choppiness indicator

Wouldn’t we all love to know when a stock is trending and when it is in flat territory?

Close your eyes for a second and imagine a world where you know on the first tick that the market is starting to trend.  An indicator that would somehow tell you to ignore all of the head fakes and shakeouts, and only focus on the move that counts.

Sounds too good to be true right?  Well, if you have not figured it out yet, I am trying to downplay the choppiness index a bit, because on first glance of the title, it sounds like it packs a powerful punch.

In this article, I will explore 4 trading strategies you can implement using the choppiness index indicator; however, it does require some work on your end.  Unfortunately, you cannot trade the buy and sell signals blindly, if only it was that easy.

Overview of the Choppiness Index Indicator

How befitting of the choppiness index to be an oscillator.  Funny to think for an indicator that is supposed to dictate choppiness, it too is bound by ranges.

Like many other oscillators, the range for the choppiness index is 0 to 100.  The choppiness index indicator uses a standard look back period of 14 days and takes into account the average true range indicator, price high and price low to determine a percentage value.

To learn more about the choppiness indicator formula, please visit the following link.  For those that follow the Tradingsim blog, you fully understand that I do not claim to be a statistician, so I don’t bog myself down in memorizing formulas.

I try to stick to interpreting the signals provided by these indicators and how well they measure up in the real world.

Inputs for the Choppiness Index Indicator

The input length for the look back period is 14.  Not that interesting if you ask me.  However, when you look at the style inputs, where you define the boundaries for the indicator, things become more intriguing.

choppiness index inputs

Do you notice anything peculiar about the inputs?

Take a hard look and no, it is not the color options.

For my Fibonacci students out there, you will notice that upper and lower limits are set to the 61.8% and 38.2% retracement levels.  In another article related to slow stochastics, I explored the concept of testing out other values to denote overbought and oversold.  Therefore, for me the fact the indicator defaulted to anything other than the standard 80 or 20 was a breath of fresh air.

If the indicator is above 61.8%, then the stock is experiencing a choppy trend; however, if the reading is below 38.2% the stock is beginning to trend.  Therefore, the closer you are to 100, the choppier the market and the closer to 0, the greater the trend.

To be honest, pretty straightforward stuff, but what are the trading strategies we can use with the indicator?  Well, please continue reading on to find out.

4 Trading Strategies for how to use the Choppiness Indicator

#1 – Buy or Sell the Breakout after extreme Choppiness Index Readings

Now, if you take a browse of the articles on the web, they will simply inform you to buy or sell the break of the 38.2% retracement of the choppiness index as the stock is starting to trend.  While this is the basic trigger for the indicator, I think there is more value to this indicator if we dig a little deeper.

For example, when a stock is trending above the 61.8% reading for an extended period of time, this is a sign to you that the market is beyond flat but practically dead.

Therefore, instead of buying or selling the break of the 38.2% retracement, another approach is to wait for a fall back below the 61.8% retracement level to signal a trend is in its infancy.

Let me show you a picture, to further illustrate this point.

choppiness index breakout

Couple of points to note is that the choppiness indicator of course would be best used for gauging a breakout after lunch.  Any of us that have been day trading for any extended period of time have come to respect the flatness of the mid-day trading session.

Therefore, it is critical for this breakout strategy to (1) occur in the late afternoon and (2) have extreme readings on the choppy index for 1 to 2 hours on a 5-minute chart.  This is a sign to you the trader, that when a breakout occurs as the stock is starting to trend, that you may be able to catch some late day fire.

#2 – Ride the Trend using the Choppiness Index Indicator

Beyond identifying when a stock is choppy, the other value add for the choppiness indicator is the ability to stay in a stock when it’s trending.  Placing a slight twist on the readings for the indicator, try applying the below logic when reviewing the charts.

If the choppiness indicator does not print 3 or more readings above the 61.8% retracement, and the stock is in a strong trend, hold on for the ride.

Below are a few illustrations of this setup.

choppiness indicator and trending stocks

choppiness indicator and trending stocks 2

What I like about using this approach, is that you can weed out all of the false readings, as these pullbacks are just noise inside of the context of the primary trend.

The key point to bring home is that you have to develop a solid system for determining when a stock is starting to trend.  If you are unable to consistently identify a trending stock, you will find yourself making trade decisions based on false signals.

#3 Trade within Choppy Markets

This is an obvious strategy for the choppiness index indicator; I just did not want to lead with this approach in our list of strategies.

Honestly, I do not see the value of using the choppiness index indicator to trade choppy markets.  From what I can see of the readings, it is not like you hit the top of a range and therefore volatility should drop off, which should coincide with a subsequent pullback and increase in volatility.

The choppiness indicator is not like an oversold or overbought indicator, so trying to time the moves inside of a tight range could prove a little difficult and may need a little help from a stochastics or Williams R.

Another way of saying this is just because the indicator is at 61.8% does not mean the stock will all of a sudden start trending.  You really need price action like in examples 1 and 2 above to increase the level of certainty provided by the indicator.

Lastly, trading the chop, as I call it, has not served me well over the years.  Not saying that you cannot figure it out, because choppiness may match your personality to the letter.

To further illustrate this point, take a look at the chart below that is in a late day afternoon trading range.  Please tell me if you see a way the indicator can help jump in front of the move.

choppiness indicator and choppy markets

#4 – Walk away from stocks that do not trade nicely with the Choppiness Index Indicator

One item to point out is that some stocks will not adhere to the nice boundaries of 61.8% and 38.2% for the choppiness index indicator.  You will look at some charts and there will be all sorts of false signals above and below the boundaries of the indicator.

This sort of chart action will be very evident on quick glance.  A few breaches of the boundaries does not warrant writing off the indicator; however, if you cannot make heads or tails of it, please do not start modifying the settings to fit each security perfectly.

The reason I say this, is that you are now trying to take an indicator and make it custom for every single stock in the market.  Honestly, that sort of effort just is not worth the time.  If anything, you want to use the fact the stock does not adhere to the boundaries as a reason to filter out the stock from your list of potential candidates.

Trust me; there will be tons of other opportunities.

To further illustrate this point, please tell me if you can get a reading on any of the charts below.

choppiness index false signal

choppiness index false signal 2

In both of these examples, you will notice that the indicator was giving readings all over the place, yet the price action was either coiling or still within the confines of a larger range.

Not that you cannot make money trading these patterns, but it is much easier to focus on the stocks that adhere to the boundaries, versus trying to solve for the 20% that do not.

In Summary

True to its name, the choppiness index indicator does help identify when a stock is experiencing volatility; however, trading choppy markets is not where the indicator excels.  The strength in the indicator is best displayed when used as a confirmation that a stock is starting to trend or breaking out.

A simple, yet effective way to validate signs from the choppiness index indicator is to see if volume accompanies the move.  Where there is volume, there is likely something brewing.

Lastly, just to reiterate the point from strategy number 4, if you find yourself having to customize any indicator, you are trying to fit a square peg into a round hole.

The same way you do not force trades, you should not force indicators to fit stocks or markets that trade differently.

To see how we can better help you understand the choppiness index indicator, please take a look at our homepage.

Much Success,

Al

The post How to Trade using the Choppiness Index Indicator appeared first on - Tradingsim.

Overview of Elder’s Force Index (EFI)

You can never call Alexander Elder a humble guy as he decided that the best name for his indicator would be that of his own last name.

I can however appreciate the fact that Alexander believed in his own analysis so much, that he was willing to associate his own name with his findings.

The Elder’s Force Index is an oscillator, which attempts to identify the force or strength of a move. Elder felt that this was best calculated by factoring in a stock’s volume and comparing the current period close to the previous period close.

This tight comparison allows the indicator to perform a bar-by-bar assessment of a stock’s performance.

Elder’s Force Index Formula

The EFI formula is about as straight forward as you can get with technical analysis these days.

(Today’s Close – Yesterday’s Close) * Volume = Elder’s Force Index

As you can imagine, if we are talking about a stock with high volume, the EFI readings will be pretty high. Therefore, when comparing different charts, a higher or lower EFI value does not mean one stock has more force than another. Remember, the reading is specific to each stock as there is no upper or lower boundary on the Elder’s Force Index like other oscillators.

Next, you need to decide on the look back period for the indicator, which will give you the average over a set number of EFI readings. The default value used by most trading platforms is 13, which is what we will be using for our chart illustrations.

length of elder’s force index

Day Trading Strategies using the Elder’s Force Index

When you read about the EFI indicator on the web and in books, you will find the standard trading strategies around waiting for the indicator to cross above or below the 0 line.

Another common strategy is to look at divergence of the EFI with the current price trend to gauge when a stock is likely to have a counter move, as the internals of the move are shaky.

These are all your plain vanilla trading strategies, which add some value. However, I will be covering some uncommon strategies that you can explore for how to use the EFI when day trading, which will hopefully give you an edge.

Strategy # 1 – Extreme Readings

Since the EFI is tied to volume, when you have volume surges the indicator will spike violently. As day traders, we make the most money trading during volatile times.

To this point, the setup requires that you wait for the indicator to produce an extreme reading to either the up or down side.  Again, these high readings just mean you have had sharp price movement with increased volume.

Next, you want to see a reversal from the extreme reading and then the EFI shoot back to a recent high or low area.  Please look at the below illustration to help with this point.

EFI Extreme Readings

I’m guessing you are wondering what happened next?  Well, let’s take a look.

Much Higher

GE managed to make a significant run after the fake out.  Notice how the most recent EFI reading is so much higher than the previous gap and reversal period that the previous extreme reading now looks like a bump in the road.

Again, the Elder’s Force Index has no ceiling, so the indicator can run if given the right circumstances.

Recap of Strategy # 1 – Extreme Readings

1. Look for an extreme high or low reading
2. The EFI needs to quickly reverse back to a recent peak or trough
3. Buy or sell the stock once it reaches the recent peak or trough

Strategy # 2 – Sell the pullback to the trend line

This strategy is a bit involved, so stay with me.  I’m pretty sure you are all familiar with the concept of drawing trend lines on indicators.  Funny enough, you can see support and resistance zones the same way the show up on price charts when using the EFI.

Since the Elder’s Force Index can trend in one direction without boundaries, the EFI will often produce longer-term trends.   As a day trader, when you are looking for a midday setup, which requires identifying longer patterns, as you do not have the volatility present in the morning, the EFI can provide insight into a break in trend.

Trend lines on the EFI

If you were in the stock and were only looking at the price action, you really had no way of knowing the fun ride was coming to an end.  However, the Elder’s Force Index had a break below a trend line, which was an early indication that the force or strength behind the move was dissipating.

The same as in price action, once the EFI back tested the uptrend line, the price went flat.  Longs that entered the position in the morning could have used this as an opportunity to exit their position and book profits.

Recap of Strategy # 2 – Sell the pullback to the trend line

1. Stock is on a run for more than a few hours.  This will produce a longer up or down trend for the EFI
2. Exit existing positions on a break of the trend line
3. If you are looking to go counter to the trend, wait for a back test of the trend line to open a position

In Summary

I just spent the last 30 minutes looking for additional creative strategies for how to trade the EFI and I kept coming up with blanks.  The standard divergence analysis just isn’t enough for me these days.

Based on the above two strategies, take a look at your existing systems and see if there is anything there you can use in your trading toolkit.

The key thing to remember is that you want to user the Elder’s Force Index to really gauge when a stock or trend is moving sharply.  The last thing you want to do is try to use the indicator when the market if flat.

Seeing that the indicator literally has force in its name, you probably want to make sure you use the market to again assess strong trends.

Good Luck Trading,

Al

The post How to Day Trade with the Elder’s Force Index appeared first on - Tradingsim.

Overview of Price Action Charts

If you browse the web, at times it can be difficult to determine if you are looking at a stock charts or hieroglyphics.  When you see a chart with a ton of indicators and trend lines, it is likely a trader trying to overcompensate for a lack of certainty.

For example, I have talked with traders whose screens look something like the picture below.

Too Many Indicators

I have even seen some traders that will have 4 or more monitors with charts this busy on each monitor.   When you see these sort of chart configurations, you hope that at some point the trader will release themselves from this burden of proof.

What if we lived in a world where we just traded the price action?  A world where traders pick simplicity over the complicated world of technical indicators and automated trading strategies.

When you remove all of the clutter from the trades, all that is remaining is price.  To see a chart minus all of the indicators, take a look at the following image.

Price Action Chart

On first glance, it can almost be as intimidating as a chart full of indicators.  Like anything in life, we build dependencies and handicaps based on self-doubt.  If you have been trading with your favorite indicator for years, going down to a bare chart can be somewhat traumatic.

In this article, we will explore the 6 best price action trading strategies.  This means when you just look at price, what setups are best for active traders to turn a profit.

#1 – Outside Bar at Support or Resistance

For those unfamiliar with an outside bar, an example of a bullish outside bar would be when the low of the current day exceeds the previous day’s low, but the stock is then able to rally and close above the previous day’s high.  The bearish example of this would be the same setup, just the exact opposite price action.

outside down day

Therefore, it’s not just about finding an outside candlestick and placing a trade.  As you can see in the above chart of Cambrex (CBM), it’s best to find an outside day after a major break of a trend.  In the CBM example, there was an uptrend for almost 3 hours on a 5-minute chart, prior to the start of the break down.

After the break, CBM experienced an outside down day, which then led to a nice sell off into the early afternoon.

#2 – Spring at Support

A spring is when a stock tests the low of a range, only to quickly come back into the trading zone and kickoff a new trend.  I like to use volume when confirming a spring; however, the focus of this article is to explore price action strategies, so we will focus only on the candlesticks.

The one common misinterpretation of springs is that traders wait for the last swing low to be breached.  Just to be clear, a spring can occur if the stock comes within 1 to 2% of the swing low.

Trading setups rarely fit your exact requirement, so there is no point in obsessing a few cents.  To illustrate this point, please have a look at the below example of a spring setup.

Spring Example

Notice how the previous low was never breached, but you could tell from the price action the stock reversed nicely off the low and a long trade was in play.

#3 – Inside Bars after a Breakout

Inside bars are when you have a number of candlesticks clumped together as the price action starts to coil at resistance or support.  The candlesticks will fit inside of the high and low of a recent swing point as the dominant traders suppress the stock beneath the breakout in order to accumulate more shares.

To illustrate a series of inside bars after a breakout, please take a look at the following chart.

Inside Bars

This chart of Neonode is truly unique, because the stock had a breakout after the fourth attempt at busting the high.  Then there were two inside bars that refused to give back any of the breakout gains.  NEON then went on to rally almost 20% in one trading day.

Please note that inside bars can also occur prior to a breakout, which strengthens the odds the stock will eventually breakthrough resistance.

#4 – Long Wick Candles

Long Wick 1

Long Wick 2

Are you able to see the consistent price action in these charts?  If not, were you able to read the title of the setup or the caption in both images?

Just having a little fun here, don’t get sensitive.

The long wick candlestick is one of my favorite day trading setups.  The setup consists of a major gap up or down in the morning, followed by a significant push, which then retreats.  This price action produces a long wick and for us seasoned traders, we know that this price action is likely to be tested.

Reason being, a ton of traders entered these positions late, which leaves them all holding the bag.  The counter pressure will be weak in comparison, so what can’t go down must go up again.  This leads to a push back to the high on a retest.

That may have been a little tough to follow, so let’s illustrate this point through the charts.

Long Wick 3

Notice how after the long wick, CDEP then had a number of inside bars, before breaking the low of the wick.  After this break, the stock proceeded much lower throughout the day.

#5 – Measure Length of Previous Swings

Have you ever heard the phrase history has a habit of repeating itself?  Well, trading is no different.

