Per Simon Sez (in the Standard Version, if I’ve got it right), this is the ‘Sell Rule’.
After a Hi flag (frowny face) is planted, the ‘Wait One’ rule kicks in. If the bar following the flag is ‘red’, then exit at the open the following day. If the bar following the flag is ‘green’, then continue to hold.
Without rigorous, extensive backtesting, it cannot be known whether that is a good policy or not. But I know it is a policy I’m not comfortable with. If the bar following a Hi flag is green, but it’s a doji and TTM Squeeze has turned from green to yellow (which will be the case) and DPO is declining (which will, again, be the case), I want to be getting out at the next open.
For sure, sometimes that modified rule has one exiting too early as prices "“take a breather before resuming their upward trend”. But my answer to that is this. "Better a missed opportunity than an realized loss." Here’s an instance where following the rule would have played in my favor.
Here’s that same chart advanced by one day.
There it would seem to have been a mistake to have used my modified ‘Sell’ rule. But let’s now advance the chart by several more days.
Now who’s smiling or frowning? Who has minimized losses?
Some caveats: The set of rules an investor or trader uses has to match up with his or her personality. I’m a Chicken Little investor/trader who hates RISK, which I define as “prices moving against me”. When that is happening, I want to be out of the trade and on the sidelines. Others are comfortable with giving their trades "wiggle room’ in the hopes/expectation that “things will work out”. But that’s not me.
Further comment. I couldn’t care less whether the present market is properly classified as ‘Bull’, ‘Bear’ or ‘Neutral’ (as Stan Weinstein does). I know it’s going to blow up, because it’s a debt-fueled bubble, totally disconnected from fundamentals. I just don’t know ‘When?’ Nor do I care how much or how little money I pull out of it before the crash happens, at which time I really do go back to work trying to deploy money, or maybe not.
But I am interested in hammering out a set of rules that would be appropriate for my nieces/nephews to use --who are still minors-- should they ever want to engage the US equity markets. That means small, equally-sized bets, EOD trading, fractional share trading (hence, no means to set stops), a very simplified rule set, and a very simplified stock and ETF universe (e.g., no leveraged or inverse ETFs per Fidelity’s rules). Hence, they need to getting in when the odds are stacked in their favor and to be getting out at the least hint of trouble on the theory that, “Trades are like buses. Another one will be along soon enough”.
Charlie