What are Donchian Channels?

Richard Donchian created Donchian Channels, which is a type of moving average indicator and a look alike of other support and resistance trading indicators like Bollinger Bands. However, Donchian Channels has a simple plotting of highest high and lowest low of the last “n” periods. The n periods is based on the trader’s choice, who can select the period according to their requirements ranging from a day, hour and minutes etc. Traders use Donchian Channels to understand the support and resistance levels.

Isn’t it a very simple calculation as compared to Fibonacci?

Let’s dig further into how Donchian Channels are used…..

Donchian Channels usage in Trading

Donchian Channels is a popular indicator for determining volatility in market prices.

Donchian channels are wider when there are heavy price fluctuations and narrow when prices are relatively flat. Generally, investors use 20-periods with the Donchian Channels as the default trading setting, but this value can be tweaked based on your trading style.

Now, let’s take a look at the below image to illustrate Donchian Channels. Since Donchian Channels are primarily used to determine volatility, we have accordingly selected the velocity Shares 3X Inverse Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return(NYSEARCA:DWTI). We have selected these securities due to the recent oil price fluctuations in the market. We have taken the default DC (20) setting in the chart and selected “day” for the time period.

In the below image, you can see that the wider price range is highlighted in blue while the narrow price range is in yellow.

Donchian Channel

Breakout indicator

Donchian channels are mainly used to identify the breakout of a stock or any traded entity enabling traders to take either long or short positions. Traders can take a long position, if the stock is trading higher than the Donchian channels “n” period and book their profits/short the stock if it is trading below the DC channels “n” period.

Let’s identify buy/short positions by taking an example of Apple stock and applying the Donchian channels strategy. We have taken a 1-hour chart covering Apple stock’s movement from April 20^th, 2016 to June 23^rd, 2016. As you see, we placed our Donchian channels indicator on the existing trend which is visible on the left side of the image.

Now, in the below image you can see that we have highlighted major breakouts. At the extreme left of the chart, on the lower side, we have identified a price breakout of a downward trend, signaling traders to open a short position or liquidate long positions. Hence, we open a short position at $106.67 on April 20^th. Accordingly, the stock had a sharp correction after a few days.

Donchian channels again indicated a buy back position during the mid-week of May 2016. We cover our short position at $94 on May 16^th, which resulted in over $12.67 profit per share.

Meanwhile, we have also identified the price breakout on the lower side of the channel, indicating the start of the new downtrend in the stock. We have highlighted this in blue in the below image.

Donchian Channels - Breakout Trades

Also, note that you need to confirm the uptrend or downtrend, with two consecutive touchpoints of the Donchian channel before pulling the trigger on a trade.

For instance, if we look at the same Apple chart below, we have highlighted where there are two consecutive price increases/decreases confirming our buy/sell trends with Donchian channels.

Donchian Channels - Multiple Touches

Trading with the Middle Band

The middle band is the average of the upper and lower bands. The middle band in Donchian channels could also be used as a breakout indicator. If the stock rises above the middle band of the Donchian channels, than you can open a long position. On the contrary, if the stock is trading below the middle band of the Donchian channel, then a trader can open a short position.

For the below chart, we have identified buy and sell positions for Apple, based on the Donchian channels middle band. We have highlighted in orange short/sell positions and
Buy/Long positions in blue.

Donchian Channels - Middle Bands

Three Simple Donchian Channel Trading Strategies

Now, let’s have a look at a few Donchian Channel trading strategies, which can be incorporated into your current trading methodologies.

Combining Donchian Channel trading strategies with other trading strategies might decrease the false entry/exit signals and give a clearer picture on trading opportunities.

Donchian Channel + MACD

Let’s combine the Donchian Channel trading strategies with the commonly used MACD. Here let’s try to match the moments when the price interacts with important Donchian Channel entry points in conjunction with MACD crosses.

When we discover this correlation between Donchian Channel and MACD, we would be able to filter the false entry signals and attain a better success rate for our trade opportunities.

Let’s have a look at the below 30-minute chart for Microsoft from May 13^th to June 23^rd, 2016.

Here we have identified a buy signal for Microsoft at $51 from the Donchian Channel as well as MACD on May 24^th.