As a trader, you can often let your emotions and more specifically hope take over your sense of logic.  You will look at a price chart and see riches right before your eyes.

Well, that my friend is not reality.  Did you know in stocks there are often dominant players that consistently trade specific securities?

These traders live and breathe their favorite stock.  Given the right level of capitalization, these traders will also control the price movement of these securities.

What you can do to better understand the price action is to measure previous price swings.  As you perform your analysis, you will notice common percentage moves will appear right on the chart. For example, if you are day trading, you may notice that the last 5 moves of a stock were all 5% to 6%.

If you are swing trading, you may see a range of 18% – 20%.  Bottom line, you shouldn’t expect the stocks to all of a sudden double or triple the size of their previous swings.

I fully understand the market is limitless; however, it’s better to play the odds with the greatest chance of occurring versus swinging for the fences.  Over the long haul, slow and steady always wins the race.

To further illustrate this point, let’s go to the charts.

Measure the Swings

Notice how FTR over a 10-month period experienced a number of swings.  However, each swing was on average 60 to 80 cents.  While this is a daily view of FTR, you will see the same relationship of price on any time frame.

As a trader, do you think it would make sense to expect $2, $3, or $4 dollars of profit on a swing trade?  At some point, the stock will make that sort of run, but there will be a ton of 60 to 80 cent moves before that occurs.  Just on this one chart, I can count 6 or 7 major swings of 60 to 80 cents.  If you are able to trade each of these swings successfully, you in essence get the same effect of landing that home run trade without all the risk and headache.

#6 – Little to No Price Retracement

Not to get too caught up on Fibonacci, because I know for some traders, this may cross into the hokey pokey analysis zone.  However, at its simplest form, less retracement is proof the primary trend is strong and likely to continue.

little retracement

Don’t get so caught up on the many Fibonacci retracement levels.  The key takeaway is that you want the retracement to be less than 38.2%.  If so, then when the stock attempts to test the previous swing high or low, there is a greater chance the breakout will hold and continue in the direction of the primary trend.

In Summary

Trading with price action can be as simple or as complicated as you make it.  While we have covered 6 common patterns in the market, take a look at your previous trades to see if you can identify trade able patterns.

To test drive trading with price action, please take a look at the Tradingsim platform to see how we can help.

Much Success,

Al

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Trading stocks is a daunting task and turning a profit trading stocks is even more difficult.  There are literally thousands of books and articles on the web related to trading and the path to riches.

Each author has their theories of how best to trade, but how do you make sense of it all.  Well, in this article I will cover a simple approach for how to make money trading stocks focusing on 6 key components.

So, What’s the System?

First off, you need to have your own edge for trading.  Quite frankly, it can be anything as long as you have taken some time back testing the system and have had some success.

Just to back up for a second, the title of this section may throw you off a bit.  You are probably saying to yourself that the strategy is what makes you successful, and this couldn’t be the furthest thing from the truth.

I could spend days or even weeks training you on the best strategy and you are still likely to find a way to sabotage your own success.  After all, only 10% of traders turn a profit in this the greatest of all games – investing.

The truth of the matter is that the system is really just the tool.  You my friend are the key to your success when it comes to trading stocks.

Don’t Overlook the Importance of Money Management

money management

After you have been trading for some time, you will quickly realize that picking winners is only a portion of the success equation.  Money management is right up there at the top of the list, which is why I am starting with this topic.

First off, you don’t need to use much margin or any margin at all.  If you are any good, you will be able to grow your account exponentially from your hard work.

Next, whether you are day trading or swing trading, never use more than 33% of your account on any trade.  This way if you somehow manage to completely blow up your account on a trade, at most you will lose a third of your account.

While this would represent a major setback, you will still be in the game.

So, if you feel the need to hit a home run – get over it.  Trading is a business and should be treated as such.

Stop Loss are a Must

You have to know when you are wrong on a trade and more importantly. you need to get out using a stop loss when this occurs.  To this point, for day traders, you never want to lose more than 2% on any trade.

For swing traders, you never want to lose more than 11%.  You may ask why these percentages. Which is a fair question.

For day trading, based on the volatility I trade, after a 2% loss I am either headed for a much larger bath or the stock has very little chance of recovering and turning me a profit.

For swing trades, I tend to give the stock more room as I am operating on a larger time frame and have a longer holding pattern.  Hence, 11% gives me enough breathing room to avoid a shakeout.

Again, since you are using a maximum of one third on any position, when day trading you would lose only .66% of your portfolio and when swing trading 3.67%.

With numbers this small, odds are in your favor that you will be able to stay in the trading business long enough in order to figure out how to exponentially grow your account.

Set a Profit Target

Profits

I have done both – not set profit targets and have set prices where I exit the position no matter what.  While not setting profits is far more exciting and I will occasionally hit a home run, for consistent profits, exiting at profit targets has always made me the most money.

When day trading, there are two targets I like to use.  The first is 1.68% as this is slightly below 2%.  You may ask yourself why this number. Well, it’s actually a simple answer.  For starters, I buy or sell breakouts and these will often only run to a point before reversing.  Secondly, I like to trade stocks with some volatility but not too much.  For this reason, the stocks I trade will often begin to go flat or reverse right around the 2% mark, hence I exit before this level is touched.

Once you get in a good rhythm and are able to judge when it’s best to exit a position, the next profit target up which I now use is 4%.

Going back to the previous section regarding stop loss, this gives me a 2 to 1 reward risk ratio.  In reality, the 2% loss is rarely triggered, so my true reward risk ratio will land in the 3 to 1 range.

For my swing traders the profit target I use is 35%.  This represents a healthy gain, but not too crazy where you may find yourself looking for the home run.

While 2% and 35% represent the targets, you also have to realize these are just that – targets.

While a stock is moving in your favor, at times they will not hit your target.

Therefore, as part of your system, you need to identify a method for trailing your profits, so if the stock has a change in plans, you can exit the trade with a profit.

There is nothing worst in trading, then letting a winner turn into a breakeven trade or a losing one.

For all you artist out there that say let the market run, why limit your gains.  I’m over it.  For me, taking the money out of the market and putting it in my pocket is the only way I have been able to generate a steady equity curve over the years.

Whenever I start to get cute and try to make a trade into more than just a trade, I get in trouble.  Please don’t make the same mistake.

Yes, You Need a Time Stop

Time

For some reason, I feel like I’m the only guy talking about time stops.  For those of you unfamiliar with the concept, a time stop is when you exit a position after a certain period of time if the stock is not performing as predicted.

You may have heard traders say time and time again, let your winners run and cut your losers.  Well, what happens when your losers are not triggering your stop loss, but have not hit your profit target?

This scenario would result in me just sitting in the position, with my fingers crossed or worst paralyzed.

To help alleviate this symptom, please say hello to your new best friend – the time stop.

After I purchase a stock between 9:50 and 10:10 am, if the stock does not move within 30 minutes, I will exit the position.

Since I trade breakouts in the morning, if the stock is still unsure of itself 30 minutes after breaking out, then something is clearly wrong with the move.

For swing trading, I give my position 3 weeks to do something.  If after 3 weeks, I am staring at a small gain or loss, I just exit the position and look for other opportunities.

The time stop is the key to making sure you avoid the negative impacts of opportunity costs of sitting in a position too long.  There is always another trade and it is your job to find the next trading opportunity.

Some people may get rich off one trade; however, to make a living at day trading you will need a track record with literally thousands of trades.

Take Money Out of the Market

Look around the web and you can count on one hand how many articles talk about the need to take money out of the market.

Every blogger and trading guru is willing to tell you how to make the money, but none of them talk about out to grow your account, while still maintaining a healthy relationship with the money in your account.

To be blunt, if you never take the money out of your account, you will never have an appreciation for the digital numbers making up your account balance on your monitor.

If you are trading for a living, you will obviously take out the necessary money to pay your bills.

However, what if you have a day job and don’t necessarily need to pull out any cash – how much should you reinvest?

I have struggled with the percentages over the years and I think my struggle really boiled down to greed.  I always wanted more, so it never occurred to me to take money out even when I had windfall trades of 100k.

To help fight this naive view of money, I now take out 10% of trading profits on every trade.  The only requirement I have is that my account must make a new high in order for me to withdraw funds.

Therefore, if I make money in the market, 10% of the profits flow through to my checking account. This allows me to realize the value of the money and it also allows me to share with my family the fruits of my labor.

Remember, your family is going along with you on this journey and more than likely, they didn’t ask for a ticket.  So, it’s important that you are able to share the successes with those close to you so they can share in the spoils of success.

In Summary

Trading comes down to the following 6 key components:

1. Decent trading system (again not the most important component)
2. Money Management
3. Stop Losses
4. Profit Targets
5. Time Stops
6. Pay Yourself

I tried to fit it all on one hand, but I went over by one.  As you can see, this is a short list.  If you incorporate these items into your trading system, you will do just fine.

Much Success,

Al

Photo Credit

Money Management by Morgan

Profits by KMR Photography

Time by Heiko Klingele

The post Simplest Approach for How to Make Money Trading Stocks appeared first on - Tradingsim.

Empty Pockets

This article title is sure promising a lot right up front.  Sounds too good to be true right?

Well, yes and no.  In this article, I will cover the two blockers that prevent most people from ever getting into day trading – lack of funds and your day job; however, I will also provide the remedy for how to navigate around both.

Lack of Funds and the role of the SEC

So, what in the world does the SEC have to do with the lack of funds?

Day trading is an endeavor that takes time to master and along the way, you are likely to experience emotional and financial pain.  As I tell all traders, this is your tuition costs for entrance into the exclusive club of profitable investors.

Yet, instead of being able to scale into day trading with limited funds to test the waters, the SEC requires retail investors to have $25,000 cash on hand to make 4 or more day trades in a 5-day period.  If your account drops below $25,000, then you are tagged as a pattern day trader and your account is essentially frozen for 90 days.  Essentially, you need to have more than $30,000 because a few bad trades can quickly take you under the threshold.

If you were planning to make a side income from day trading, going 90 days without collecting any money would be a horrible wage.

I wrote an article covering creative ways you can get around the $25,000 minimum, but all of these will require some flexibility on your part.  If you like things simple and straightforward, then opening multiple accounts and trading through prop firms is probably not a path you would want to take.

Unfortunately, in this case, the law is the law and as law-abiding citizens, we have no choice but to comply.

There is a Minimum Cost of Entry

You will read on the internet about traders that have made a fortune day trading starting out with less than $5,000 dollars, but I think these are truly the unicorns of our industry.  For me it comes down to how much money you need to cover commissions, which on a small account kills your ability to turn a profit.

For this reason, I do not recommend investing with really small amounts of cash.  If you trying to make a fortune starting out with less than a $1,000 dollars, you will either end up over leveraging yourself, or holding on for the home run trade in order to cover trading commissions.

Your Job

Your Job

Outside of the lack of funds, the next major deterrent I hear from people looking to get into day trading is that fact they have a job.

Unlike other side businesses, which you can work late at night or on the weekends, day trading requires you to be available from 9:30 am to 4:00 pm.  Now you may not have to sit at your desk for the entire six and a half hours, but you have to be attentive during some portion of the day.

So, how do you ever start day trading with a demanding job?

Well, if the job is the issue then why not just quit and chase your dreams?  Oh how cool and liberating that sounds.

Let’s pump the breaks a little before you get too excited.  Remember, you have not proven to yourself you can day trade successfully and you kind of need your job for now in order to make ends meet.

The Answer – International Trading

International Flags

I realize thus far the article has been a bit of a Debbie Downer, but this is the harsh reality for many would be day trading participants.  You so want to get involved, but money and time are always the two factors holding you back.

Well, there is another way.  This will require some flexibility on your part and that is the option of day trading the international markets.  Before you react too quickly to that statement, let us walk through why this could be your way in to the game.

No Pattern Day Trading Requirements

Most international markets do not have the pattern day trading requirement.

Leave it up to the US to overreact to the tech bubble from the late 90s and then never reassess the law to see if it makes sense.  To be honest, it probably has little impact on protecting small investors, as they will likely just save up the $25,000 dollars, resulting in a bigger loss in the end.

With the pattern day trading requirement out of the way, you could start with anywhere from $5,000 to $20,000.  Just remember you need to be able to cover commissions; time will do the rest in terms of growing your equity curve.

You can still trade Stocks

In the last five years, there have been many breakthroughs in terms of access to global markets.  One of which, is that you can now trade on international stock exchanges.  Historically, if you wanted to trade international markets, you needed to day trade forex or futures.

Now you do not have to worry about getting into these sophisticated instruments and can still focus on stocks through a number of domestic brokerage firms, which we will cover later in the article.

You can Trade Outside of Work Hours

The beauty of international markets is that they trade during different time zones.  This means you can find a time that works for you and your schedule.  For example, if you are a day trader living on the east coast, you could day trade Australia or Japan which open at 8 pm Eastern.

If you are a day trader on the west coast, you could day trade the Hong Kong Stock Exchange which opens at 6 pm Western time.

Point is you can day trade and still keep the checks coming in from your day job.

Commissions are now Reasonable

Years ago, the commission structure made international trading unreachable for the average retail investor.  While the rates are higher than US domestic commissions, you are able to place trades for under 20 bucks each way.  You will likely end up with a total round trip commission of $20 to $30 bucks.

Again, going back to the previous section on the amount of money needed to get started; you just need to make sure you have enough to cover these commission costs.

Markets are Different, Human Nature Is the Same

Before you start trading any market, you need to first observe their price action.  For example, in the US lunch trading is the dead zone with little trading activity.  Does your international market of choice behave the same way?

I think you get the point, each country will have its own trading culture, but at the end of the day, trading patterns that work in the US will work the same in Japan.  Remember, we are dealing with the raw human emotions of greed and fear.

There are tons of Markets to Trade

There are now over 15 to 20 international markets you can trade in North America, Europe and Asia.  The opportunities are truly limitless.

You will need Support

If you have a family, spouse, or anyone that counts on you on a daily basis, you will need their support.  They will have to understand that while it is Sunday evening, Japan opens up at 8 pm, so you will not be able to watch this week’s Sunday night game.

As long as you have the support of your family, you will do just fine.  Remember, day trading at work is difficult due to the distractions, so can day trading from home if your family members do not respect the privacy and time you need to focus on your trading.

In Summary

You can day trade starting out with a small amount of money and during times that work best for your schedule.  I think it goes without saying that you of course need to define your trading strategy, have spent a considerable about of time paper trading in the market you plan to invest and have the time required to day trade on a consistent basis.

While it may seem a bit out there to start trading in Japan with 4 digit stock symbols, the alternatives are probably even crazier when you really think about them.  For example, saving up a ton of money that you may end up losing or trying to day trade at work, or for my big risk takers, leaving your job on blind faith without knowing where things will land.

Brokerage Firms that offer International Trading

In the US, we do not have a ton of firms that provide day trading on international markets, but below is a list of the top ones I could find doing a search on Google:

Fidelity

Scottrade

TD Direct Investing

Charles Schwab

Interactive Brokers

When evaluating each broker you will want to take into account the following:

1. Ability to short stocks on the international exchange you are targeting
2. Data delays
3. Delays in order execution
4. Commission structures (flat rate or by share)
5. Customer Support
6. Quality of trading platform

Please note that Tradingsim does not have any affiliate arrangements with any of the aforementioned firms. Just wanted to make that clear up front.

You will want to do an exhaustive review of each firm to identify which one best suits your trading needs.

Good Luck Trading,

Al

Photo Credit

Empty Pockets by Dan Moyle

Job by Yasser Alghofily

International Flags by Viv Walker

The post How to Day Trade with Little Money and Keep Your Day Job appeared first on - Tradingsim.

What is the Ichimoku Cloud?

