High Probability Trading with the Delphian Studies
A breakout refers to when the price of a stock moves above a resistance area and continues higher. Delphian finds stocks breaking out in multiple states that have moved above the upper Keltner channel and upper Bollinger band. Backtesting revealed this signal occurs at the beginning of a breakout and to expect continued movement higher.
When the stock price breaks above the upper Bollinger Band or the upper Keltner Channel there is a lot of upward momentum in the stock. When a stock price breaks above both the upper Bollinger Band and Keltner Channel it provides a stronger indication of upward movement. Additionally, as a secondary confirmation, Delphian only finds stocks that are in States conducive to a breakout (State 1, 2, 3 and 7). Using the three signals as confirmation for a trade entry can provide the opportunity to enter a trade at the beginning of a large uptrend.
The Breakout study uses the following signals:
Charts depicting confirmation of a breakout:
BP State Modeling – State 1, Target 1 and Stop Loss 1 not hit as of 4/10/2018
BP closing price crossed above Keltner Channels 2 ATR for 30 days on 4/10/2018
BP price closed above Bollinger Bands 2 standard deviations for 30 days on 4/10/2018
BP chart after the bullish signal on 4/10/2018
Trade results after buy signal:
Long stock with 5% profit and 10% stop loss
Entry 04/10/2018, 5.10% profit achieved on 05/01/2018 (In trade 16 trading days)
Long call with 25% profit and 100% stop loss
Entry 04/10/2018, 54.76% profit achieved on 04/24/2018 (In trade 11 trading days)
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Explanation of the signals:
1. Bollinger Bands (BB) are volatility bands placed above and below a simple moving average. Volatility is based on the standard deviation, which changes as volatility increases and decreases. The bands automatically widen when volatility increase and narrow when volatility decreases.
2. Standard Deviation (SD) is calculated through the average volatility of the stock on a daily basis over a historical period. It indicates how much the value deviates from the mean. In periods of low volatility the width of the price ranges will be less than in a high volatility environment.
3. Simple Moving Average (SMA) is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods.
4. Keltner Channels (KC) are volatility-based lines set above and below an EMA (exponential moving average). Keltner Channels are similar to Bollinger Bands, but Keltner Channels use ATR (average true range) to set the distance between the lines, whereas Bollinger Bands use standard deviation.
5. Average True Range (ATR) is a stock's range between the high and low price on any given day. It reveals information about how volatile a stock is. Large ranges indicate high volatility and small ranges indicate low volatility.
6. Exponential Moving Average (EMA) is a type of moving average that is similar to a simple moving average, except that the most recent data gets the greatest weight and each price value gets a smaller weight as we go back in the series chronologically.
7. State Modeling™ is a proprietary signal from Delphian Trading. Stocks are in a State numbered from 1 to 8 at any given time and only in one state at a time. States 1, 3, 5 and 7 are bullish and States 2, 4, 6 and 8 are bearish. State 1 is extremely bullish while State 8 is extremely bearish. This signal allows users to find symbols based on their current state and whether or not their current targets or stops losses have been met.