We received a sell signal from MACD on the following day, and at this point, the stock had already risen to $52.40, giving traders a profit of over $1.4 per share. This is definitely a lucrative return in the span of two days.

Donchian Channel and MACD

Donchian Channel + Volume Oscillator

Let’s have a look at Randgold Resources Ltd. (ADR) (NASDAQ:GOLD) chart from May 9^th, 2016 to June 23^rd, 2016. The stock had a wide trading range in the two months given fluctuating gold prices. We have selected the default Donchian Channel (20) and Volume Oscillator for this period.

We have identified a buy opportunity at the upper band as per the Donchian Channel on May 31^st at $85.07. At the same time, the Volume Oscillator started rising and crossed above zero indicating strong volumes at these levels. We have highlighted the buy opportunity in violet for both indicators.

After initially trading flat, the stock delivered outstanding returns for a number of days before indicating a sell signal on June 10^th, and this trend was supported by the Volume Oscillator, which was heading below zero while prices were falling. We have identified the sell position in red for both the trading strategies in the below image.

By the time we receive the sell signal, the stock had already generated strong returns topping out over $94.28 on June 10^th. This would have resulted in over $9.21 per share returns in a span of one week.

Wow! Isn’t it attractive?

Donchian Channel and Volume Oscillator

Donchian Channel + Stochastic Oscillator+ Moving Average

Lastly, we are going to cover a trading strategy with the Stochastic Oscillator and Moving Average.

We have taken an Amazon chart from May 22^nd, 2016 to June 24^th, 2016. Let’s take a look on how we have applied these three indicators to establish a trading position.

First, we have a buy signal from the Donchian Channel on May 2^nd, 2016.

Next, we have a buy from the Stochastic Oscillator within three days on May 5^th.

With the stock price breaking out above the moving average on May 6^th, the bullish trend is confirmed. Accordingly, we open a long position slightly above $669.

Consequently, the stock rallied for over a week post May 9^th touching more than $720.

Donchian Channel and Stockastic and Moving Average

The stock prices started consolidating and we received our sell signal from the Donchian Channel on May 17^th. In addition, the stock was trading below the moving average indicator as well and the stochastic oscillator gave an overbought signal.

This trade generated us a profit of $31 per share in a span of just two weeks.

Conclusion

• Donchian Channels are a type of moving average indicator
• Donchian Channels indicate the support/ resistance levels of a security
• Donchian Channels is used primarily to determine volatility
• Donchian Channels upper band is used for identifying long/buy positions
• Donchian Channels lower band is used for identifying short/sell positions
• Donchian Channels can be used as a breakout indicators by traders
• Donchian Channels middle band is the average of upper and lower bands and could also be used as a breakout indicator
• Traders need to confirm a trend with two consecutive touches instead of only one, before taking a position
• Donchian Channels usage along with other indicators can reduce the number of false trading signals
• A few simple trading strategies using the Donchian Channels are:
  • Donchian Channel + MACD
  • Donchian Channel + Volume Oscillator
  • Donchian Channel + Stochastic Oscillator+ Moving Average

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The broad stock market made a ferocious recovery off of the BREXIT lows.  It was a broad based market rally that essentially retraced everything that was lost.  As a day trader, I look for high momentum stocks to trade on a daily basis.  This week presented challenges in terms of the number of trades available.  Fortunately, there were a couple high flying momo stock out there which presented great opportunities for profit.   One of them was Stone Energy, or ticker: SGY.

The stock was up over 2000% in a couple of days.  It rallied from around .50 all the way over 12.  I wanted to create a video on how you could have traded this stock on the breakout above its most recent rally highs from last week.  There were actually three different entries that you could have taken on this stocks intraday.

Many of these high momentum stocks are low float issues.  This means that they do not have a very large outstanding float of shares available to trade.  This lack of liquidity provides even more gas for stocks like this to go much higher than most people think they can.  The short covering in momo stocks can create vicious rallies especially when they have wide bid/ask spreads.

HELP US GROW by subscribing to our Youtube channel and be updated every time we post a new trade review.

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Overview of the KST Indicator

The Know Sure Thing (KST) indicator is a two-line indicator similar to the MACD developed by Martin Pring. The oscillator swings above and below zero, and accordingly gives trade signals to traders.