The Ichimoku Cloud, also known as Ichimoku Kino Hyo is a technical indicator, which consists of five moving averages and a “cloud” formed by two of the averages. The default parameters of Ichimoku Cloud are 9, 26, 52, but these parameters are configurable based on the preferences of the trader. Since the Ichimoku Cloud provides a number of trend signals, some traders consider the Ichimoku Cloud the only technical indicator required on the chart.

The Ichimoku Cloud indicator on first glance can feel overwhelming to traders not familiar with the indicator.

Look at the image below:

LinkedIn Price Chart

This is a normal H1 chart showing the price action of LinkedIn during the month of September 2015. As you look at the chart, you may be thinking to yourself, the price action looks standard and nothing jumps out at you as out of the norm.

Now we add the Ichimoku Cloud to our LinkedIn chart and we get the following picture:

Ichimoku Cloud – LinkedIn

“What just happened”, is the initial reaction of traders not familiar with the Ichimoku Cloud. To the untrained eye, the indicator looks like total chaos on the chart, with lines crossing each other without any clear purpose or trajectory.  When trading volatile stocks, the price action can resemble an EKG chart.

I can assure you that the Ichimoku Cloud is the furthest thing from chaos and is quite easy to understand after you become accustomed to the settings.  To this point, in this article we hope to improve your understanding of the indicator and provide a simple trading strategy you can apply to your trading toolkit.

Components of the Ichimoku Cloud

After panicking about the number of lines on your chart, let’s take a closer look at the inputs to the Ichimoku Cloud. What do we see first? Five lines: one red, one blue, one green, two orange and a shaded area in-between.

Now, let’s define each of these lines to further understand their purpose.  Just to reiterate a point made earlier in the article, each line is a moving average. Therefore, you should look at the Ichimoku Cloud indicator as five moving averages and nothing more.  If you are not familiar with moving averages, it is one of the easiest technical indicators to master, so no worries on that front.  To further dive into the makeup of the Ichimoku Cloud, the below content outlines the moving averages and how the cloud is formed.

• Tenkan Sen (red line) – this line is a moving average, which displays the middle value of the highest and lowest points on the chart over the last 9 periods.

• Kijun Sen (blue line) – it has the same function as the Tenkan Sen (red line), with the difference that the periods taken into consideration are 26. As you have probably noticed, the Kijun Sen (blue line) is slightly slower than the Tenkan Sen (red line) and the reason for that is the larger number of periods. Since the moving average takes more periods, it takes a longer period of time to “react” in a meaningful way.

• Chinoku Span (green line) – this line represents the current price, but it is shifted to the left by 26 periods. If you look at the image above, you will realize that the green line is 100% identical with the price movement.

• Senkou Span or “The Cloud” (orange lines) – since people call this span “The Cloud”, we decided to color its inside with a clear white color, so it will really look like a cloud. The cloud consists of two lines, which we have colored orange.
  1. The first line of the Senkou Span is the current average of the highs and the lows of the Tenkan Sen (red line) and Kijun Sen (blue line), displaced 26 periods to the right (leading).
  2. The second line displays the middle point between the highest point and the lowest point on the chart for 52 periods. This line is also displaced with 26 periods to the right, as the other line of the cloud.
  3. The cloud is the area on the chart, which is comprised of the interactions of the two aforementioned averages of the Senkou Span. The cloud also represents the furthest support/resistance level, where our trading position is recommended.

So, after explaining the components of the Ichimoku Cloud, we hope things are a little clearer for you the reader!  Well, not really, but things have to be a little involved if it is the only indicator required on the chart.

How to use the Ichimoku Cloud indicator when trading?

Today we are going to discuss an Ichimoku Cloud trading system, which does not require any additional indicators on the chart. This Ichimoku trading strategy is applicable for every trading instrument and timeframe.

Placing a trade when the price closes outside the cloud

This method could also be coined the Ichimoku Breakout Trading Strategy. This is because the trade trigger occurs at the point the price breaks through the cloud.  First, you open your trade in the direction of the respective breakout and then hold the position until the security breaches the Kijun Sen (blue line) on a closing basis.

To illustrate the breakout strategy, we will review a real-market example of Intel from September and October 2015.

Ichimoku Cloud Breakout Strategy

As you can see, early on in 2015 the price action was in a sideways channel. Furthermore, the cloud itself was flat to down during this same time period.

When analyzing the price action for potential trade entries, we walked through the following sequence of events:

First, the price of Intel goes through the Tenkan Sen (red) and Kijun Sen (blue) in a bullish fashion. Although these signals are bullish, we still need additional confirmation in order to take a long position.

Second, the price of Intel breaks through the cloud in a bullish fashion as well.  We open a long position (first green circle) and hope for the best!

Third, Intel had a few unsuccessful attempts to break the Kijun Sen (blue), but lucky for us, the price never breaks on a closing basis and the upward trend remains intact.

Fourth, the price breaks the Kijun Sen in a bearish direction and closes below the Kijun Sen. This price action means we need to exit our position and begin seeking other opportunities.

In the next 4 hours, the price does another bullish break through the Tenkan Sen (red) and the Kijun Sen (blue). At the same time, Intel also breaks the cloud in a bullish direction once again. Opportunity after opportunity – great! We take another long position based on the bullish price action. On this run up, Intel unfortunately broke the Kijun Sen (blue) on a closing basis; therefore, we exited our long position with a decent profit.

These are two trading examples of how this strategy could be successfully implemented. Note that in the second case, the signal to exit the position wasn’t very strong, but should still be honored.

Although the market continues to move in our favor after we exited the position, there are many cases where the sell signal could lead to further losses. Therefore, the better alternative is to always follow your trading rules and exit your positions when required.

The results are the following:

• 2 successful bullish positions
• 0 fails
• A total profit of 318 bullish pips

Now, let’s try the same strategy on another trading instrument! Below you will see an image displaying the M10 chart of Apple Inc.:

Ichimoku Cloud Apple Example

In this example, our Ichimoku Cloud breakout strategy fails twice, but also succeeds twice.

Similar to our earlier Intel example, Apple starts with sideways movement. The price has been range bound and the cloud has been flat – presenting no opportunities to open a position. Then suddenly…

• We see the price breaking the Tenkan Sen (red), Kijun Sen (blue) and the cloud in a bullish fashion. We go long according to our Ichimoku Cloud breakout strategy. Unfortunately, shortly after the breakout, the price records a rapid bearish candle, which results in Apple closing below the Kijun Sen line (blue). We close our position with a loss equal to 19 pips.

• Fortunately, with the next two candles comes our second chance, as the price breaks through the cloud, Tenkan Sen (red) and Kijun Sen (blue) in a bullish fashion. So, we open our new long position. The market starts moving in our favor and we enjoy this nice and steady bullish movement. After a few hours, the price of Apple breaks the blue Kijun Sen line and closes below. We exit our position with a profit equal to 144 pips.

• After four hours, we take our third bullish position on another breakout. After two hours of hesitation, Apple’s price closes below the Kijun Sen (blue). We follow our exit strategy and are forced to close our position with a loss of 43 pips.

• Our fourth example is where the Ichimoku Cloud can really help you capture the big wins. As you can see on the chart, the bullish trend is really strong and has yet to break the Kijun Sen (blue).  Therefore, our fourth position is still open and the result for now is a profit of 412 pips. Wohoo!

Let’s now revise the results of our second trading example:

• 4 bullish positions
• 2 successful
• 2 fails
• Loss = 62 pips
• Profit = 556 pips
• Balance = 556 – 62 = 494 pips profit

Not bad eh?

In the last chart example, we provided examples of unsuccessful traders on purpose.  We did this because it is necessary to illustrate that the Ichimoku Cloud indicator is not perfect and there will be bumps in the road.

Any who, when trading with the Ichimoku Cloud, you should be extremely careful not to ignore a signal and it is highly recommended to always monitor your open positions – do not walk away from the computer!

The reason is that you could miss an exit signal and a winner could just as easily turn into a losing trade.  Remember, never give up on your trading strategy principles and never compromise any of your rules for profits.

In Summary

• The Ichimoku Cloud is a trading indicator consisting of 5 moving averages and a “Cloud”
• The default Ichimoku settings are 2, 26, 52
• The names of the Ichimoku components are Tenkan Sen, Kijun Sen, Chinoku Span and Senkou Span (The Cloud)
• The Chinoku Span is displaced backwards (26 periods) – it is lagging
• The Cloud is displaced forwards (26 periods) – it is leading
• The Ichimoku Cloud could be used by itself for trading
• The Ichimoku Cloud is not as complicated as it looks
• The Ichimoku Cloud is fully customizable

The post Ichimoku Cloud Breakout Trading Strategy – it’s not as complicated as it looks appeared first on - Tradingsim.

As stated in its name, the volume weighted moving average (VWMA) is similar to the simple moving average; however, the VWMA places more emphasis on the volume recorded for each period.  A period is defined as the time interval preferred by the respective trader (i.e, 5, 15, 30).

Therefore, if you place a 20-period simple moving average (SMA) on your chart and at the same time, a 20-period volume weighted moving average, you will see that they pretty much follow the same trajectory.  However, on further review, you will notice the averages do not mirror each other exactly.

The reason for this discrepancy, as we previously stated is the VWMA emphasizes volume, while the SMA only factors the average of the closing price per period.

VWMA versus SMA

The above chart is of Microsoft from September 25, 2015. On the chart, we have placed a 20-period simple moving average (red) and a 20-period volume weighted moving average (blue). At the bottom of the chart, you will also see the volume indicator, which we will use in order to demonstrate how the VWMA responds to volume. In the green circles on the chart and on the volume indicator, we have highlighted the periods of high volume. Notice, that wherever we have a big volume candlestick, the blue volume weighted moving average starts moving away from the trajectory of the red simple moving average. Then, whenever we have lower market volumes, the red simple moving average and the blue volume weighted moving average are very close in value.

Can you see the difference now?

What is the Volume Weighted Moving Average good for and what signals can we get out of it?

The VWMA has the ability to help discover emerging trends, identify existing ones and signal the end of a move.

#1 – Discovering Emerging Trends

If the volume weighted moving average switches below the simple moving average, this implies a bearish move is on the horizon. This could lead to a weakening in the bullish trend or an outright reversal.  If the price is able to break through both the VWMA and the SMA a bearish trend is confirmed and a short position can be initiated.

Conversely, if the volume weighted moving average moves above the simple moving average, a bullish trend change is likely around the corner.  Once the price is able to break both the VWMA and the SMA to the upside, one can open a long position.

The below chart illustrates these trade setups.

Breakout through VWMA and SMA

This is a M2 chart of Deutsche Bank from August 5, 2015. On the chart, I am using the 30 SMA and 30 VWMA. As you see, after the market was range bound for a period of time, we notice an increase in the distance between the volume weighted moving average and the simple moving average. At the same time, the price breaks out of the range, which gives us an additional bullish signal. We go long with the second bullish candle after the breakout of the range and we enjoy the impulsive move higher.

#2 – Identifying Current Tends

Here we have a simple rule, if our volume weighted moving average is between the chart and the simple moving average, then we have a signal for a trending market. Note that sometimes the volume weighted moving average will test the simple moving average as a support and resistance, depending on the primary direction of the security. These tests can be considered as an implication of a potential trend reversal. Take a look below:

Trend Folllowing and VWMA

This is a M5 chart of Google from July 22^nd, 23^rd and 24^th from 2015. We use the same 30 SMA and 30 VWMA as in the previous chart example.

In the green circle, you will see the moment where the price breaks the 30 SMA and the 30 VWMA in a bearish direction. At the same time, the blue VWMA further separates from the SMA and is between the SMA and the candlesticks. This is a clear “short it” signal. If you check a half an hour later, you will see that the blue VWMA is still below the red SMA, which means that the bearish trend is still intact.

The arrows show the moments, where the VWMA provided a signal for the continuation of the bearish trend.  If we were to go short at any of these points, we would not be disappointed. The last red arrow shows us the moment when the bearish trend shows signs of slowing down as the VWMA and SMA begin to hug one another.

#3 – Detecting the End of a Trend

This signal is pretty much the same as when we had to discover emerging trends. The difference is we are looking for a contrary signal to the primary trend. For example, you have taken a long position and you notice a tightening in the distance between the VWMA and the SMA. This is the moment where you might want to consider the option to get out of the market and to collect your profits.

Trend Reversal and VWMA

The above chart is of Facebook from July 16^th – 22^nd.   Facebook begins the week with a strong gap up with high volume. After the gap, we have a solid bullish candle and a large distance between the 30-period VWMA and the 30-period SMA. Therefore, we go long with the closing of the first bullish candle. Facebook keeps increasing until the volume drops and the market enters a correction phase. This is when the blue VWMA interacts with the red SMA and we get a “caution” signal. Fortunately, with the next candle, the trading volume increases and the VWMA moves again above the SMA.

Still in the game! Bullish we are!

We hold our position for about 20 more periods and we nearly double in our long position. Then, the blue VWMA switches below the red SMA (red circle) and refuses to go above for about 8-9 periods. We believe 3-4 periods of waiting are enough in order to realize that this is the right moment to close our position. After we exit our position, the price of Facebook starts to rollover and eventually breaks down through the moving averages. Exiting Facebook at the right time brought us a profit of about 55 bullish pips! Viva les Market Volumes!

#4 – The VWMA Divergence

Yes, that is correct! You can discover divergences between the volume weighted moving average and the general chart. You will say, “How could this be possible? This is not an Oscillator!”

Nevertheless, the volume weighted moving average could be in a divergence with the chart, and the secret is in the second moving average we advised you to use. When you have for example a simple moving average in addition to the chart, the volume weighted moving average will switch above and below your simple moving average depending on trade volume. Therefore, whenever the volume weighted moving average is closer to the chart than the simple moving average, we can say that the market is trending and volumes are increasing! Still not getting “the divergence”, let’s walk through a chart example.

Divergence and VWMA

Above is an M15 chart of Microsoft from the first seven days of October, 2015. As you see, after a strong bullish movement, the blue volume weighted moving average moves below the red simple moving average. Therefore, we expect to see a decrease on the chart. Although the bullish movement loses its intensity, the price of Microsoft still manages to close higher for a few candlesticks.  This all happens while the blue volume weighted moving average stays beneath the red simple moving average, thanks to the bigger trading volumes shown on the bottom of the chart. This is a bearish divergence, which you could use as an opportunity to go short.

Divergence and VWMA – 2

KABOOM! The result is 100 bearish pips and a successfully traded bearish divergence between the chart and your 20-period volume weighted moving average. Note, the high bearish volumes at the bottom, which appeared right after the divergence and right before the drop of the price. These bearish volumes also confirm the authenticity of our bearish divergence.

In Summary

In conclusion, we could say that although the volume weighted moving average looks complicated at times, it is not!

If you have difficulties understanding the VWMA, just open a volume indicator at the bottom of your chart. It will give you a better picture explaining the “chaotic” movement of the VWMA in comparison to the SMA.

• The volume weighted moving average places a greater emphasis on periods with higher market volume.
• The volume weighted moving average is a better indicator when combined with another trading instrument for trading signals.
• The simple moving average is a great tool to combine the volume weighted moving average.
• VWMA can provide the following signals
• A trend is coming!
• A trend it is!
• The trend is ending!
• The VWMA can also identify divergence in the market

The post 4 Simple Ways to Trade with the Volume Weighted Moving Average (VWMA) appeared first on - Tradingsim.

Just like regular exchange traded funds, a leveraged ETF can get you exposure to a particular sector, but as the name suggests, it uses built in leverage to maximize or minimize the exposure, depending on the directional movement of the market. Hence, before you endeavor to trade leveraged ETFs, please remember that it can be a double edged sword.

