Dow Jones - On-balance volume strategyI have checked and over checked this strategy a few times, so I hope there won't be too many mistakes. As you will see, this is a very simple and effective strategy, which produces signals when used on its own, without adding any other indicator on the chart or using any fundamental factor. All you need is the OBV indicator, candlesticks and support and resistance. This is how it goes :
1 Look for a divergence on OBV. It shouldn't be a divergence when the price goes flat, it should be a divergence formed on two peaks or troughs. Note that only class A and B divergences have been taken into consideration.
2 After spotting a divergence, wait for a bullish or bearish candlestick like : hammer. shooting star, doji, engulfing, piercing line, dark cloud cover, abandoned baby. Candlestick patterns can be considered too : Evening/morning star, island reversal.
3 Look for the first structure support, that is the start of the current rally or the start of the current correction and set a target above or below it by a few points. On that particular target, position should be closed by <=50%, of the entire position.
4 Before getting to the target, after moving in your favor, the stop should be adjusted to breakeven.
5 The remaining of the original position should be closed when the trader sees fit, or till a contrary signal appears. I have not found a proper closing signal yet.
In the period this strategy was tested, it produced 39 signals. That means 3 signals each year.
4 signals were whipsaws, the red lines.
5 signals broke even (if the stop would have been adjusted to breakeven after the trade moved in your favor)
11 signals went to structure support, and made a rebound.
19 signals went a lot below structure support, with some of them even predicting long lasting corrections.
You can see that I'm using the word support, and not resistance. That is because this strategy doesn't really give long signals, most of them are shorting signals. Out of the 39 signals, 9 were long, 30 were short. Out of the 9 long signals, 6 went through the immediate resistance, 2 made it only to the resistance, and one of them failed.
This is a trading strategy that I'm going to use from now on, separately from my usual trading system. I'll be back with more information.