Divergence with price and KST also provides signals to traders.

If the Know Sure Thing crosses above the zero line then a buy signal is triggered. If the KST holds above the zero line for an extended period of time, an uptrend is confirmed.

Conversely, if the KST crosses below the zero line, then a sell signal is triggered. In addition, if the KST remains below the zero line, then the downtrend is confirmed. .

Now, let’s see how the Know Sure Thing indicator is calculated.

The Know Sure Thing indicator uses four different time frames to give the overall momentum instead of using only one time frame. Below are the four different time frame calculations:

Rate of Change Moving Average 1= 10-Period Simple Moving Average of 10-Period Rate-of-Change

Rate of Change Moving Average 2 = 10-Period Simple Moving Average of 15-Period Rate-of-Change

Rate of Change Moving Average 3 = 10-Period Simple Moving Average of 20-Period Rate-of-Change

Rate of Change Moving Average 4 = 15-Period Simple Moving Average of 30-Period Rate-of-Change

Based on the above formulas, the Know Sure Thing indicator line is calculated as per the below calculation

Know Sure Thing Indicator Line = (Rate of Change Moving Average 1 x 1) + (Rate of Change Moving Average 2 x 2) + (Rate of Change Moving Average 3 x 3) + (Rate of Change Moving Average 4 x 4)

Now the final Know Sure Thing Indicator Signal Line is calculated based on the 9-period Simple Moving Average of the Know Sure Thing Indicator.

(Know Sure Thing Indicator Signal Line = 9-period Simple Moving Average of Know Sure Thing Indicator)

Let’s have a look at an example on how the KST indicator is plotted.

The below image is the 30-minute chart of Alcoa from June 1^st to June 23^rd, 2016.

Now if you take a look of default KST indicator line, there are 9 periods that have been selected-

KST (10, 15, 20, 30, 10, 10, 10, 15, 9).

Traders can choose their periods based on their preference and trading style.

Know Sure Thing Indicator

In the above image, we have highlighted the bullish trends from KST with a blue line. We have identified the first cross over, where Alcoa has remained above zero. Accordingly, we enter Alcoa at $9.22 and the stock rallied.

The bullish trend holds until the price reaches $9.80 and the downtrend was confirmed as the KST began trending downwards and ultimately fell below zero.

Again, we get a buy signal on June 15^th, 2016, and accordingly KST has been rising above zero, confirming a bullish trend.

Divergence with the KST Indicator

Like other technical indicators, the KST also has divergences.

If the prices are falling while the KST indicator is rising, there is a bullish KST divergence. This indicates that the stock would recover if the KST indicator has confirmed a bullish trend. The below example would show you how the bullish KST divergence works.

KST Bullish Divergence

This is the 5-minute chart of Citigroup from June 13^th to June 15^th, 2016. The trend we have indicated in the blue line is the place where the KST indicator is rising post a crossover. However, the price was falling during the same period, showing divergence.

Similarly, if the stock price is rising while the KST indicator is falling there is a bearish KST divergence.

The stock could fall after the KST indicator has confirmed a bearish trend by falling below zero. The below example shows the bearish KST divergence in action.

Below is a 2-minute Alibaba chart from June 21^st-June 22^nd, 2016. We have highlighted the divergence in orange.

The Alibaba stock was surging while the KST indicator was falling. Ultimately, you can see that the stock breaks down, thus confirming the bearish trend.

KST Bearish Divergence

Trading Morning Breakouts with the KST

The KST indicator can be an effective tool for intraday traders.

In the below image, we have selected an intraday 2-minute chart of Alibaba from June 22^nd. We have identified several crossover signals from the KST indicator. For instance, the KST indicator is signaling a bullish trend in the morning session at around 10:15 am on June 22^nd, 2016.

A long entry could have been initiated at $78.50 and held until a crossover to the downside at $79.

This would have resulted in a 50 cent per share profit in less than two hours.

KST Morning Breakouts

Trading Double Bottoms with the KST

Now, let’s combine the Know Sure Thing indicator with a double bottom on the chart.

Let’s take a look at Ford’s 5-minute chart for June 22^nd and June 23^rd, 2016.

