In my humble opinion it is not related to a specific indicator but to a group of indicators, and the most important is to choose the correct ones and how to set them all together to find an edge.
In the following example I will show you how the Small Range Setup uses a different group of indicators to filter a setup from different scopes ;
The following is a GOLD ( GC 02-13 ) Chart of today ( Dec 20, 2012 )
On this setup I use a trendline ( blue exponential moving average )
an envelope ( gold envelope of 8 ticks size around a 17 moving average )
and Donchian Channel of 13 bars.
When the envelope is all below the trendline we are in sell mode...
A bar can trigger a signal, only if it is making equal or higher high for a short, so we check that the high of bar must be touching the Donchian Channel.
If all of these conditions align, then we place a sell stop 2 ticks below the signal bar...
If price continues against our entry we don't get a fill, just another bar with better entry, until the envelope touches the trendline again and the trade is discarded.
On this example, we keep moving our entry up for several bars until we get a fill at 1659.4
The stop must be placed 2 ticks above the high of the entry bar ; 1660.8 so we are risking 1.4 points = $140 per contract.
We usually should go for 1.5 to 2 times the range of the chart as first target ( 15 to 20 ticks ). On this example the move was enough to get 6 points ( $600 ) per contract.
I created a dedicated indicator to follow this setup that does all the calculations, paint the bars, show the indicators used and also places a diamond where you need to place the order... Really easy... More info Here
On instruments like gold or crude oil we should always take into account the option of using trailing stops, because these markets offer great potential.
There are several ways to manage a trailing stop, and that may be one of my next posts...
Regards,
Pablo Maglio
