One requirement for using Trend Energy is to have a view on the market. Trades are then taken in the direction of the view. The big question remains: how to have a systematic approach to trend direction ? Earlier, we have explained how 60 minute charts may be used to determine the trend.
Another method is offered here, which may well serve the purpose of determining the direction of the trend. Once this direction is known, Trend Energy signals are taken only in this direction.
Instead of using a higher time frame, an unrelated indicator is used to determine the trend.
Keltner Channels – Method 1.
Apply a Keltner channel with the following parameters to the 5 minute Chart. (This process may be applied to any future, not just the Nifty):
Keltner channel inputs: Close, 10, 1
Rules:
1. Take only buy signals in Trend Energy when the Keltner channels are moving up. The channel consists of the outer lines (excluding the middle line). Both lines should move up.
2. Take only sell signals in Trend Energy when the Keltner channels are moving down. The channel consists of the outer lines (excluding the middle line). Both lines should move down.
3. Sometimes, the Keltner channels become flat. In such cases, there are two options: First – wait for the channels to move in any one direction. Second – Be ready to take trades in both directions – up and down.
4. Exits should be based on Trend Energy rules. These are summarized again:
In an uptrend, buy when:
A. A normal bar (green or red bar) appears after a blue bar (start of an up move)
B. A brown bar appears. (strong momentum).
C. Exit the long position if a normal bar (green or red bar) comes after a brown bar, or, a blue bar comes.
The process of exits needs to be understood carefuly. While we use Keltner to confirm our entry, exits are based exclusively on the different Trend Energy signals. To explain this : assume that the trend is up, with both keltner lines moving up. Now a buy is taken with brown bars. Even if Keltner channels turn down, we will not exit on them. Our exit will be when a normal bar comes after a brown bar.
MACD – Method 2
Apply an MACD indicator to the 5 minute chart. Use the default MACD values. These are:
MACD Inputs: fast – 12, Slow – 26, Signal – 9
Rules:
1. Take only buy signals in Trend Energy when the MACD is in a ‘Buy’ mode. The MACD is in a ‘Buy’ when the MACD line – Blue line is above the trigger line – red line. Thus, when Blue is above or higher than the red, take only buy signals.
1. Take only sell signals in Trend Energy when the MACD is in a ‘Sell’ mode. The MACD is in a ‘Sell’ when the Trigger line – Red line is above the MACD line – Blue line. Thus, when Red is above or higher than the Blue, take only sell signals.
4. Exits should be based on Trend Energy rules. These are sumamrised again:
In an uptrend, buy when:
A. A normal bar (green or red bar) appears after a blue bar (start of an up move)
B. A brown bar appears. (strong momentum).
C. Exit the long position if a normal bar (green or red bar) comes after a brown bar, or, a blue bar comes.
The process of exits needs to be understood carefuly. While we use MACD to confirm our entry, exits are based exclusively on the different Trend Energy signals. To explain this : assume that the trend is up, with Blue MACD line above the Red Trigger line. Now a buy is taken with brown bars. Even if MACD goes into a sell, we will not exit on them. Our exit will be when a normal bar comes after a brown bar.
