions when the 10 sma is above the 30ema and only focus on longs. Even though Williams %R is over bought, above -20, we only want to trade in the direction of the trend.
Also, notice how we ignore long positions when the 10 sma is below the 30 ema and only focus on short setups. Again we only want to trade in the direction of the trend.
On the right edge of the chart the 10 sma has just crossed down through the 30 ema so we can no longer trade on the long side. Instead, we will manage our existing trades and wait for Williams %R to get above -20 to focus on the short side.
See how we are NOT predicting what is going to happen in the future? That is a waste of time. Instead, we are reacting to whatever the chart tells us to do.
Use this market timing method to identify when to establish long or short positions. Once you are in a stock, trade the chart of the stock itself and forget about the market. Then, use your specific entry and exit strategy to get into and out of individual stocks.