If you are new to leveraged exchange traded funds (ETFs), and still wondering what is a leveraged etf, you should first click here and familiarize yourself with what leveraged ETFs are and learn about how this extraordinary trading instrument works.

Finished reading? Great! If you have read the overview regarding  leveraged ETFs, you should understand why trading leveraged ETFs in the long-term doesn’t work as well as trading these in the short-term.

So, in my opinion, what type of strategy would work better in the short term? The obvious answer is technical trading strategies. This is because changes in fundamentals can take days, or even weeks, to have any noticeable effects on the market. This is especially true, when you are analyzing the entire sector of an ETF based on macroeconomic factors.

Tip # 1 – Know Your Leveraged ETF

“If you know your enemies and know yourself, you will not be imperiled in a hundred battles… if you do not know your enemies nor yourself, you will be imperiled in every single battle.” – Sun Tzu

Well, you are not going to war, but it pays to understand the underlying securities that make up the leveraged ETF. Some commodities and sectors are extremely volatile compared to others, and trading a triple leveraged ETF based on that commodity or industry can completely destroy your entire day’s profits in minutes.

Figure 1: The Volatility of VelocityShares 3X Long Crude ETN (UWTI) Can Be Very High

For example, according to Google Finance, the beta of a triple leveraged oil ETF like the VelocityShares 3X Long Crude ETN (UWTI) is 2.18.

Figure 2: The Volatility of Direxion Daily Gold Miners Bull 3X ETF (NUGT) is Much Lower

On the other hand, the beta of a leveraged gold ETF like the Direxion Daily Gold Miners Bull 3X ETF (NUGT) is only 0.54.

So, you should individually assess the leveraged ETF risk. If you trade UWTI and NUGT with the same trend trading strategy, it would be suicidal. Because NUGT price tends to have a more range bound price action, while the UWTI would likely establish a trend during the trading day.

Now that you know what to look for in a leveraged ETF to classify it as suitable for trend trading, visit ETFdb’s leveraged etf list and cross check the beta of the leverage ETF in order to cherry pick the most volatile ones. You should remember that a beta above 1 indicates a higher volatility compared to the market, whereas a beta below 1 indicates that it has a lower volatility compared to the market.

Tip # 2 – Trading Leveraged ETF Breakouts with Directional Movement Index

Now that you understand why it is better to trend trade volatile leveraged etfs, like an oil leveraged etf, let’s discuss a Directional Movement Index strategy that you can apply to trade leveraged oil etf breakouts.

Figure 3: Directional Movement Index Above Level 20 Signals Potential Start of a New Trend

If you are not familiar with any of the Directional Movement Index strategies, here is a quick tip: professional day traders often consider that the leveraged etf instrument is about to start a short-term trend whenever the average directional movement (ADX is the red line on the DMI chart) climbs above 20. However, a lot of traders are more conservative and only consider a reading above 25 to be an indication of a potential trend.

Depending on your own risk appetite, you can decide which level you would like to watch. But, the principle would remain pretty much the same.

When you find that the average line of the Directional Movement Index is climbing above level 20 (or level 25), and the price of the leveraged ETF closed above a significant resistance level, it should be considered as a valid breakout.

In figure 3, the UWTI price was trading between $8.50 and $8.61, while the ADX value climbed above level 20. It indicated that this could be the start of an uptrend. If you find the market in this kind of situation, you should place a market order to buy the leveraged etf the moment the price climbed above the high of the range and closes above it.

Tip # 3 – Trend Trading  Leveraged ETFs with Directional Movement Index

As we discussed earlier, the reason you should pick highly volatile leveraged ETFs for short-term day trading is that these tend to trend a lot. By applying the Directional Movement Index indicator, you can easily capture the bulk of the short-term trends of leveraged ETFs.

Even if you already have a long position, the Directional Movement Index can help you to scale-in and increase your exposure in the sector of the leveraged ETF.

Figure 4: When ADX is Rising, There is a High Probability That the Trend Will Continue

A rising average directional index (ADX) indicates that the underlying trend is gaining strength. Hence, when you find the ADX of the leveraged ETF is gaining momentum, and the line is going up, you should look for opportunities to increase your exposure.

There are a number of ways you can scale-in or add additional positions to your trade. For example, by combining other technical indicators with the Directional Movement Index  signal, such as moving average crossovers or even price action, to scale-in to a position.

In figure 4, after breaking out of the consolidation, the Directional Movement Index of the UWTI leveraged ETF continued to rise and went above level 40. When the Directional Movement Index value approaches level 40, you should consider that the leveraged ETF is in a strong trend and look for signals to scale-in. On this occasion, the UWTI price formed a large inside bar (IB) after the breakout.

Along with the rising Directional Movement Index, the formation of the inside bar signaled a trend continuation. You could have easily entered an additional long position when the UWTI price penetrated the high of the inside bar and increased your exposure as a part of your leveraged investment strategy.

Tip # 4 – Using Directional Movement Index for Trading a Range Bound Leveraged ETF

Figure 5: Using Directional Movement Index for Trading Range Bound ProShares Ultra S&P 500 (SSO)

When you find a leveraged ETF is trading within a range and the Directional Movement Index is lurking below 20, you can be certain that the likelihood of a breakout is slim. Hence, you can easily buy near the support and exit the position near resistance and make some easy money in the process.

In the trade example above (figure 5), you can see that the ProShares Ultra S&P 500 (SSO) formed an inside bar around the support level while the Directional Movement Index reading was below 20. So, you could have been pretty sure that there was a high probability that the ProShares Ultra S&P 500 (SSO), which is a leveraged s&p 500 ETF, would have continued to remain within support and resistance level.

So, if you place a buy order when the SSO price penetrated the high of this inside bar, you could easily capture the bullish move towards the resistance level. In this instance, when the SSO price approached the resistance level, the Directional Movement Index reading was rising, but still remained below 20. Therefore, you could have simply closed out the long position and exited the trade with a bulk of the profits. Then again, if the Directional Movement Index reading climbed above 20, you could wait for a potential breakout instead!

Conclusion

A leveraged ETF trading strategy that uses the Directional Movement Index can prove to be a great way to make some quick profits, especially on short time frames like the 5 minute chart.

Since leveraged ETFs have built-in leverage, institutional traders often use these instruments to day trade large funds that cannot utilize leverage due to regulatory reasons. This attracts a lot of liquidity and increases the volatility level of certain leveraged ETFs. This offers some great day trading opportunities for retail traders who solely depend on technical trading strategies to capture the short-term movements in the market.

If you are happy to handle large price swings and live to trade volatile instruments, leveraged ETFs can offer a lot of opportunities for short-term trading. By combining the tips regarding Directional Movement Index with some common sense, you can successfully trade leveraged ETFs and make decent profits.

The post 4 Tips for How to Trade Leveraged ETFs with the Directional Movement Index appeared first on - Tradingsim.

What is the Ease of Movement Indicator?

The Ease of Movement (EMV) is an oscillator, which analyzes the relationship between price and trading volume.  The EMV has an uncanny ability to identify price inefficiencies in the absence of market volume.

The EMV is often represented as a curved line, which bounces above and below zero.  Whenever the EMV is above zero, it conveys the price is increasing with relative ease. Conversely, when the EMV is below zero, the security is decreasing unchecked; hence, the indicator is named Ease of Movement. The below image displays the ease of movement indicator in action:

EMV Indicator

It appears chaotic, don’t you think?

Nevertheless, after reading this article, you will garner a clear understanding of how the indicator can assist in your trading endeavors.

How to Trade with the Ease of Movement Indicator?

Opening a Position

The truth is the Ease of Movement indicator is not a standalone trading tool.  One of the most common indicators to combine with the EMV is volume. Since the EMV is derived from volume activity, volume is a valuable tool in validating trading signals.  The below image illustrates how you can confirm a setup prior to trade entry:

EMV Trading Signal

This is a 5-minute chart of Twitter from October 28 and 29, 2015. First, we see a gap down, which results in tremendous down pressure on the EMV below the zero line.  This bearish action acts as a sign of caution for traders looking to enter long positions.

Despite this negative price action, approximately 15 periods later, the EMV crosses above the zero line.

Did you notice that as the price is breaking out, volumes are also increasing? This bullish price action coupled with strong trading volume provides a great opportunity to establish a long position.  If entered a long position in Twitter, we would have enjoyed the spoils of a nice impulsive move higher.

At the end of the bullish move, the EMV begins making lower highs with each subsequent rally and begins to draw closer to the zero line. In addition, volumes continue to drop with each trading period.

Fortunately, for us, once there is a bearish cross of the EMV below zero with increased volume, we use this as an opportunity to exit our long position and get short.

We open our short position and are able to ride the wave back down for another round of healthy gains.

When to Close a Position

Indeed! We know when to enter a trade, but does the EMV provide accurate exit signals

The answer is yes and no.

As previously mentioned, the EMV is not a standalone trading indicator. At the same time, the volumes indicator is only good for confirming signals, but not for telling us when to enter or exit.

What are we to do?

Here we have two options: the first one is to stay with the EMV and volume in order to keep things simple.

Another option is to combine an additional trading indicator for increased accuracy.

Option 1 – Keep it Simple

In every decision making process we should always consider the option to do nothing. This approach would simply call for us to exit positions whenever the EMV breaks the zero line contrary to the primary trend.

Option 2 – Add a Moving Average

The use of moving averages is a classic method for exiting trades

The moment price closes on the opposite side of the Moving Average, the position should be closed. It is very important to note that your risk appetite will dictate the number of periods you use when configuring your moving average (i.e., 5, 10, and 20).

The other positive of using a MA is that it gives us a bonus validation entering and exiting trades. Whenever EMV signals are supported by increased market volume, coupled with a moving average signal, you have what I like to call the triple threat.

See the below image for a trading example of option 2:

EMV with SMA

Above is a 15-minute chart of Facebook from October 8-14, 2015. The green circle represents when we enter the market and the red circle displays our exits.

The first trade signal occurs after the confirmation of a double bottom, price closing above the SMA, increased volume and the EMV moving above 0.  This provides four confirmation points and displays what we like to call market harmony.

We go long on this signal and enjoy a healthy run up over a number of trading periods. With the opening of the markets on October 13, 2015 Facebook has a significant gap down below the SMA.  Therefore, we stick to our strategy exit our long position.

Let’s go through another example on the short side.

EMV Short Trade

This time we have 5-minute chart of Microsoft from October 21 and 22, 2015.

Our first position is short and is based on a drop of the EMV below zero and a close below the SMA.

Note that the volumes at this time are relatively low. Nevertheless, we decide to go short, because we get a bearish confirmation from the price closing below the 30-SMA.

The price action begins a sharp bearish decline with a minor test of the 30-SMA prior to resuming the downtrend in earnest.

It’s not until the market shoots sharply higher with volume do we exit our position and go long.

In both of these examples, the Ease of Movement indicator formula, combined with volumes and a Simple Moving Average can provide a trader more clarity into the health of the price trend.

In Conclusion

• The Ease of Movement Indicator is a volume oscillator that incorporates price action.
• A trader can enter a long position when the EMV closes above the zero line and can go short when the EMV closes below the zero line.
• Volume and SMAs are the best friends to the Ease of Movement indicator.
• Avoid EMV signals during periods of low volume.

The post Ease of Movement Indicator (EMV) – The Best Way to Interpret Price Action appeared first on - Tradingsim.

If you are interested in short-term trading such as day trading based on technical analysis, then you would have probably heard about the Williams %R indicator. Pronounced as Percent R, the indicator was invented by famous technical analyst and charting enthusiast Larry Williams.

The Williams %R is essentially a momentum indicator, which gauges if a particular stock is overbought or oversold in order to identify the possibility of a counter move. In this article, we will discuss additional methods you can incorporate the Williams %R indicator in your strategies in order to successfully day trade the market.

Understanding How Williams %R Is Calculated

Like most other technical indicators, you can probably find the Williams %R in your favorite charting package. While you do not need to calculate the raw values by hand, there are many good reasons why you should probably thoroughly understand the Williams %R formula. It is always a good idea to pay attention to how a technical indicator generates its signals as you are about to risk a lot of your hard earned money based on its signals.

Without further ado, here is the formula that you need in order to calculate the Williams %R:

(Highest High_n – Close_{current period}) ÷ (Highest High_n – Lowest Low_n) x -100

In this formula, the highest high would be the highest recorded price of the security for the number of time periods you are calculating the Williams %R. On the other hand, the lowest low would be the lowest price during the same period. The close in the formula represents the closing price of the last bar or time period.

This is why professional traders recommend that you should always wait for the bar to close before considering a signal generated by the Williams %R indicator. During extremely volatile market conditions, the closing price can change quickly and the signal can reverse after you have placed an order.

When you add the Williams %R in your charting package, the indicator settings would usually allow you to set the number of periods. The _n in the formula would the number of bars or time periods that you are calculating the Williams %R.

Although Larry Williams initially calculated it with a 10-day trading period and your charting package probably already set the default period for calculating the Williams %R to 14, you can always customize the Williams %R to fit your day trading strategy.

Relationship between Williams %R and the Stochastic Oscillator

No discussion about the Williams %R would be complete if you do not compare the indicator to the Stochastic Oscillator. Before we discuss further, let us take a quick look at the Stochastic Oscillator formula.

As it has two plotted lines, %K and %D, the formula to calculate these two data points are as follows:

%K = (Close_{Current Period} – Lowest Low_n) ÷ (Highest High_n – Lowest Low_n) * 100

%D = 3-Day Simple Moving Average (SMA) of %K

While there are two variants of the Stochastic Oscillator, the formula above is for the Fast Stochastic Oscillator. As you can see, the Williams %R is the inverse of the Fast Stochastic Oscillator.

The Williams %R indicator represents the level of the closing price by comparing it with the highest price in the number of periods you are calculating. By contrast, the Fast Stochastic Oscillator represents the level of the closing price by comparing it with the lowest price for a number periods.

You may have noticed the Williams %R multiplies the formula by -100 where the Stochastic Oscillator multiplies the formula by 100. Once you multiply the %R value by negative 100, the outcome would be the same as the %K, right?

Figure 1: Comparing Williams %R and (fast) Stochastic Oscillator

However, if you pay attention to the Stochastic Oscillator and Williams %R charts in Figure 1, you will notice that the scaling values are different. The Stochastic is oscillating between 0 and 100, but the Williams %R is oscillating between -100 and 0. Besides this, the %K and %R lines are the same!

Interpreting the Williams %R Indicator

Figure 2: Williams %R Above -20 and -80 Usually Represents Overbought and Oversold Market Conditions

As we mentioned earlier, Larry Williams plotted the %R on a 10-day period and he considered the market to be oversold when the %R reading came below -80. On the other hand, when the 10-day period %R came up above -20, he considered the market overbought.

However, it is important that when the market becomes overbought or oversold, it does not directly imply that you should open a short or long trade, respectively.

During a strong uptrend, the stock can remain overbought for a long period of time where the Williams %R would fluctuate around -20. In contrast, during a strong downtrend, the Williams %R may move around -80 and constantly show an oversold condition. In both cases, you would end up taking a counter trend position and lose money faster than you can count it.

Examples of Trading with the Williams %R Indicator

The Williams %R Indicator can be a very powerful tool if you know how to use the indicator properly. Instead of using the indicator for simply identifying overbought and oversold market conditions, you can develop a trading plan around the -50 line cross.

Example of Taking a Short Position with Williams %R Momentum Strategy

Figure 3: Example of -50 Line Cross Strategy

After becoming overbought and oversold, if the Williams %R crosses the -50 line, it generally indicates a shift in momentum. At this point, you can start to look for opportunities to trade the stock in the direction the %R crossed the -50 line. In the example trade illustrated in figure 3, the %R of MSFT  was overbought, then the stock price started to decline and the %R crossed below the -50 line quickly, before the bulk of the bearish move happened.

