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Tried, True, and Simple Technical Rules for Investment Trading

Many professional traders make a living by applying the same simple indicators and the same simple rules, over and over again, on the same small set of securities. “It can’t be that easy!” you think. But it is. Professionals have a superhuman ability to focus on a single narrow set of circumstances. They know from experience that the indicator and rule produce a profit most of the time. If it fails to produce a profit this time, too bad. They accept the loss and move on to the next trade.

Following are two rules that have stood the test of time:

  • 5/20 system: One of the oldest trading concepts is also one of the simplest — Richard Donchian’s 5/20 system, which uses a trend-following principle. You buy when the 5-day moving average crosses above the 20-day moving average and sell when the closing price crosses below the 5-day moving average. Both the buy-and-sell crossover signals are qualified according to additional filtering criteria, specifically that a crossover has to exceed the extent of the previous crossover in the same direction, proving its street credentials, so to speak.

  • Opening range breakout: Another simple but effective one-rule concept is to buy when the price moves above the range established in the first x number of minutes of trading. The opening range breakout is a volatility breakout setup.

    With the opening range breakout, you can improve the odds of getting a successful trade by adding one or more confirmation qualifiers, such as:

    • The preceding bar was an inside day or doji.

    • The x-minute opening range over the past three to ten days was narrowing.

    • The opening is a gap from the day before.

    The key reason for adding confirming indicators is to overcome the inconvenient little fact that every indicator fails some of the time. By requiring a second indicator that gives the same buy or sell signal, you increase the probability that your trades are profitable.

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