A Simple Way To Spot Setups, Part II

I would like to answer some of the questions I received concerning yesterday's piece by showing you another example. This time I will be using an example of short selling. 

At 10:10 a.m., Smith International (SII | Quote | Chart | News | PowerRating) broke down below its 10-period moving average of low and closed below the line. This was an alert. (I use simple moving averages, but exponential moving averages work as well.) The very next bar is the short-selling entry point. That means you sell the stock as soon as it traded below 56.60. 

Where do I set my stops? It depends on your risk tolerance, but I would set my initial stop slightly above the 10-period moving average of low. (For buy, slightly below the 10-period moving average of high.) 

Several readers asked me how to calculate moving averages of high and low. Most well-known trading software packages have these features available, so ask your friends. They can give you specific names.

This is not, obviously, a holy grail. Paper trade before risking your hard-earned money. Remember, always place stops to protect your positions.


Eddie