Use the checklist to keep out of unsuccessful trades and confirm trend continuation

When I gave webinars on my checklist I said a key feature was that I developed it not only to get into High Probability trades, but also to keep out of unsuccessful trades.  That is, to guard against misleading and unsuccessful MACD crossovers that did not result in HP movements.  I showed that if you used MACD crossovers alone, your success rate would only be about 50%, which is equivalent to tossing a coin.  In contrast, the checklist can be used to obtain over 90% probability of success.

This is well illustrated by the gold short that started on 23 April.  Since then, there have been five unsuccessful MACD crossovers that could have been interpreted as trend reversals (i.e., the onset of a long).  The image below shows total checklist scores for each of these crossovers.  The checklist is scored on the tallest blue histogram bar, so it represents the highest score obtainable.  In every case, the total score is below 14, which I have suggested is a minimum score, with a probability of success > 90%.

Further, total score is not the only threshold for entry.  The first threshold is to have a score of four out of four essential predictors.  Adequate MACD momentum is an essential predictor.  In all but one of these five crossovers, I assessed MACD momentum as below the threshold for entry - remember this was the maximum momentum assessed on the tallest blue bar.  So, in fact four of the five entries would have been rejected on MACD momentum alone.  Another essential predictor is price trend reversal/change; several of these were also dubious, but for this exercise I have scored them as true.

Another critical point I have made several times is that the checklist should be assessed on closing price; some of those 5 crossovers looked more promising during the day than after the market closed in New York - remember this is where most of the action takes place.  I recommend:  assess the checklist at the end of the NY day as a prospect for entry the following day, i.e., use it retrospectively.  Here patience is required:  you will be sucked in if you do not obey this rule (I speak from experience).  If it really is developing into an HP movement, then it will last for several days and a little waiting for entry is more effective than jumping in.

Now for the point that eluded many, including me until recently, because of our cognitive bias to the upside:  if it ain't a trend reversal it's a trend continuation!  In every case the unsuccessful MACD crossover was followed by further decreases in price as the MACD declined and then crossed back to yellow bars.  If you look at the image, the decline in the blue MACD bars and return to yellow bars was associated with large red candles that were a potential signal to increase your short position.  

I hope to give a webinar on methods for accurately assessing MACD momentum within the next month