Once it crossed below -50 and you waited for the bar to close, you can simply place a sell order.

However, we recommend that you try to combine price action with this Williams %R trading strategy in order to increase the odds of your success. As you can see, the bar that pushed the Williams %R reading below -50 was a bearish outside (BEOB). If you simply placed a sell stop order below the low of this bar, you would have entered the market when the bearish momentum was at its highest. Hence, you could have gotten away with placing a smaller stop loss, which would in turn increase your risk to reward ratio on this particular trade.

You can use this same strategy to take a long position when the %R crosses above -50 from after being oversold for some period of time.

If you have any questions about how to incorporate this Williams %R strategy into your existing trading plan or you have an idea about improve it, please feel free to share it with us in the comments section.

Example of Trading Williams %R Divergence

Figure 4: Trading Williams %R Divergence

If you are familiar with divergence then you can use the Williams %R divergence to confirm if the price of the stock is going to continue trending in the current direction or would it likely reverse directions anytime soon.

Williams %R divergences are very powerful you should pay attention to these when it happens. In figure 4, you can see the AMGN stock price formed a down trend, but the Williams %R highs formed an uptrend in the chart. This kind of divergence suggests a trend continuation. As you can see, after forming a bearish price action bar, the AMGN price shortly resumed the downtrend and you could have easily placed a sell stop below the bearish bar to capture this short swing.

Conclusion

Since Williams %R lines are similar to the Fast Stochastic Oscillator, you can simply use the Stochastic Oscillator. But, remember that the intended trading strategy of the Williams %R is completely different compared to the Stochastic Oscillator.

Like other momentum indicators, Williams %R has its flaws, as it can remain extremely overbought during an uptrend and vice-versa. However, as we showed here, you should not use the Williams %R to blindly take a position in the market based on its overbought and oversold readings.

Instead, if you trade smartly by combining price action and use the Williams %R to confirm the momentum in the market, your chance of ending up with a profitable trade would increase tremendously.

The post Tricks You Can Use to Successfully Day Trade with the Williams %R Indicator appeared first on - Tradingsim.

If you are wondering what is the VWAP, then wait no more. VWAP stands for Volume Weighted Average Price and is used to identify the true average price of a stock by factoring volume into the equation.

Finding the average price based on closing value of a security will not give you an accurate picture of a stock’s health.  

Did the stock close at a high with low volume?  Did the stock move to a new low with light volume?  

These are all critical questions you would want answered as a day trader before pulling the trigger.

This is where VWAP can add more value than your standard moving average indicator because the VWAP reacts to price movements based on the volume of a given period.

In this article, we will explore the seven reasons day traders love using the VWAP indicator.

Reason # 1: VWAP Calculation Factors in Volume

For the record, the VWAP formula is:

∑ Number of Shares Purchased x Price of the Shares ÷ Total Shares Bought During the Period

As you can see, by multiplying the number of shares by the price, then dividing it by the total number of shares, you can easily find out the volume weighted average price of the stock. Since VWAP takes volume into consideration, you can rely on this more than the simple arithmetic mean of the transaction prices in a period.

Theoretically, a single person can purchase 200,000 shares in one transaction at a single price point, but during that same time period, another 200 people can make 200 different transactions at different prices that do not add up to 100,000 shares.

In that situation, if you calculate the average price, it could mislead, as it would disregard volume.

Reason 2 #: VWAP Can Enable Day Traders to Buy Low and Sell High

If your technical trading strategy generates a buy signal, you probably execute the order and leave the outcome to hopes and prayers. However, professional  day traders do not place an order as soon as their system generates a trade signal. Instead, they wait patiently for a more favorable price before pulling the trigger.

Figure 1: Price of AAPL Compared to Its 5-Minute VWAP

If you find the stock price is trading below the VWAP indicator and you buy the stock at market price, you are not paying more than the average price of the stock for that given period.

With VWAP trading, you can stick to a trading strategy where you can always buy low. If you are shorting the stock, you sold at a higher price compared to the average price.

By knowing the Volume Weighted Average Price of the shares, you can easily make an informed decision about whether you are paying more or less for the stock compared to other day traders.

Reason # 3: A VWAP Cross Can Signal a Change in Market Bias

Buying low and selling high is all great; however, if you are a momentum trader, you would look to buy when the price is going up and sell when the price is going down, right?

Figure 2: AAPL Crossing Above VWAP

A VWAP strategy called VWAP cross can help you trade the momentum in the market. Since the VWAP indicator resembles an equilibrium price in the market, when the price crosses above the VWAP line, you can interpret this as a signal that the momentum is going up.

When you find the price is crossing below the VWAP, you can consider this as a signal that the momentum is bearish and act accordingly.

Reason # 4: VWAP Indicator Can Act as Dynamic Support and Resistance

Figure 3: BONT Price Respecting VWAP Resistance

Day traders love the VWAP indicator because more than often the price finds support and resistance around the VWAP. Although this is a self-fulfilling prophecy that other traders and algorithms are buying and selling around the VWAP line, if you combine the VWAP with simple price action, a VWAP strategy can help you find dynamic support and resistance levels in the market.

You should note that the likelihood of a VWAP line becoming a dynamic support and resistance zone becomes higher when the market is trending.

Reason # 5: VWAP Can Help You Confirm Counter Trend Trading Opportunitie

Figure 4: VWAP Confirms the Oversold Signal Generated By the RSI Indicator

Ever wondered if a stock is overbought or oversold and if this is the right time to take a counter trend trade? If you are just looking at the RSI or Stochastics and double guessing if this is a strong trend or the market will turn back, then adding the VWAP indicator on your chart can make your life much easier.

Professional day traders have a rule of thumb when using the VWAP – if the VWAP line is flat lining, but the price has gone up or down impulsively, the price  will likely return to the VWAP line. However, if the VWAP line is starting to gradually go up or down along with the trend, it is probably not a good idea or good time to take a counter trend position.

Reason # 6: VWAP Can Help You Reduce Market Impact

Most day traders do not understand that their actions can impact the market itself because we often trade our personal funds at the retail level. However, if you are a hedge fund manager or in charge of a large enough pension fund, your decision to buy a stock can drive up the stock price.

Just imagine for a second you are day trading and want to buy 5,000 shares of Apple (AAPL). AAPL is a fairly popular stock and traders rarely face any liquidity problems when trading. Hence, you will have no trouble finding a seller willing to let go of his 5,000 AAPL shares at your bid price.

However, if you want to buy 1 million AAPL shares within 5 minutes and place a market order, you will probably buy up all the AAPL stock on sale in the market at your given bid price within a second. Once that happens, your broker will fill the rest of your order at any price imaginable, but probably higher than the current market price.

Congratulations, you have just bid the price up and created a market impact!

Placing a large market order could be counterproductive as you will end up paying a higher price than you originally intended. Hence, when you want to buy large quantities of a stock, you should spread your orders throughout the day.

If you find the stock price is trading below the VWAP, you are paying a lower price compared to the average price, right? This way, a VWAP strategy can act as a guide and help you reduce market impact when you are dividing up your large orders into small pieces.

Reason # 7: VWAP Can Help Beat High Frequency Algorithms

They are watching you – when we say they; we mean the high frequency trading algorithms. Have you ever wondered why the liquidity levels in the stock market have gone up over the last few years?

The high frequency algorithms can be little angels when the liquidity is low, but these angels can turn to devils as they can sense when you are trying to spread out a large buy order to reduce market impact.

For example, if you want to buy 100,000 shares of a small cap company, you can sit in front of your screen and try to buy 1,000 shares per minute for 100 minutes, and waste over one and half hour of your life. But, if you program a VWAP algorithm to do that, it can probably get it done during the same time, wasting none of your time.

There is a slight problem with manually buying the same quantity of stocks over a period. Once the high frequency algorithms find a pattern you are trading a certain number of shares per minute, these will try to artificially drive up the price of the stock just before you place a new order.  

A VWAP algorithm can be programmed to buy a random amount of shares when the price is trading below the VWAP. This way, you can make it harder for the preying high frequency algorithms to identify what you are up to.

If you are a retail trader like myself, you are better off knowing the algorithms are out there, but not trying to defeat them.  Odds are these large hedge funds have teams of programmers working around the clock to find price inefficiencies.  

Don’t concern yourself with this cyberwar stick to your system and let the market tell you when you are wrong.

Conclusion

Once you apply the VWAP in your day trading, you will soon realize that it rarely produces very accurate buy or sell signals.

Well, the VWAP was not developed to be used as an indicator that generates trading signals. Instead, if you use the VWAP indicator in combination with price action or any other technical trading strategy, it can simplify your decision making process to a certain extent.

There are many practical applications of VWAP when you are trading large quantities of shares to ensure you are not paying more than market value over a period of time. 

If you have any question about VWAP, please share it in the comments section below.

The post 7 Reasons Day Traders Love the VWAP appeared first on - Tradingsim.

The True Strength Index (TSI) is a technical indicator that was developed by William Blau in the early 1990’s. While there are many applications for the True Strength Index, professional traders use the TSI indicator to gauge the strength of a trend.  The TSI is better suited for trade management instead and not providing entry signals.

In a nutshell, the true strength indicator is a momentum indicator.  However, since the true strength index calculation applies exponential moving averages as a smoothing factor, the TSI can provide an early indication of whether the prevailing trend will continue or reverse.

Armed with this information, you can easily decide if you should keep holding on to your winning trades or take profits.

How to Interpret the True Strength Index?

Before we show you the practical applications of the true strength index, let us first take a look at how to interpret the indicator.

Primarily, the True Strength Index oscillates between 100 and -100. When the index line crosses above the zero line this is a sign that the market bias has turned bullish. By contrast, when you see the TSI cross below the zero line, this is a sign the price action has turned bearish.

Please keep in mind if you change the periods in the true strength index settings, the indicator will respond to price action accordingly. For example, if you calculate the True strength index for 50 periods, you will effectively reduce its sensitivity compared to when calculating for 15 periods.

Now that you know how to interpret the True Strength Index, would you like to know exactly how you could apply and incorporate this indicator in your day trading strategy?

Please keep reading to see how.

# 1 – Hold On to Your Winning Trades When the True Strength Index Crosses the Zero Line

Figure 1: True Strength Index 0 Line Cross Suggests Change in the Momentum

The quality of the price action bar we identified in Figure 1 isn’t great. Nevertheless, since this is just an example, let’s assume you took a long position when AAPL made a higher high at $108.50.

Once you are long the trade, you might wonder if you should keep the position open or close it with a small profit. If this was a strong candlestick, you may have enough conviction to hold onto the position.

Even professional traders often get enticed to close a winning trade with a small profit, especially, when the quality of the entry was not so great.

In these kind of situations, you can one of two things:

• Close the trade with a small profit
• Move your stop loss to break even and hope for the best

However, if you had the True Strength Index on your chart, you could have seen that the index line was gradually going up. So, you would probably lean towards not closing the position, right? Good decision.

As you can see on the example chart, as soon as the True Strength Index crossed above the zero line, the price began moving in an impulsive fashion.

If you had a short position in the market, you can use the same technique to hold on to your short trades as well. Meaning, if you see the True Strength Index crossing below the zero line, keep your fingers off the trigger! Agreed?

# 2 - Watch Out for the True Strength Index Trend Lines

Figure 2: True Strength Index Trend Line Break Can Signify Change in Market Bias

While it is always a good idea to wait for the True Strength Index to cross above or below the zero line, there are alternative methods for identifying trade signals.

If you look closely in Figure 2, you can see that the peaks and troughs of the True Strength Index match with the actual price peaks and troughs, but the trendlines often act as a leading indicator of an impending change in the trend. Hence, you can easily anticipate a change in the market bias once the TSI breaks above or below the existing trend lines.

In Figure 2, you can see that when the True Strength Index broke the downtrend line, the momentum changed. However, when the True Strength Index broke below the uptrend line, it turned out to be a false signal. Are you wondering if you should take these kind of trend line breakout signals seriously?

Well, do not use the trend line breaks as an entry signal because it is not meant to be used this way! Instead, consider keeping your winning trades open as long as the True Strength Index trend line is making higher highs and higher lows.

# 3 – Use True Strength Index Divergences

Figure 3: True Strength Index Divergence Can Indicate Impending Change in Trend

You can also use the True Strength Index divergence to identify if the trend is going to change anytime soon.

When you see a True Strength Index divergence like the one in the PRGO chart (figure 3) above, do not simply close your positions. That would be suicidal! Remember that during strong trends, the True Strength Index tends to generate a lot of false divergence that do not play out very well.

Instead, when you see a divergence forming in the True Strength Index, meaning the price is making higher highs and the True Strength Index is not crossing above its previous peak, keep your position open, but move your stop loss close to the market price to book some profits in the process.

This way, if the divergence does play out and the trend reverse, you will at least get out with some gains. If the trend continues, you will be more than happy that you allowed the winning trade to run. Do you remember that trading cliché: cut your losses short and let your winners run?

# 4 – Use True Strength Index Support and Resistance Levels

Figure 4: True Strength Index Horizontal Support and Resistance Can Also Indicate in Momentum

Just like trend lines, you can also draw horizontal support and resistance lines on the True Strength Index. If you find that the True Strength Index line breaks above a major resistance or below a major support level, respectively, then you can immediately close your open positions. On the other hand, if you see that the True Strength Index is fluctuating around its support and resistance levels, it may be a good idea to hold on to your winning trades.

# 5 – Watching True Strength Index Overbought and Oversold Levels

Before we discuss how to use the True Strength Index levels to identify overbought or oversold levels, let us make one thing clear that if you are trading highly volatile stocks like tech companies, the True Strength Index range has to be higher. In contrast, if you are trading blue chip companies that have low volatility, then you can use a lower True Strength Index range to identify if the stock price is overbought or oversold.

One way you can decide about the True Strength Index range would be using the stock’s beta. If the stock’s beta is above 1, use a higher True Strength Index range like +70 and -70. On the other hand, if the stock’s beta is below or around 1, you can probably stick to a +50 and -50 range. You can easily change the levels you want to see on your chart in Tradingsim using the true strength indicator settings.

Figure 5: MSFT Overbought and Oversold Levels Should Be +50 and -50, Respectivley

If you check on Google Finance, you would find that MSFT has a beta of 1 (as of November 24, 2015). Although MSFT is a tech stock, this is an established company. Hence, based on the beta alone, you can consider this stock to be overbought and oversold when the True strength index crosses above or below the +50 and -50 levels, respectively.

Conclusion

One of the great features of the True strength index is that unlike other oscillators, you can use it for identifying both the trend direction and the trend strength. Isn’t it much easier to keep an eye on a single indicator like the True Strength Index instead of using combinations of multiple indicators like scholastics and directional movement index?

Just keep in mind that if you need to change the true strength indicator settings for each trading instrument based on the stock’s volatility. Otherwise, you will end up getting a lot of false signals, which will do more harm than good. Nonetheless, True Strength Index could prove to be one of the best technical indicators that can help you improve your trading by keeping you in winning trades.

The post 5 Ways the True Strength Index Keeps you in Winning Trades appeared first on - Tradingsim.

What is the Relative Vigor Index?

The Relative Vigor Index (RVI or RVGI) is a technical indicator, which anticipates changes in market trends.  Many day traders consider the RVI a "first cousin" of the Stochastic Oscillator due to the similarities in their formulas (both use the open, close, high and low of each candlestick).

