Quote from DrPepper:
.....I am curious what method of trading you find to be effective in chop?
I am also very interested in the use of volatility in trading and would be interested in how you use it.
I'll answer the chop question for now....
Firstly I'm talking about stocks only, not indices-Forex etc, as I only trade stocks.
Chop can happen at any time, ie unpredictable and most often I've found it will happen when the market as a whole takes a breather.
As trading is a probabilities game you need to look at this issue in terms of probabilities I believe.
What I do is scan for stocks which historically trend well.
This can be done a number of ways, eg, how often do your buy and sell signals indicate on each particular stock.
( you need a program which to do explorations on - like Amibroker)
Another method is look for stocks which have historically low bar volatility as well as run up and down steeply in terms of % gains and falls.
I've found it's best to use weekly bars, not daily for this type of searching.
Yet another method is to use RSI and measure ONLY the average RSI over a longish lookback period. eg If the average RSI over a lookback of 12 months is 60, then you know this has been a trending stock.
Now just because its been a trending stock in the past doesn't guarantee it will in the future.
So what do you do now?
Well by using indicators a little differently in approach you can come up with some novel ideas.
Another approach is when the market as a whole is downtrending or chopping, what are some particular stocks doing?
When you've found the best performers, then look at the last annual report.
Look at who the directors are. If they have experience in their field of endeavour, keep an eye on the stock.
If the directors for example of a Resource company are predominantly Lawyers, accountants, politicians, bankers, throw that stock into the junk directory and don't go near it again.
As I said, it's a probabilities game, so screen out the junk stocks first, then trade what's left over.
Quality companies are what will give best returns, junk companies can also trend well but what happens often is it will often plunge suddenly. That's OK so long as you are very fast and continually sharp with the trigger finger.
