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A Color-Based System For Short-Term Trading

Use The Rainbow

Using the Spdr S&P 500 exchange traded fund as an example, here’s how you can apply a simple swing trading system that utilizes the colors of volume bars.

Most technical traders use some combination of price-based indicators to support their trading decisions. Here’s a very simple swing trading system based on coloring volume bars. It can be used either as a standalone trading system or in conjunction with other trading systems. This is how it works:

• If today’s closing price and volume are greater than two weeks ago, color today’s volume bar green.
• If today’s closing price is greater than two weeks ago but volume is not, color today’s volume bar blue.
• Similarly, if today’s closing price and volume is less than two weeks ago, color today’s volume bar orange.
• If today’s closing price is less than two weeks ago but volume is not, color today’s volume bar red.

It’s a very simple color-based trading system that takes only long positions and works as follows:

• Buy the green or blue volume bars, use a 1% trailing stop, and stand aside on red or orange bars.

FIGURE 1: DAILY CHART OF THE SPDR S&P 500 ETF (SPY) FROM APRIL 17, 2002 TO APRIL 17, 2003. Here you see the green, blue,orange, and red bars implemented into the chart. Buy on thegreen or blue volume bars. Use a 1% trailing stop. Stand aside on the red or orange volume bars.

…Continued in the July issue of Technical Analysis of Stocks & Commodities

Excerpted from an article originally published in the July 2011 issue of Technical Analysis of Stocks & Commodities magazine. All rights reserved. 
© Copyright 2011, Technical Analysis, Inc.