Since the Relative Vigor Index indicator is an oscillator, the indicator bounces above and below zero  – producing both positive and negative values. The below image displays the two lines which make up the RVI indicator:

Relative Vigor Index

The Relative Vigor Index formula is as follows: RVI = (Close – Open) / (High – Low) for each period.

You may be thinking, “But wait! How do I calculate these two lines?”

• Green Line

The green line is a standard simple moving average of the Relative Vigor Index calculation. Although you can adjust the green line, the default value is 10-periods.

• Red line

The red line is a 4-period volume weighted moving average.  The red line is the "trigger line", because it provides trade signals when it crosses above or below the green line.

Types of RVI Trade Signals

• Overbought/Oversold market

A low value indicates an oversold market and a high value signals an overbought one.

• Crossovers

Entry and exit signals are triggered when the short moving average crosses the long moving average.

• Divergence

Divergences between price action and RVI often lead counter trend moves.

• Chart Patterns

The RVI can plot formations such as double bottoms, double tops, head and shoulders, etc.

The picture below, illustrates a double bottom formation of the RVI indicator:

RVI Double Bottom

This is a 10-minute chart of Facebook from October 27-29, 2015, where the Relative Vigor Index develops into a clear double bottom signal. After creating the "W" bottom, Facebook's price took off!

Like every other indicator, the RVI can produce a number of false signals. Therefore, I strongly suggest you combine the Relative Vigor Index with additional trading tools to identify head fakes.

To address the risk of false signals, we will now cover 5 day trading strategies using the RVI indicator.

5 Trading Strategies using the RVI:

1 - Relative Vigor Index and the Stochastic Oscillator

RVI and Stochastics Strategy

Above is a 10-minute chart of Bank of America from November 15-17, 2015. The two green circles indicate when the RVI and the Stochastic start registering an oversold condition. We go long the moment the green line of the Relative Vigor Index tool breaks the red line signaling a new bullish trend. After we go long, we get a price increase of 50 cents, which equals about 4% of the total price per share.

2 - Relative Vigor Index and the Relative Strength Index (RSI)

Relative Vigor Index and RSI Strategy

Above is a 10-minute chart of Yahoo from September 7-8, 2015.

In the first setup, we hope to take a long position once the RSI registers an oversold condition and the RVI has a bullish cross.  We go long at 3 pm on the 7th and are able to make a $1.20 per share by the next trading day.

In the second setup, we are on the short side of the trade. The RSI is in overbought territory and after several periods, the RVI begins to display an overbought reading as well. Once the Stochastic and RVI cross to the downside, we open a short position.  After a few periods, the price decreases ~$1.16 leaving us with a nice trading profit.

3 - Relative Vigor Index and Two Moving Averages

The moving averages can be of any length, as long as it matches your trading style.

In our case, we will combine the RVI with the 9-period and 16-period SMAs. After receiving a trade signal from the Relative Vigor index, you only enter a new position after a cross of the two SMAs in the direction of your desired position. Conversely, you exit your position once there is an SMA cross, which goes in the opposite direction of your trade.

Relative Vigor Index and Two Moving Averages Strategy

Above is a 10-minute chart of IBM from November 2-3, 2015. IBM produces an oversold signal in the first green circle.

Despite a long signal from the RVI, we wait for a bullish cross from the SMAs. This happens after 30-minutes and we decide to take a long position. Therefore, we buy IBM and hold until the two SMAs cross in the opposite direction.

4 - Relative Vigor Index and the Moving Average Convergence Divergence (MACD)

Relative Vigor Index and MACD Strategy

Above is a 10-minute chart of Twitter from November 17-18, 2015. Similar to the previous strategies, we wait for both the RVI and MACD to confirm a trade before opening a position.  In this example, we were able to open a long position, which net us 75 cents per share!

5 - Relative Vigor Index and Bollinger Bands

Finally, we are going to expose another trading strategy, which consists of combining the Relative Vigor Indicator with Bollinger Bands. As you probably know, the Bollinger Bands indicator consists of a simple moving average (20-period SMA by default) and two bands – upper and lower. The upper band is two standard deviations above the SMA and the lower band is two standard deviations below the SMA (default values). Therefore, the two bands form a corridor, which is split on two halves by the 20-period SMA.

In this trading strategy, we need two signals in order to enter the market. The first one comes from the RVI indicator being overbought or oversold. After we receive such a signal, we need the price to cross the SMA of the Bollinger Bands in the direction of the RVI signal. Whenever we get the cross, we open a position accordingly. We will exit our position, when we get the price to cross the Bollinger Bands’ SMA in the opposite direction.

Relative Vigor Index and Bollinger Bands Strategy

The image above shows the 10-minute chart of Apple for October 13-14, 2015. In this image, we see that the two signals we need from this trading strategy come at once. The RVI shows overbought market and its lines cross in a bearish direction. At the same time, the price breaks the 20-period SMA of the Bollinger Bands in a bearish direction, which is our short trigger. We go short and the price begins to ride the lower bands, which is great for our short position. Twenty-two hours later, we see the price of Apple breaking the 20-period SMA of the Bollinger Bands in a bullish direction. This is where we close our position and take our profits of $1.37 per share.

Please note while this example is of an overnight position, we at Tradingsim do not believe in holding positions overnight, as we are day traders.  If you are a swing trader, then of course the above example would fit within your trading time frame.

Comparing the 5 Strategies

Strategies using the Stochastics and RSI will provide similar trading signals as both are oscillators.  It's better to focus your attention towards on-chart indicators, as these interact directly with the price action.

To this point, while the MACD is not an oscillator, it stifles the effectiveness of the RVI indicator.  By the time the MACD provides a trade signal, the buying opportunity is gone.

The Bollinger Band strategy will produce many signals as stocks will often cross above and below the 20-period moving average.   As a trader, avoiding over doing it is always a great idea.

Therefore, out of the 5 strategies, I would have to say the RVI with two moving averages is the best for day trading.

The moving averages allow you to assess the price action while the RVI gives you an indication of oversold and overbought conditions. This way you need actual price action to confirm the signal from the RVI oscillator.

Conclusion

• The RVI is a leading indicator (oscillator),
• The RVI consists of two lines, which interact with each other and fluctuate around a zero level.
• The RVI gives signals for overbought and oversold conditions.
• The RVI creates divergences and chart patterns.
• An additional trading indicator should always confirm RVI signals.
• You should combine the RVI with other indicators:
• Stochastic Oscillator
• Relative Strength Index (RSI)
• Two Moving Averages (Recommended)
• Moving Average Convergence Divergence (MACD)
• Bollinger Bands.

The post 5 Trading Strategies Using the Relative Vigor Index appeared first on - Tradingsim.

If you carefully observe any bar chart, you can see that even when the stock price is trending upwards or downwards, the price is actually ranging. The only difference between trending and ranging markets is the direction of the range. Once you draw an equidistant channel on any price chart, the ranging nature of price becomes more evident.

Figure 1: Theory Behind the Mass Index Indicator

When Donald Dorsey developed the Mass Index indicator, his rationale was that if the prevailing trend were going to change, the price range would have to widen. If you are having difficulty imagining the situation, look at figure 1, do you see what we mean?

Although the Mass Index is great at signaling a potential change in the trend, it will not tell you which direction the trend is changing. After all, an uptrend can gain additional bullish momentum and that will also help make the range much wider.  You have to remember that when the Mass Index technical indicator line is going up, the climbing line is only signaling that the volatility of the stock is going up. However, the Mass Index indicator line does not signify any directional bias of the stock.

That’s why you need to incorporate other technical analysis tools into your mass index trading strategies in order to identify the change of direction of the prevailing trend.

Consider an analogy for a moment, you are driving a car and the mass index calculator, which shows volatility of the stock, is your speedometer. The speedometer of the car will only show how fast or how slow you are going, but you will probably need to use a compass to figure out if you are driving towards the north or the south. Do you think the analogy about comparing trading with Mass Index and driving cars with a speedometer make any sense? In a way, it actually does!

Here are three ways you can utilize the mass index indicator to spot a trend reversal:

# 1 – Watch Out for Mass Index Reversal Bulges

Donald Dorsey found that when the Mass Index indicator value goes above 27, the likelihood of the trend to reverse increases. He then developed some mass index trading strategies based on this hypothesis.

Figure 2: NXPI Formed a Mass Index Reversal Bulge

One of the best known Mass Index strategies is to wait for the index value to go above 27, and then, wait for the reading to drop below the 26.5 level to form a reversal bulge. Once the reversal bulge formation is completed around the 27 level, you can consider that the prevailing trend is going to change very soon.

If you are a conservative trader, you should wait for the Mass Index indicator reading to fall below 26.5 before considering any position in the market. However, as the Mass Index reading over 27 already indicates that the trend is likely to change, you can apply other technical analysis tools to generate an entry signal. If you get an early signal, you can enter the trade much earlier in order to capture the bulk of the reversal move, which would effectively help you increase the risk to reward ratio of your trade as well.

The original Mass Index formula uses 25 periods as the default parameter, but you can change this setting in your charting software to match the overall volatility levels of a particular stock.

If you decrease the period settings for low volatility stocks, it would help you generate more signals. Nonetheless, remember that if you reduce the Mass Index calculation periods on a highly volatile stock, you will receive a lot of false signals that can seriously increase the chances of turning into losses.

# 2 – Use Basic Technical Analysis with Mass Index to Spot Trend Reversals

Figure 3: Using Trend Line with Mass Index Can Increase the Odds of Winning

If you combine basic technical analysis tools like trend lines with your mass index trading strategies, the result can be fascinating. The price must make higher highs to form a trend line, right? Furthermore, we know that all trends will have reversals at some point. Based on these two obvious facts, you can actually trade the market with the Mass Index!

Regardless, one of the major problems with using trend lines is that you never know if the reversal would be strong enough and yield some sizable profit. If the reversal turns into a small retracement and the prevailing trend resumes shortly after you place the trade, you are definitely going to take a loss on that trade, right?

If you want to solve such a dilemma, as a volatility indicator, the Mass Index indicator can come handy to cherry pick the best of the best trend line breakouts!

In Figure 3, you can see the NXPI price has formed a nice uptrend line. Once you see the Mass Index indicator line crossing above 27, you can already anticipate a potential change in the uptrend.

Now, all you have to do is wait for the NXPI price to penetrate and close below the trend line. Once that happens, all you need to do is place a market sell order at the closing price of the bar that closed below the trend line, which happened to be $83.26. In this particular example, you could easily make $0.10 profit without using any leverage whatsoever, within 30 minutes!

On the other hand, if you waited for the Mass Index indicator reading to fall below 26.5, as the developer originally intended, your entry price would have been $83.11. Now, use a pocket calculator to figure out how many cents you would have made in that trade.

Done with using the calculator? The answer is probably 0, if your broker is generous enough to let you trade without charging any commissions or spreads. No?

Bad luck, it’s a loss.

If you use the simple trend line breakout strategy every time you see the price penetrating a trend line, you can get many signals, but most of them would be false signals.  However, by combining the simple trend line breakout entry with a Mass Index reversal bulge strategy, you can cherry pick only the best reversal signals and increase your odds of turning profitable trades.

# 3 – Spot a Trend Reversal By Combining Mass Index with Other Technical Indicators

As we discussed earlier, the Mass Index is more of a volatility indicator. You should use the Mass Index in combination with other technical indicators to validate trade signals.

Does it matter which indicators you are using to identify the direction of the trend? No, not really.

As long as you properly use the Mass Index with your favorite directional bias indicator, you should be able to easily spot a trend reversal with accuracy.

Figure 4: Using TRIX with Mass Index Indicator to Trade BONT Trend Reversal

In figure 4, you can see that the BONT price was trending upwards and after the Mass Index reading touched and fell below 26.5, the stock started to go range bound for a while.

In this type of market condition, you would probably feel clueless about how to play the stock. However, if you use a technical indicator to identify the directional bias, you can easily get an entry signal for the potential trend reversal.

Here, we applied the TRIX indicator, which generated the sell signal. As you can see in figure 4, as soon as the TRIX reading fell below zero and generated the sell signal, the BONT downtrend accelerated. If you placed a sell order at $6.14 per share, you could have easily made $1.44 in profit on this single trade.

TRIX is a nice directional technical indicator, but you can practically use any other oscillator along with the Mass Index indicator. For example, a slow stochastics cross just after the Mass Index reading went above 27 would yield great results as well.

Conclusion

While you can use a lot of other technical indicators such as standard deviation  to measure volatility, the reversal bulge function of the of the Mass Index can offer you  a unique perspective about the market condition. Here, we discussed using the Mass Index indicator to spot trend reversals, but you can also use the Mass Index to trade trend continuations.

The Mass Index indicator can prove to be a great tool for short-term trading when you take the time to change the sensitivity or periods according to the historical volatility of the particular stock that you are studying. That is why you should use a back-testing program like the Tradingsim to fine tune which period settings you should use on certain stocks.

Once you learn how to use the Mass Index indicator by combining other technical trading strategies, you can easily identify potential trend reversals and improve the timing of your short-term trades.

The post 3 Ways to Spot Trend Reversals with the Mass Index appeared first on - Tradingsim.

If you are a fan of classic chart patterns, look no further as we will cover two of the most reliable chart formations in this article.

What are triple bottoms and triple tops?

If you see the price of a stock hitting the same resistance level three times in a row, you have a triple top. Conversely, if the price drops to a support level three times, then you have a triple bottom.

Do not obsess over the exact price point.  I have seen traders sit there laboring over the difference of pennies between swing points.  At the end of the day, none of that matters.  Just make sure the price is within 0% to 3% of the swing level.

Again, do not obsess over the figures I have just presented to you; the bottom line is you should be able to see on the chart that the price is respecting a key level.

Triple Bottom

The above chart displays a triple bottom formation and how price ultimately breaks out after the pattern ends.

Triple Top

As you see, this is pretty much the same scenario. The only difference is that we start with an upwards price movement, followed by three tops at resistance and a subsequent price decline.

The concept behind the triple top and triple bottom are the same as any other reversal chart pattern.  Price runs hard in one direction, a battle between bulls, bears ensues, and then the start of an impulsive price trend in the opposite direction.

The key element for trading triple tops and bottoms is to identify the breakout level.  Once this level is breached, price movement picks up in earnest.

How to trade triple tops and triple bottoms?

Traders should look to buy triple bottoms and short triple tops.

The rule of thumb is the price will retrace the entire price move prior to the development of the pattern.  As you can see in the above charts, the counter trend retraces the entire move in both price and time.

If you are a conservative trader, a more realistic target is the width of the formation.

Buying Triple Bottoms

After we identify the triple bottom formation, we set our trade trigger at the resistance line and we measure the potential breakout target. Once the line crosses the resistance line, it is time to open a long position.  The below image illustrates this process.

Triple Bottom Breakout

This is a 60-minutes chart of Yahoo illustrating the price action from November 2015. Yahoo is experiencing a strong bearish trend, which ultimately develops into a triple bottom formation.

The blue circle highlights the highest swing point of the triple bottom formation.  The distance between this high swing point and the lowest low of the formation added to the swing high (blue circle) produces the price target.

Once the price breaks above the resistance line (brown circle), we open a long position. The upward move equals $2.60 per share, which exceeds the price target of the formation.

Shorting Triple Tops

This is a 30-minutes chart of Bank of America, illustrating the price action between Nov 17 and Nov 23, 2015. As you see, at the end of its bullish trend the price of BAC starts creating three tops.

In addition to the three peaks, we also see the lowest point of the formation highlighted in blue.

To calculate the price target, we take the highest swing point, less the low highlighted in blue and add this to the low point.

Once this support level is breached, we opened a short position, which is indicated with the brown circle.

