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How entry criteria save you money

April 15, 2013

In the last few months, I’ve been looking for some RSI divergence set ups that have not materialised. By using entry criteria, both in terms of being ready to pull the trigger AND then actually pulling it, I can avoid calling trend changes too early.

Example 1: Gold stocks

In my 25 February post, I was looking for an oversold condition on gold stock breadth that lasted until at least late March. This was achieved but entry criteria, such as what existed for Pan American Silver (PAAS) in July 2012 have not been reached on any gold stocks, on price or relative to the S&P500 Index. Newmont Mining (shown on 25 February) failed to set up on its daily chart and the weekly set up then failed

Gold has accelerated downwards and acceleration is usually an ending signal of some degree. Picking lows without momentum divergence is not one of my methods though.

Example 2: Sector RSI divergences

Also on 25 February, I was looking for bearish RSI divergences on several sectors, including the Biotechnology sector, which has continued to power ahead.

The RSI divergence entry criteria, stated on my methods page, state:

  • Entry signal is a weekly close of the RSI above (or below for tops) the intervening high
  • At times, a weekly bar reversal can be taken as an entry signal. This will depend on other confirming factors

Either way, no entry signal was given and these trades were avoided.

Similarly, the RSI and breadth divergence set up described on 18 February had a stated position entry of a weekly close below $43.09, which was never achieved.

Summary

By defining set ups and entry criteria, based on observation of what has been most reliable in the past, most of the time you can avoid picking trend changes too early.

Postscript

If I had followed the Bollinger Band breakout on the MS Consumer Index (CMR) v MS Commodity Related Equity Index (CRX) of 25 February, then including today’s action, this trade would have a gain of 13.2%.

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