Bias Indicator (BI)

What is the Bias Indicator (BI). The Bias Indicator is basically based on the share price opening range.

We will investigate:

  • How to select stocks to trade
  • entry tactics
  • stop loss settings

The Bias Indicator is defined in terms of time and price. The time element is simply the first X number of minutes in the trading day. The number of minutes used to define the Bias Indicator is your decision as a trader. I define the Bias Indicator as the first 30 minutes of the trading day. I have found this period to work the best for my strategies that are geared towards day trading.

One of the most important factors affecting the market’s supply-and-demand equation (i.e., selling and buying transactions in the market) is the expectations of the participants — expectations about where prices are headed, fundamental reports and the market’s response to news releases.

I will focus on the 30 minute BI because I think that this is the best time frame to used for Day trading. I believe that the market tends to experience a reversal period around 10:30 A.M., as many reports are released between about 9:30 A.M. and 10:30 A.M. Fund managers also seem to start their daily inputs around this time. So the 30 minute BI includes both of these factors.

The price component of the BI is the day’s trading range at the end of the BI time period. This means that the 30 minute BI is defined as the stock’s high and low for the day at 10:30 A.M.

The BI is not the opening price. In fact, the opening price is not a factor in calculating the BI. For example, if BHP were to open at $26.49 and then sell off to $26.06 at 10:15 AM and then reverse and rally to $26.86 at 10:30 A.M. the 30 minute BI would be the day’s range at 10:30 A.M. or $26.06 – $26.86. This is because during the 30 minute BI period $26.06 and $26.86 were BHP’s low and high, respectively.

Note: I said the day's range at 10:30 A.M., not the range for the whole day.

The easiest way to mark the Bias Indicator Range is to use an intraday candle chart, set at 30 minutes interval. The first complete candle then gives you the Bias Indicator Range. Draw a line on top of the candle and one on the bottom of the candle and you have today’s BI marked on your chart.

As you can see, defining the BI is easy. The 30-minute BI is strictly the high and the low of the first 30 minutes of trading. I find that the BI often reveals the bias of a stock for the day.

Why is the Bias Indicator so powerful?

The fact that the Bias Indicator is assessing such an informative period means that it can often determine the bias for the day as being bullish, bearish, or neutral.

The BI represents how the bulls and bears establish their initial positions for the day. A move away from the BI indicates that one side is stronger than the other. A stock moving above the BI means the prevailing sentiment in the stock is bullish. The manner in which the stock breaks above and trades above the BI will indicate the strength of the bullish sentiment. The same but opposite analysis applies when a stock moves below its BI.

A move below the BI indicates that the stock is weak and the bears are in control.

How can we use the BI to help us in our day or short term trading?.

The most basic application of the BI principle is that when a stock is trading above its Bias Indicator you should have a bullish bias, and when it is trading below its Bias Indicator you should have a bearish bias.

Trading any breakout from the BI breakout is a simple concept, but there are some considerations to take care of and a few tactical trading approaches to consider.

As discussed in creating a trading plan, before you enter a trade you must know your stop loss point. This is where you will exit the trade in the event that the stock moves against you. The loss that you expect to incur if you exit at your stop loss point is your 'risk'. As discussed in money management, the position size is based on this risk calculation.

We have established a range of prices for a particular stock and have drawn the 2 lines on our chart. Of course you can use any good intraday chart.

Note: For the purpose of trading, I prefer to use a 5 minute chart.

Let us have a look at two practical trading approaches using the BI.

  • Buy the initial breakout
  • Buy the second breakout after a retracement.

What is a breakout? I define as a breakout when the whole 5 minute candle is above the upper line of the range.

First Approach: Buy initial breakout

Entering the market at this stage is the most aggressive approach because it does not allow for any form of confirmation that the stock’s break above the resistance level will continue. Perhaps this strategy should be reserved for the most promising stocks. However it has the advantage of providing, in many circumstances, the cheapest entry point.

Using this strategy, I would like to see the breakout accompanied with high volume, again on the 5 minute chart. The stop loss should be set at the lower line of the range, as drawn in after 30 minutes. I find it best to use an automatic stop loss, as this eliminates all emotions.

However many times you will find that using the 30-minute lower line will often define risk values which are too high. You may have a range of say one dollar, too high to get a decent risk/reward ratio. I this case I suggest you use a stop based on levels the market has defined for you, say a Moving Average level or a support level. If you can not find a stop level to give u a good enough risk/reward probability, it may be better to miss the trade and look for a better opportunity.

So to summarize the first approach:

  • Buy at initial breakout
  • Watch for volume
  • Set your stop loss
  • Pass the trade if the risk/reward ratio is not good enough.

Second Approach: Buy the second breakout after a retracement

This tactic may suit the more conservative trader. Here you have the opportunity to evaluate how well the stock broke out. You can see how the stock trades above the BI. When using this approach you are looking for the market to create a new breakout after a retracement. As soon as the market demonstrates that a new breakout occurs, you can buy the stock with a stop below that retracement level.

The advantage of waiting for confirmation and a retracement is that you have more information before you enter the trade. You will not get stopped out of a stock that fails immediately after it breaks out. The disadvantage is that not all breakouts retrace. You may of course miss the best opportunity that a particular stock has to offer that day.

There will be a lot of opportunities everyday. Be patient, and get in at the right time as determined by your risk. Don’t take trades late because you feel as though you are going to miss out.

Many times you will find that the stock retraces or moves along sideways until later in the day, then suddenly breaks out again and gives you a good trading opportunity, maybe during an afternoon rally.

To summarize the second approach:

  • Wait for initial breakout
  • Wait for retracement
  • Buy at second breakout
  • Be patient, often the second breakout happens later in the day.
 ...Continues here - Martingale System Reviewed

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