We have identified the first bottom in the morning session on June 22^nd at nearly 9:35 am. We have confirmed the second double bottom at around 1:25 pm. Consequently, after around half an hour, a bullish crossover develops in the KST confirming the bullish trend. Accordingly. we take a long position at $13.18. On June 23^rd, Ford made a gap up and crossed $13.40. We get a bearish crossover from KST and hence we sold our position at around $13.36 position.

In this example, you would have held a position overnight.  I personally do not hold positions; however, you will need to determine if this makes sense for your trading style.

KST Double Bottom

Day Trading Ranges with the KST

Now, let’s have a look at an Apple chart on a 1-minute interval. Next we evaluate how many trading opportunities we have using the KST indicator during the entire day. We have highlighted buy signals in orange and sell signals in orange.

For instance, in the below chart you could see that we received a buy signal from the KST indicator on June 23^rd at $95.50. Then we receive a sell signal from the KST indicator after over half an hour and accordingly we cover our position with a slight gain at $95.80.

These range bound trading signals work best during mid-day trading as the volatility dries up in the market.

Remember, if a stock is trending sharply, there is no indicator that will keep the stock from going in its desired direction.

KST Range Bound Trading

How to Avoid False Signals with the KST

Lastly, we are going to cover how to avoid false signals with the KST.

KST gives false signals like any other indicator and hence day traders should use another method for validating trade signals.

Combining the KST with the volume indicator is an effective way of entering into strong trends.

In the below image, we have selected a 2-minute chart of Apple and observed the KST indicator and volume changes on June 23^rd, 2016.

We received a buy signal from the KST indicator in the morning session at around 9:58 am. This trend was confirmed with the volume increase along with price expansion. Hence, we open a position at $95.50.

We later receive a sell signal at $95.77 from the KST in less than an hour. We exit the position and book the small gain.

We then enter the waiting game of letting additional trade signals develop.

Near the end of the June 23^rd trading day, Apple stock got a strong buy from the KST indicator as well as supported by huge increase in volume. Accordingly, we opened a long position at $95.45 and the stock made a clear rally higher and closed at the end of the day near $96.05. This resulted in a gain of $0.87 per share during the day.

KST False Signals

Conclusion

• The Know Sure Thing (KST) Indicator is a two-line indicator similar to the MACD.
• If the Know Sure Thing crosses above the zero line or makes a crossover of its signal line than it is a buy signal.
• If the KST crosses below the zero line or makes a crossover below the signal line, than it is a sell signal.
• The KST Indicator signal Line is calculated based on the 9-period Simple Moving Average of the KST Indicator.
• The default setting of the KST indicator is KST (10, 15, 20, 30, 10, 10, 10, 15, 9).
• If the prices are falling and the KST indicator is rising, than it is a bullish KST divergence.
• If the stock price is rising while the KST indicator is falling then it is a bearish KST divergence.
• The KST indicator can be an effective tool for intraday traders.
• The KST is prone to giving false signals like any other indicators while the combination with other indicators could decrease this risk to traders.
• The KST along with Volume indicator is one of the effective way of knowing and validating the trends.

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Coppock Curve

Edwin Sedge Coppock, an economist by profession developed the Coppock Curve in 1965, which is a momentum indicator to identify long-term buying opportunities in the S&P 500 and Dow Industrials.

Coppock used monthly data to find buying opportunities but did not use the indicator much for sell signals.

Now let’s take a look on how the Coppock Curve is calculated?

Coppock Curve = 10-period weighted moving average of the 14-period RoC + 11-period RoC

RoC stands for Rate-of-Change which is the momentum oscillator and oscillates above and below the zero line. The default setting for the Coppock is 11 and 14 periods.

The Coppock Curve is a smoothed momentum oscillator and can be used on any timeframe while investors can choose based on their desired trading/investing style and time horizon. Coppock Curve is similar to the most widely used indicator- MACD

The weekly charts produce many more signals than the monthly chart. Likewise, an intraday chart would form more signals than the weekly or monthly charts.

Apart from choosing the timeframes, parameters can also be adjusted based on the trader’s choice. Traders can choose whether they want to go for a faster or a slower Coppock Curve indicator. A shorter RoC setting would make the Coppock Curve more sensitive and faster, which would be best for Intraday traders. Meanwhile, a longer setting would make the Coppock Curve less sensitive and slower which could be a favorable indicator for swing traders.

