Profit with the Pro-Setups script
Did you buy a *good* stock after it has considerably fallen, only to see it fall even further? Oops... you entered when the stock was in a downtrend. Disaster is just around the corner if the downtrend regains further momentum.
Or, you bought a stock when it was in an Uptrend, but it came down, hit your stop loss, and then started rising again. Ouch... you entered when the stock was already extended.
The Pro-Setups script is the solution to the above problems and many more.
Let's talk about the script.
The objective of the script is to provide us a high-probability profitable setup, plus the knowledge of the underlying trend, which we further combine with price action to take a trade.
Setup + Trend + Price Action = Trade
The script is inspired by Guppy Multiple Moving Averages (GMMA), conceptualized by famous Australian trader Daryl Guppy, using two sets of multiple moving averages. I am assuming that you know what are moving averages. If not, click here to read about them.
The first set of 5 EMAs (Exponential Moving Averages) uses shorter periods and is blue in color, while the other set of 5 EMAs uses longer periods and is red in color. Guppy called blue EMAs as traders and red EMAs as investors. Since your chart will look messy if you plot 10 different EMAs on it, both the sets are shown in the form of blue & red clouds.
In an Uptrend, the blue cloud continuously moves above the red cloud.
In a Downtrend, the blue cloud continuously moves below the red cloud. See the picture below.
Let's talk about the Trend first.
The width of the red cloud tells us the strength of the trend. As the width increases, the trend starts getting stronger.
Now, that's still not enough, so we have Trend bars on the top of the chart. Green bars denote Uptrend, while Red bars denote Downtrend. At the time of change of trend, the bars turn Yellow.
The trend bars help us to identify the probability of the direction of the trade. It tells you the direction of the traffic. Common sense says that you should buy when the trend is green. Buying when the trend is red is like catching a falling knife, which will more likely injure you.
The price is either going up, or it is not. If it is not, why not just drop it from the list of potential investments. It is always benefecial to walk with the crowd as it propels prices steadily higher in an easily defined trend.
More on trends in a separate blog, where I explain why there is a need of knowing the higher timeframe trend on daily timeframe charts and how the script shows it.
Let's talk about the Setup now.
Since the blue cloud is made up of shorter duration EMAs, it is faster to react to change in prices. On the other hand, the red cloud reacts late because it is made up of longer duration EMAs. After all the blue cloud represents traders and the red cloud represents investors. Investors like to buy & hold, and are not bothered with short-term price movements.
In a strong trending market, it is quite normal to see the blue cloud compress while there is no impact on the red cloud.
The blue cloud compresses and then expands and this keeps on happening. What actually happens is that the traders (blue cloud) are taking trades at the time of compression and exiting with profits when the cloud has expanded. They do this repeatedly when the blue cloud compresses. On the other hand, the investors (red cloud) are not bothered by this activity of traders and continue to hold their investments.
Whenever the compression of the blue cloud happens, the script shows blue dots at the bottom of the chart.
In fact, all such stocks where blue dots have formed, appear in the Watchlist shared with the paid subscribers. The Watchlist also shows the trend bars color (i.e. green for Uptrend, red for downtrend, and yellow for changing trend).
The next thing is to discuss Price Action to take a Trade.
Swing traders can use compression of blue cloud to consider a trade opportunity, while Long-term investors or trend followers can use them to enter into pullbacks. The trend bars help us to judge - in which direction a trade is more likely to happen.
In the chart above, you see blue dots at the bottom, which means that the blue cloud has compressed. The stock makes a narrow range as shown by two blue parallel lines. The trend bars are green representing the Uptrend, which makes the probability of the price going up much more than its probability of going down. We take a trade when the price moves out of the parallel lines while keeping our stop loss below it. This keeps our stop loss small, and the reward much higher.
If you are entering into a stock when the blue cloud is already expanded, you will be entering into an expanded setup. And if your stop-loss is small, it is more likely to get triggered.
As far as exits are concerned, swing traders can look to exit when the blue cloud expands, while long-term investors or trend followers can continue their investments when the trend is strong.
Chart patterns & other tools in the script
The script also prints certain chart patterns & tools to add weight to the trading, such as:
Double Weekly Inside Bars - The script prints double Weekly Inside Bars which are formed when the current week's candle (candle C) is inside the previous week (candle B); and the previous week's candle (candle B) is inside the week prior to it (candle A). It indicates consolidation and a lack of volatility. A trade can be made when the current week candle surpasses the high/low of candle C.
Candlesticks Patterns - It sometimes helps to know how traders are behaving by identifying candlesticks patterns. The script prints engulfing candles, pinbars, and double & triple inside bars on the chart.
Star Signs ✩ at the bottom - Star signs come when the blue cloud compresses and the Average True Range (ATR) is at the lowest level. ATR is a technical indicator measuring market volatility. Simply put, when a stock experiences a high level of volatility, it has a higher ATR, and during a low volatility period, it has a lower ATR. Periods of low volatility are followed by periods of high volatility and vice-versa. When star signs appear, consider that a quick big move is expected.
Advantages & Limitations of the Pro-Setups script
One major limitation of this script is that you will never be able to buy a stock when it is at rock bottom prices. But then, as they say, nobody is ever able to enter a stock at the bottom or exit at the top.
But the script helps you to know in which direction the traffic is moving. It also helps you to enter where your stop losses are small and profits are big. With this script, you will definitely not be entering when the setups are already expended.
Let's say your analysis says that a company is worth buying at the current price although its stock is continuously falling. Here's what Guppy wrote about GMMA indicator in his book on this particular situation:
Think of this indicator as a sign on the side of the road. You want to go north and this sign is pointing south. The sign does not tell you about the road conditions ahead, but it tells you the direction of the traffic... The indicator simply says this company is travelling south. If you want to go north then a company with this indicator relationship is not the vehicle you want to hitch a ride with.
Getting access to the Pro-Setups script
The Pro-Setups script is FREE to try. Use it to give further power to your trading strategy. If you also want to know which stocks have compressed & formed the setups traded with the script, use the Dashboard.