CHAPTER 10
The Mechanics of the Winning Edge Trading System
In this chapter we describe the mechanics of the winning edge trading system, which are entry and exit signal generation with money management techniques. Let’s begin with entry price.
Entry price in the system utilizes two indicators: the relative strength index (RSI) and the detrended price oscillator (DPO) in issuing entry and exit signals. When there is a divergence between price bar and DPO and RSI, the entry signal is generated.
ENTRY SIGNALS
As mentioned, the Winning Edge Trading System uses two indicators—the RSI and the DPO—to confirm an entry signal and indicate an entry point. Similarly, every entry point should be initiated with two conditions via DPO and RSI. A long signal happens when there is a bullish divergence between the DPO and security price bars and the RSI has crossed above the overbought condition. Accordingly, a short signal occurs when there is a bearish divergence between the DPO and security price bars and the RSI has crossed below the oversold condition. Now let’s look at the details of these two types of signals.
Long Signals
A long signal signifies a good price level at which to buy a security. It occurs when there is a bullish divergence between the DPO and security price bar at the same time the RSI has crossed below the 30 percent, or oversold, boundary. Figure 10.1 depicts a long-signal entry produced for a QQQQ ETF. The signal appeared on a March 17, 2008, daily chart at $42.50, ...
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