One point I would like to call out to you is that stocks do not always go in your desired direction immediately.  Remember hundreds if not thousands of traders are looking at the same price action.  Therefore, things will not always go as planned.

Again, our conservative target price is the width of the triple top formation.

Triple Top Breakdown

Similar to our triple bottom example, the price action exceeded our target.

When to exit your positions?

The easiest exit point for triple tops and triple bottoms is using the width of the respective formation added to the high or low point.

However, does this really give you the best opportunity to reap the most profits on your trading position?

One option is to tighten your stops once the target is hit, but we all know once you begin counting the pennies, you will ultimately end up closing the position prematurely.

The example below illustrates this point:

Triple Top Price Target

This is the 30-minutes chart of EBAY for the first two weeks of November 2015.

We opened a short position at the brown circle.

We reach our target relatively quickly which is illustrated by the green circle.  Assuming we placed our stop loss order close to the target, we would have closed our position literally on the next candle.

By closing the position, we would have missed 60% of additional profit.

I bet you want that additional 60%.  No worries, this is why I am here!

I suggest using the Elders Force Index in addition to the triple top/ triple bottom trading strategy. The Elders Force Index is a leading oscillator, which summarizes the current price, previous price and market volume. The indicator consists of a curved line, which fluctuates above and beneath a zero level. The basic signal of the indicator is to go short whenever the line is below zero and go long whenever the line is above zero.

Using the Elder’s Force Index will help us exit the market at the right moment.

Thus, when the target is reached, we will then use the Elder’s Force Index as our trade trigger for exiting the position.

Triple Bottom Price Target

This is the 30-minutes chart of Blackberry for Sep 25 – Oct 5, 2015. The image shows a triple bottom scenario, where the price target is reached.

Now, let us look at the same example, but this time let us use the EFI to manage the trade.

Triple Bottom Price Target - 2

Let me guess, you notice a “slight” difference.

The green circle shows that the EFI is still above the zero line when we reach our target. Therefore, we stay in the market until the EFI crosses the zero level in a bearish direction. The results are more than satisfying.

The blue circles show the moment when the EFI crosses zero and we exit our position.

Comparing the two scenarios, we see that without the EFI we achieve a profit of approximately 30 cents per share.

With the EFI, we are able to capture profits of $1.05 per share. Thus, using the Elder Force Index in combination with triple tops and bottoms will surely give you a better prospective of when to exit the market.

Another option is to close a portion of your position when the price target is reached.  You could elect to close half or a third of your shares.

This way you are able to lock in some profits and if the stock continues to move in your direction, you can continue to unload shares.

Conclusion

• Triple tops and bottoms are one of the most reliable chart patterns.
• The difference between triple tops and triple bottoms is the direction of the market.
• There are two types of breakout trading strategies
• Shorting breakouts - triple tops
• Buying breakouts - triple bottoms.
• After the stock breaks out, the first price target is the width of the triple bottom or triple top.
• One of the best tools for setting exit points on triple tops and bottoms is the Elder Force Index.
• You can also close portions of your position as things go in your favor.

The post How to Trade Triple Bottoms and Triple Tops appeared first on - Tradingsim.

What are rising and falling wedges?

Rising and falling wedges are a technical chart pattern used to predict trend continuations and trend reversals. In many cases, when the market is trending, a wedge will develop on the chart. This wedge could be either rising or falling. Wedges can also appear at the end of a bullish or bearish trend. Thus, a wedge on the chart could have continuation or reversal characteristics depending on the trend direction and wedge type.

What do rising and falling wedges look like?

Although many newbie traders confuse wedges with triangles, rising and falling wedges are easily distinguishable from other chart patterns.

Rising Wedge

The rising wedge chart pattern develops when price records higher tops and even higher bottoms. Therefore, the wedge is like an ascending corridor, where the walls are narrowing until the lines finally connect at an apex.

The below image illustrates the rising wedge formation:

Rising Wedge

Note that the rising wedge formation only signifies the potential for a bearish move. Depending on the previous market direction, this bearish movement could be either a trend continuation or a reversal. In other words, during a rising wedge, price is likely to break through the figure’s lower level.

Falling Wedge

A falling wedge is an exact mirror image of the rising wedge. A falling wedge develops on the chart when there are lower bottoms and even lower tops:

Falling Wedge

As you see, the bottoms are decreasing, but the tops are decreasing at a faster pace.

Opposite to rising wedges, falling wedges provide a bullish signal, which implies the price is likely to break through the upper line of the formation.

How to determine the potential breakout direction of the rising and falling wedges

Again, rising and falling wedges could result in a continuation or reversal, depending on the direction of the primary trend. You may be thinking, “But how is it possible for a pattern to have two very different outcomes?”

The answer to this question lies within the events leading up to the formation of the wedge.

Trend Continuation

During a trend continuation, the wedge plays the role of a correction pattern on the chart. For example, imagine you have a bullish trend and suddenly a falling wedge develops on the chart. In this case the wedge represents a correction. Thus, we expect a price breakout from the wedge to the upside.

The same applies for rising wedges. The difference is that rising wedges should appear in the context of a bearish trend in order to signal a trend continuation. Ultimately, the price action will break to the downside.

Trend Continuation Chart Example

Take a quick look at the image below, which shows how wedges behave during a bullish market:

Wedge Continuation Pattern

This is the 10-minute chart of General Motors from the period Aug 29 – Oct 1, 2015. As you can see, GM is in a strong uptrend, which is tested a total of 9-times.

There are two falling and two rising wedges on the chart.

As previously stated, during an uptrend, falling wedges can indicate a potential increase, while rising wedges can signal a potential decrease. Notice that the two falling wedges on the image develop after a price increase and they play the role of trend correction.

Conversely, the two rising wedges develop after a price increase as well, so they represent the exhaustion of the previous bullish move. As you see, after the two increases, the tops of the two rising wedges look like a trend slowdown.

During a downtrend, we have the exact same scenario – price is likely to increase after a falling wedge and price is likely to decrease after a rising wedge. However, since the equity is moving downwards, our rising wedge implies trend continuation and the falling wedge - trend reversal. This is when the two types of wedges switch their roles. Yet, their behavior and potential remains the same.

Trend Reversal

In different cases, wedges play the role of a trend reversal pattern.  In order to identify a trend reversal, you will want to look for trends that are experiencing a slowdown in the primary trend.  This slowdown can often terminate with the development of a wedge pattern.

Trend Reversal Chart Example

Wedge Trend Reversal Pattern

Above is daily chart of Google and a 10-minute chart of Facebook showing the exact trigger for entering a position.

Note in these cases, the falling and the rising wedges have a reversal characteristic. This is because in both cases the formations are in the direction of the trend, representing moves on their last leg.

How to trade rising and falling wedges?

When should you enter the market?

Every wedge has a signal line. Depending on the wedge type, the signal line is either the upper or the lower line of the pattern.

For example, if you have a rising wedge, the signal line is the lower level, which connects the bottoms of the wedge. If you have a falling wedge, the signal line is the upper level, which connects the formation’s tops.

When you see a break in the signal line, you should enter the market in the direction of the break. For example, when you have a rising wedge, the signal line is the lower level of the figure. When you see the price of the equity breaking the wedge’s lower level, you should go short. At the same time, when you get a falling wedge, you should enter the market whenever the price breaks the upper level of the formation.

Where should you place your stop loss?

When trading a wedge, stop loss orders should be placed right above a rising wedge, or below a falling wedge. You do not want to make your stops too tightly as the price action will often violate one of the trend lines before rebounding swiftly.  You will want to see a real break of significance to know you need to exit your position.

When should you take profits?

The potential price target of a wedge is equal to its size.

This means that if we have a rising wedge, we expect the market to drop an amount equal to the formation’s size. If we have a falling wedge, the equity is expected to increase with the size of the formation.

Below you will see an image showing how to trade a rising and a falling wedge:

Wedge Trading Example

This is the 5-minute chart of JP Morgan from Sep 29-30, 2015. There are two wedges on the chart - red rising wedge and blue falling wedge. We enter these wedges with a short and a long position respectively.

The overall JPM movement is bullish and the two wedges show a price cycle during a bullish trend:

• Price bounces from a trend
• Price starts hesitating and closes a rising wedge
• The wedge is broken and the price decreases into a falling wedge
• Price touches the trend and the falling wedge is broken in a bullish direction
• New bullish movement appears

The blue arrows next to the wedges show the size of each edge and the potential of each position. The green areas on the chart show the move we catch with our positions. The red areas show the amount we are willing to cover with our stop loss order.

In both cases, we enter the market after the wedges break through their respective trend lines.

These two positions have generated a total profit of 80 cents per share by JPM.

In Conclusion

• Wedges are technical analysis chart patterns.
• Wedges could be rising and falling.
• Rising wedges imply a decrease.
• Falling wedges imply an increase.
• Wedges could be trend confirming or trend reversing depending on the previous price movement.
• We should enter the market with the break through the signal line of the wedge.
• Stop loss orders should be placed above the rising and below the falling wedges.
• We should aim for a minimum amount equal to the size of the wedge.
• Even if the wedge is successfully completed, we should not close our position if the equity is still trending in our favor.

The post How to Trade Rising and Falling Wedges appeared first on - Tradingsim.

Are you an indicator trader? If yes, then you will enjoy reading about one of the most widely used trading tools – the moving average convergence divergence (MACD). Today, we will cover 5 trading strategies using the indicator and how you can implement these methodologies within your own trading systems.

What is the MACD?

The MACD calculation is a lagging indicator, used to follow trends. It consists of two exponential moving averages and a histogram as shown in the image below:

The default MACD values are 12,26,9.

It is important to mention that many traders confuse the two lines of the MACD with simple moving averages.

The slower line of the MACD is calculated by placing a 12-period EMA on the price and then smoothing the result by another 26-period EMA. The second line is calculated by smoothing the first line by a 9-period EMA. Thus, the second line is faster and hence is the “signal” line.

The last component of the indicator is the histogram, which displays the difference between the two MAs of the indicator. Thus, the histogram gives a positive value when the fast line crosses above the slow line and negative when the fast crosses below the long.

MACD Indicator

What signals are provided by the MACD?

1. Moving Average cross

The most important signal of the MACD is when the faster MA breaks the slower one. This gives us a signal that a trend might be emerging in the direction of the cross. Thus, traders often use this signal to enter new trades.

2. Divergence

MACD also gives divergence signals. For example, if you see the price increasing and the MACD recording lower tops or bottoms, then you have a bearish divergence. Conversely, you have a bullish divergence when the price drops and the moving average convergence divergence produces higher tops or bottoms.

3. Distance between MAs (overbought/oversold)

Since the MACD has no limit, many traders do not think of using the tool as an overbought/oversold indicator.

To identify when a stock has entered an overbought/oversold territory, look for a large distance between the fast and slow lines of the MACD.  The easiest way to identify this divergence is by looking at the height of the histograms on the chart.

This divergence often leads to sharp rallies counter to the primary trend.  These signals are visible on the chart as the cross made by the fast line will look like a teacup formation on the indicator.

5 Trading Strategies Using the MACD:

#1 - MACD + Relative Vigor Index

The basic idea behind combining these two tools is to match crossovers. In other words, if one of the indicators has a cross, we wait for a cross in the same direction by the other one. If this happens, we buy or sell the equity and hold our position until the MACD gives us signal to close the position. The below image illustrates this strategy:

MACD + Relative Vigor Index

This is the 60-minute chart of Citigroup from Dec 4-18, 2015. It shows two short and one long positions, which are opened after a crossover from the MACD and the RVI. These crossovers are highlighted with the green circles. Please note that the red circles on the MACD highlight where the position should have been closed. From these three positions, we gained a profit of $3.86 per share.

#2 - MACD + Money Flow Index

In this strategy, we will combine the crossover of the MACD with overbought/oversold signals produced by the money flow index (MFI). When the MFI gives us a signal for an overbought stock, we will wait for a bearish cross of the MACD lines. If this happens, we go short. It acts the same way in the opposite direction – oversold MFI reading and a bullish cross of the MACD lines generates a long signal.

We stay with our position until the signal line of the MACD breaks the slower MA in the opposite direction. The below image illustrates this strategy:

MACD + MFI

This is the 10-minute chart of Bank of America from Oct 14-16, 2015. The first green circle highlights the moment when the MFI is signaling that BAC is oversold. 30 minutes later, the MACD has a bullish signal and we open our long position at the green circle highlighted on the MACD.

We hold our position until the MACD lines cross in a bearish direction as shown in the red circle on the MACD. This position brought us gains equal to $0.60 (60 cents) per share for about 6 hours of work.

#3 - MACD + TEMA

Here we will use the MACD indicator formula with the 50-period Triple Exponential Moving Average Index. We attempt to match an MACD crossover with a break of the price through the TEMA.

We will exit our positions whenever we receive contrary signals from both indicators. Although TEMA produces many signals, we use the moving average convergence divergence to filter these down to the ones with the highest probability of success. The image below gives an example of a successful MACD + TEMA signal:

MACD + TEMA

This is the 10-minute chart of Twitter from Oct 30 – Nov 3, 2015. In the first green circle we have the moment when the price switches above the 50-period TEMA. The second green circle shows when the bullish TEMA signal is confirmed by the MACD. This is when we open our long position. The price goes up and in about 5 hours we get our first closing signal from the MACD. 20 minutes later, the price of Twitter breaks the 50-period TEMA in a bearish direction and we close our long position. This trade brought us a total profit of $0.75 (75 cents) per share.

#4 - MACD + TRIX indicator

This time, we are going to match crossovers of the MACD formula and when the TRIX indicator crosses the zero level. When we match these two signals, we will enter the market and await the stock price to start trending.

This strategy gives us two options for exiting the market, which we will now highlight:

• Exiting the market when the MACD makes a cross in the opposite direction

This is the tighter and more secure exit strategy. We exit the market right after the MACD signal line breaks the slower MA in the opposite direction.

• Exiting the market after the MACD makes a cross, followed by the TRIX breaking the zero line

This is the looser exit strategy. It is riskier, because in case of a change in the equity’s direction, we will be in the market until the zero line of the TRIX is broken. Since the TRIX is a lagging indicator, it might take a while until this happens.

At the end of the day, your trading style will determine which option best meets your requirements. Now look at this example, where I show the two cases:

MACD + TRIX

This is the 30-minute chart of eBay from Oct 28 – Nov 10, 2015. The first green circle shows our first long signal, which comes from the MACD. The second green circle highlights when the TRIX breaks zero and we enter a long position.

The two red circles show the contrary signals from each indicator. Note that in the first case, the moving average convergence divergence gives us the option for an early exit, while in the second case, the TRIX keeps us in our position. Using the first exit strategy, we generate a profit of $0.50 (50 cents), while the alternative approach brought us $0.75 (75 cents) per share.

#5 - MACD + Awesome Oscillator

This MACD indicator strategy includes the assistance of the well-known Awesome Oscillator (AO). We will both enter and exit the market only when we receive a signal from the MACD, confirmed by a signal from the AO.

The challenging part of this strategy is that very often we will receive only one signal for entry or exit, but not a confirming signal. Have a look at the example below:

MACD + Awesome Oscillator

This is the 60-minute chart of Boeing from Jun 29 – Jul 22, 2015. The two green circles give us the signals we need to open a long position. After going long, the awesome oscillator suddenly gives us a contrary signal.

Yet, the moving average convergence divergence does not produce a bearish crossover, so we stay with our long position. The first red circle highlights when the MACD has a bearish signal.  The second red circle highlights the bearish signal generated by the AO and we close our long position.

Note that during our long position, the moving average convergence divergence gives us bearish signals a few times. Yet, we hold the long position since the AO is pretty strong. This long position brought us a profit of $6.18 per share.

