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Session - 3

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0% found this document useful (0 votes)
124 views24 pages

Session - 3

Uploaded by

harshkumar patel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Session - 3

SCANNING PROCESS
Topics to be covered in Session - 3
a) Components of Screening Process

b) Code the screener in MetaStock

c) How to use and run the screener


Problems with identifying patterns

➢ Ideal text patterns are rare to find.

➢ Sometimes, subjectivity creeps in while identifying a pattern.


My Initial Set of Rules for Buying
➢ Focus on stage 2 stocks with strong Earnings, Sales & OPM.

➢ Let them consolidate for 3 weeks at least.

➢ Buy when a stock breaks out of the base and close above 22-days high on the highest Volume in
the last 22 days.

➢ Low of daily range should be stuck in 10-day Weighted Moving Average on entry day.

➢ 10-day WMA should be trending above 20-day WMA on entry day.


Example - PHILIPCARB
Common Patterns in Majority of Winners

❑ Stock trades in a tight range i.e volatility is very low.

❑ Daily range is shrinking.

❑ Volume is drying.
Indicators We Use to Spot These Signals

➢ Standard Deviation

➢ Average True Range

➢ Volume at the lower level in the base


Points to Remember

❑ These signals work only when they take place together at a time in a stock.

❑ The combination of these signal works more effectively when it takes place around a major
resistance or support level
Standard Deviation

Standard deviation measures volatility by measuring how widely prices are dispersed from the
average price. If price trades in a narrow trading range, the standard deviation will reach a low
value indicating low volatility.
How Standard Deviation Works
❑ When Standard deviation rises, it indicates that price is getting volatile. As price action calms,
standard deviation starts declining.

❑ Market tops are usually made when the price is volatile.

❑ Market bottoms created on increasing volatility or rising slope of Standard Deviation indicate
panic sell-offs. While on the other hand, market bottoms created on decreasing volatility or falling
slope of Standard Deviation indicate a calm zone.
Case Study - BSE
Settings of 1st Component - SD

➢ Time Period = 22

➢ Value of Standard Deviation < Its 13-day WMA < Its 22-day WMA
Average True Range

➢ The majority of trends come out of small daily ranges and the majority of trends end with big and
ballooned daily ranges.

➢ Average True Range or commonly known as ATR is the average of true ranges of bars or
candlesticks i.e. their length from high to low on a single session over a specific period.

➢ Typically, the default setting for Average True Range is 14 periods i.e. it calculates the average of
true range of 14 sessions.
How ATR Works
When range of daily bars start getting larger, the slope of Average True Range rises and it indicates
increased volatility in the stock. A continuous rising slope in ATR indicates that daily price ranges
are very volatile and they usually take place in a sharp advance or a decline.

➢ If price is advancing and ATR is rising continuously, it means trend is becoming obvious to the
crowd and the price might be extended from the base at that point.

➢ if the price is declining and ATR is rising continuously, it indicates a sharp sell off.
Case Study - BSE
Settings of 2rd Component -
ATR

➢ Time Period = 1

➢ Volume < Its 5-day WMA < Its 13-day WMA < Its 22-day WMA
Volume
In constructive price patterns like VCP, Cup with Handle, Flat base etc, Volume is contracted
significantly most of the time just before breaking out and a good up move. When Volume dries up
and reach the lowest levels within the base, after a period of correction or consolidation, it
indicates that selling pressure is diminishing and drying up. So, a significant contraction tells you
that the supply has stopped.

❑ Almost every big move comes out of a quiet zone where Volume was contracted.

❑ Look for a day or multiple days in a row where Volume dries so significantly that it reaches near
the lowest level in the entire base structure or sometimes even below that level.
Case Study - BSE
Settings of 3rd Component -
Volume

➢ Volume < Its 5-day WMA < Its 10-day WMA < Its 20-day WMA
Refine the Process

➢ The stock should be within 10% range of 10 Day High.


Points to Remember

➢Consider acting only after all these three criteria are met combinely.

➢ This combined action forming in following patterns has more probability to succeed –

Cup with Handle, VCP, Tight Base, Tennis Ball Action, Low Cheat

➢ Always wait for a signal of buyers commitment aka Pocket Pivot signal along with a couple of
other signals, to be discussed in session 4.
Examples
Hope You Enjoyed the Session Today

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