Recommendations

I prefer combining my MACD indicator with the Relative Vigor Index or with the Awesome Oscillator. The reason is that the RVI and the AO do not diverge from the MACD much and they follow its move.

In other words, the RVI and the AO are less likely to confuse you and at the same time, provide the necessary confirmation to enter, hold or exit a position.

The TEMA also falls in this category, but I believe the TEMA could get you out of the market too early and you could miss extra profits.

I find the MACD + TRIX indicator strategy too risky. Yet, it could be suitable for looser trading styles. Lastly, the Money Flow index + MACD generates many fake signals, which we clearly want to avoid.

Conclusion

• Moving Average Convergence Divergence (MACD) is a lagging indicator
• MACD is used to find new trends and to signal the end of a trend
• MACD consists of three components:
  • Faster Moving Average (Signal Line)
  • Slower Moving Average
  • MACD Histogram
• The moving average convergence divergence provides three basic signals:
  • Moving Average Crossover
  • Divergence
  • Overbought/Oversold Signals
• MACD combines well with the following indicators:
  • Relative Vigor Index (RVI)
  • Money Flow Index (MF)
  • Triple Exponential Moving Average (TEMA)
  • TRIX
  • Awesome Oscillator (AO)
• The indicators best suited for the MACD indicator are the RVI and AO.
• External Link - create the MACD formula in excel.  This one is for all you book worms that need to see exactly how the indicator works.

The post 5 Trading Strategies Using the MACD appeared first on - Tradingsim.

Today we are going to discuss two important tools for identifying support and resistance on any chart – introducing price channels and bollinger bands!  During the course of this article, we will cover the details of each approach and provide a recommendation of which best suits your trading style.

What are price channels?

Price channels are one of the most important tools for active trading. Price channels are established as a stock begins to bounce back and forth between support and resistance levels. Thus, traders use price channels to set entry and exit points when trading.

Types of Price Channels

Bullish Channel

The price channel is bullish when the support and resistance levels are parallel and sloping to the upside.

Bearish Channel

The price channel is bearish when the support and resistance levels are parallel and sloping downwards.

Horizontal Channel

This price channel consists of parallel support and resistance levels.  This formation develops during consolidation periods and is the most common price channel.  Due to the lack of volatility, most day traders prefer either the bullish or the bearish channel.

Have a look at the below image which illustrates the three types of price channels:

Three Types of Price Channels

Note: In order to confirm the presence of a channel, we need at least two tops and two bottoms to generate the resistance and support levels. Again, these levels should be parallel to one another. Have a look at the image below for further clarification:

Bullish Price Channel Example

The two tops and two bottoms help form the two parallel lines of the channel. In the above image, the top highlighted in green is the first point you could open a trade.  Please note, we will cover below why this first trading opportunity should only be used by the more seasoned traders.

How to trade price channels?

Trading Bullish Channels

Once you spot a bullish price channel, go long once the price bounces from the support level, which is the bottom line. You then hold your position until the stock touches the upper level of the channel, also known as resistance.

Note:  You could short the touch of the resistance level, but this should be reserved for seasoned traders. Reason being, as you are in a bullish pattern, it is much harder to go counter to the primary trend.

Trading Bearish Channels

Once you identify a bearish channel, go short once the price touches the upper level of the channel.  You then hold this position until price touches the lower channel, also known as the support line.

Note:  Again, counter trend trading should be left to the professionals.

Trading Horizontal Channels

Earlier we mentioned that you would likely want to avoid horizontal channels for active trading.  Again, this is because the market is lacking volatility and volume, which often generates false trading signals. This churn of trading activity often leads to less profitability, over trading and higher commissions.

With the disclaimer out of the way, there are still those of you that will gravitate towards trading horizontal channels.

In many cases, the price movement within the horizontal channel is limited; however, there are times volatility can live within its boundaries. When these opportunities present themselves, you will want to go long at the lower channel and short at the upper channel.

Note:  One of the benefits of trading horizontal channels is you can play both sides of the market – long and short.  This is because the market is in a consolidation pattern.

Let’s now walk through a real-life example of a bearish channel example.

Bearish Price Channel Example

Above is a 5-minute chart of Facebook from the period Aug 6-10, 2015.

The first four red circles show the tops and bottoms required to establish the bearish channel. After establishing the channel, there were two short opportunities, which played out nicely.

The third shorting opportunity failed and Facebook began to breakout above the resistance line.  After breaking out, Facebook provided a slight back test of the resistance line and did not retreat into the bearish channel.

This folks is a sign that your previous resistance line is now support and a bear raid could be in progress. This is a clear long signal, which resulted in a price spike the next day.

What are Bollinger Bands?

Bollinger bands (BB) is an on-chart trading instrument. It consists of an upper and lower band, which measure volatility and a 20-period simple moving average. The two bands are standard deviations of the price action. Thus, the bands expand and contract on the chart.

Bollinger Bands

Although it looks slightly chaotic, the purpose of the bollinger bands formula is straightforward. Traders use BB as support and resistance, to set entry and exit points on the chart and to identify an equity’s volatility.

How to trade using Bollinger Bands?

Although it may look a bit messy, using bollinger bands to improve your trading is not as hard as it may seem. The two basic bollinger band trading strategies that work are associated with price interacting with upper and lower bands.

Bounces

The main bollinger bands trading rule is when price reaches the upper or lower bands, price is likely to return to the middle line. Conversely, price will also bounce off the moving average back in the direction of the primary trend.

Riding the Bands

In this case, when price interacts with the upper and lower bands, the bands can expand at times from one another. This expansion can often signal the start of a new impulsive move.

This is also known as riding the bands, where the price literally hugs the upper or lower bands. If this happens, we go long or short once the candlestick closes beyond the bands and hold our position until the price breaks the middle line (20-period moving average).

Riding the Bands

Above is a 5-minute chart of AT&T from the period Nov 12-16, 2015.

Here we spot three trading opportunities. The red rectangles illustrate the moments when the BB levels are close to each other, meaning there is low volatility. The green rectangles indicate the periods when the bands are expanding and volatility is in the air! Again, which is great for active traders.

For the first two trading opportunities, we notice the bands expanding, as the price closes below the lower band. We then hold these short positions until the price breaks the 20-period MA in a bullish direction.

The third case mirror the first two trading examples, but in the opposite direction. When the bands begin to widen, the price closes outside of the upper band. Thus, we go long and hold until the 20-period MA is broken in a bearish direction.

These three trading positions brought us a profit of $0.53 (53 cents) per share!

Price channels or Bollinger Bands?

The truth is that both of these tools are very effective and could lead to consistent profits, if executed properly. Yet, BB and channels are quite different.

Number of Trading Opportunities

Channels are simply based on price and do not account for any fancy calculations. Therefore, parallel channels may or may not develop on the chart.  However, bollinger bands are dynamic and are always present on the chart - every interaction with a band could be traded. Since BB is a dynamic indicator, it is the riskier option. Some traders say, “Nothing good will happen to you if you are always in the market!” If you are not prepared for dynamic trading, you are likely to fail when trading with BB. Thus, price channels might suit you better here.

Early Entry and False Signals

BB also gives us the option for an early entry, while price channels require at least two tops and two bottoms in order to confirm the channel. In addition, BB assists you with a moving average, which helps a lot especially when determining exit points. Yet, a moving average could instantly be added to a price channel if needed.

Remember, we said that corrections could be traded with channels (mainly horizontal)? Meanwhile, BB is very confusing if used to identify corrections. On the other hand, BB has clear rules when to enter and exit the market. With price channel trading, you might be tricked sometimes. There are cases when the price breaks a level of the channel, creating the impression that this is the beginning a move. You open your position, but then the price suddenly jumps back into the channel! What a shame!

Have I completely confused you yet?

Let’s try to clean things up a bit.  If you are a dynamic trader, then BB might suit you well. If you are not that comfortable with price dynamics and you may want to slow things down a bit, then price channels are for you.

In both cases, if you follow the rules as discussed above, you will already be well ahead the majority of traders!

In Conclusion:

• There are three types of price channels:
• Bullish Price Channels (trending)
• Bearish Price Channels (trending)
• Horizontal Price Channels (consolidations)
• We confirm the presence of a channel by spotting at least two tops and two bottoms – parallel to each other.
• The trending moves in channels are more profitable and less risky. Trade corrective moves only if you are experienced!
• Bollinger bands are an on-chart indicator, which measures volatility.
• BB components are:
• Upper Band
• Lower Band
• 20-period MA
• When the bands expand, the stock is volatile and could start trending! This is when we should enter the market.
• We exit the market when the price breaks the 20-period MA.
• When the bands are tight, stay out of the market.
• BB puts us in the market relatively earlier than price channels.
• Corrections can be traded with price channels, while this is very confusing with BB.
• BB is riskier than price channels, because there are way more trade signals.
• Price channels will suit you better if you are a quiet trader. BB trading is for active traders!

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Are you a day trader? Have you ever considered holding your day trades overnight? Although many traders and investors conduct this practice, today I will explain to you why it is a bad idea if you are day trading.

Day Trading

What is a day trade?

Day trading is when you open and close your position on the same day. Since day traders have to exit their positions before the market close, they cannot take advantage of long-term market moves. Hence, day traders rely on leverage, liquidity and the ability to place multiple trades per day in order to amass solid annual returns.

Despite the fact day trading happens during the day, there are cases when some traders prefer to hold their positions overnight. I consider this as a very risky initiative as you are taking control out of your hands and allowing external market factors to decide your fate (i.e. news releases, management changes).

But how exactly can overnight trading negatively impact your trading activity?

Well, let’s dig into the top 5 things that can go wrong on any given trading day.

Why it’s a terrible idea to hold day trades overnight

1# - Gaps Hurt

If you are a trader, you have probably noticed that when the market opens, volatile stocks will have big opening gaps from the previous days’ close.

The reason for this is there are news events that occur prior to the market open that can have a positive or negative impact on the share price.  Have a look at the example below:

38.2% Retracement

This is the 5-minute chart of Facebook from Dec 10, 2015.

After the confirmation of a double bottom formation, we decide to go long. Fortunately, the price starts increasing, which is great for our long position. A decrease appears, but we are well aware of the fact the 38.2% Fibonacci retracement held up on the close.   Thus you might say: “Hey! It looks like the price will jump back in bullish direction! Let’s hold our position overnight!”

If you do this, you are subject to the risk of an after hours or morning gap. The gap could be bullish or bearish. Therefore, your chances are 50-50 on the trade. Let’s see what happens next in our case:

Gap Chart

“Wow! What did just happen!?” is probably your reaction. That’s right, Facebook gave it up on the open and retraced the previous uptrend in 20% of the time.  In reality, this sort of price move happens every day across all of the major exchanges.

If you want to protect yourself from gaps, the simplest way to do this is not to hold your position overnight.

#2 - Your Stop-Loss is worthless

The worst thing when holding your trade overnight is that stop loss orders cannot protect you from the gaps. You will probably say “How is that possible? Isn’t the stop supposed to close my order immediately once triggered?

That is absolutely correct; however, when there is a gap, the price technically jumps your order, rendering your stop loss worthless.

Once the market opens, the first price will trigger the stop loss, which will likely be well beyond where you hoped to cut ties.

Stop Loss Orders

If you placed a stop loss at the 38.2% Fibonacci level around $105.14, Facebook jumped this stop on the open and would have executed at $104.14.

While you thought you limited your risk to a maximum price decrease of $0.28 (28 cents) per share, based on an entry at $105.42; in reality, the decrease you would have experienced equaled to $1.26 per share.

Another way of saying this is that you now loss 4.5 times would you had first set out in your trading plan.

If you are the type of trader that uses more cash with tighter your stops, this sort of hit could prove as a serious setback for your weekly or monthly profit targets.

If you sometimes consider keeping your trade overnight just remember the following: stop loss orders cannot protect you from gaps in the opposite direction! Therefore, you have three alternatives:

• Not to hold day trades overnight.
• Hold your position overnight and take the 50-50 risk of a gap.
• Hedge your position with another financial instrument.

It is your call which of these you are going to chose. My advice is, go with the first alternative, if you do not feel 110% comfortable with the other two.

#3 - Broker’s Punishment

Yes, that is correct. Brokers can and will charge an overnight fee on some day trading accounts.  This fee can run as high as a few hundred basis points.

The less fees you pay the greater odds of success.  So, if you are that much in love with the stock, you can always reopen your position in the morning.

#4 - Bankroll Size

If you would like to hold a trade overnight you should definitely have a solid bankroll. Since you plan to stay in the market with the looming risk of a gap, you should make sure you can afford any potential margin calls.

A margin call means your broker will start selling your assets in order to cover any shortfall. In other words, your overnight trades and available cash could be wiped out to cover the broker’s potential losses.

The other way to protect yourself from the aggressive margin call is pretty straight forward –deposit more money! However, cash sitting in an account just to protect against a potential margin call does not provide the best rate of return.

#5 - Stress

What about you? If you somehow manage to tackle the insidious market and get out unscathed, you should ask yourself this question: “Is holding a position overnight worth the stress?”

The first four reasons not to hold a position overnight all translate into stress on you.

Think about how you are going to spend the night in your bed when you have all of this on your mind.

Isn’t your bed the place where you should relax, gaining energy and strength for the next trading day?

Conclusion

• Day trading is the process of trading financial instruments within the trading day.
• Day trading is a full-time job, which requires discipline, consistency and self-confidence.
• Day traders sometimes hold their positions overnight, which exposes them to external variables.
• The reasons not to hold day trades overnight include:
• You put yourself into a great risk of market opening gap.
• Your stop loss order cannot protect you from that gap.
• Your broker will charge you an extra fee for leaving an open trade overnight.
• You can get an instant margin call with the opening of the market.
• You might not be as experienced as you think in order to tackle the market in the morning.
• You will expose yourself to a great stress.
• Holding your stock overnight is considered a very risky activity, which should be implemented only from the most experienced equity traders.

The post 5 Reasons it’s a Bad Idea to Hold Day Trades Overnight appeared first on - Tradingsim.

The Tradingsim University provides you a framework for how to use the Tradingsim Platform.  Each module focuses on topics that are key to successful day trading.  This is not a race!  Take your team going through each lesson, while using the Tradingsim Platform in order to take your trading to the next level.

Much Success,

Al

Module 1 - The Basics

Why Practice Day Trading

New to Trading

Top 50 Day Trading Myths

Module 2 - Trading Psychology

The Definition of a Successful Day Trader

11 Things that Separate Winners from Losers

Learn to Conquer the Fear

Module 3 - Basic Day Trading Strategies

3 Strategies for Trading Flags and Pennants

4 Simple Ways to Trade with the Volume Weighted Moving Average

How to Trade Rising and Falling Wedges

Day Trading Setups

Day Trading Breakouts - 4 Simple Trading Strategies

Module 4 - Advanced Day Trading Strategies

7 Reasons Day Traders Love the VWAP

Ichimoku Cloud Breakout Trading Strategy

6 Price Action Trading Strategies

First Hour Trading

How to Trade Early Morning Range Breakouts

Module 5 - How to Find Day Trades

8 Things to Consider when using Most Active Stock Lists

5 Simple Steps for How to Day Trade Penny Stocks

Module 6 - Trade Execution

How to Improve Your Trade Entry and Execution

How to Set Day Trading Profit Targets

Module 7 - Money Management

How to Trade with Margin

5 Reasons it's a Bad Idea to Hold Day Trades Overnight

How to Day Trade with Little Money and Keep Your Day Job

Module 8 - Tracking Trade Performance

10 Elements of a Winning Trading Plan

How to Measure Your Trading Performance

Module 9 - Pulling it all Together

How to Day Trade - Guide for Successful Trading

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