How to identify signals using Coppock Curve

If the Coppock Curve crosses zero and enters into positive territory than a buy signal is generated.

If the Coppock Curve falls below zero and enters into negative territory than a sell signal is generated.

Below is the one day Amazon chart since 2014 (till July 6^th, 2016). The buy signals in the below chart are highlighted with the blue line while the red line indicates the sell signal.

As you can see, long-term traders would have a number of opportunities to enter the bullish trends for Amazon.

Coppock Curve

Coppock Curve could also be used to trade ETFs.

Below is the image of the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) 3-minute chart from July 1^st 2016. As you can see in the beginning of the chart, a buy signal was generated during the initial trading hour, as the Coppock Curve crossed above the zero line. Accordingly, we opened a long position at $107.61.

After about an hour or so, you can see that the Coppock Curve began heading towards zero. Simultaneously, you see that the PowerShares QQQ Trust ETF is consolidating. After the Coppock Curve fell below zero, immediately we exited the position at $108.2.

Coppock Curve Long Position

Now, since the founder of the curve used longer time frames to identify buying opportunities, let’s now shift our focus over to daily charts.

Below we have a chart of Goldman Sachs from the period of March 15^th, 2016 till June 30^th, 2016.

On the last day of March, the Coppock Curve is showing a positive trend, as the curve is above zero and generated a positive signal.

Accordingly, we initiate a long position on March 31^st at $156.02. As you see in the below chart, the Coppock Curve has maintained a positive trend for the initial week. On May 10^th 2016, the Coppock Curve fell below zero and gave a sell signal. We cover our long position at over $160.

However, if you combine the Coppock Curve along with the Hull MA, we could have booked our profits in a better range, as the indicator started giving a bearish trend well before the Coppock Curve’s sell signal. If we had followed the Hull MA indicator, then we could have booked profits near $163. However, this depends on the trader’s preference.

Coppock Curve Long Trade Signal

Divergence with the Coppock Curve

Another way of trading the Coppock Curve is identifying divergences with the indicator and the current price action.

A bullish divergence occurs when the market makes a higher high, but the Coppock curve is unable to exceed its previous high.

Below, you can see the 5-minute chart of Alcoa from May 2^nd to May 30^th, 2016. On the extreme left hand side of the chart, you can see that we have highlighted the new highs of the price, while the Coppock curve is making lower tops.

However, the Coppock curve immediately raised above zero while prices also increased, confirming the bullish divergence. However, bullish divergence is not a definite indicator of the trend, which is why traders should avoid taking positions solely based on divergences with the Coppock Curve.

Coppock Curve Divergence

Similarly, a bearish divergence occurs when prices decline from lower bottoms, but the indicator makes a higher bottom. From the above image you can see that the highlighted elliptical part for the same Alcoa chart has formed lower bottoms, but the Coppock curve made a higher bottom indicating a bearish divergence. You can see how the stock has fallen after that, as highlighted by a red trend line in the chart.

Again, we do not recommend making trading decisions solely based on divergences between the Coppock Curve and the price action.

Challenges of using the Coppock curve on intraday charts

The Coppock curve is generally better at catching market bottoms (i.e long term opportunities) as compared to short opportunities as the founder has mainly developed this indicator to identify buying opportunities.

But, the major drawback of the indicator is giving false signals and forcing investors to short or exit their position. The signal could again give a buy signal within a shorter timeframe.  This might create confusion for traders in quick succession.

Below is the three-minute chart for Microsoft on June 29^th, 2016, which is the perfect example of this scenario.

Here you can see that the Coppock curve has been heading downwards as highlighted with the blue trend line. For the same period, you see a range bound or in fact a slightly bullish trend from the Microsoft chart.

After some time, the Coppock curve fell below zero but you don’t see any downtrend in the price activity. After the false signal, the Coppock curve began rallying upwards through the zero line.  As you can see, Microsoft’s price rallied the remainder of the day.

False Coppock Curve Signals

Trading Coppock Curve with the Hull MA

Hence, to avoid these shortcomings in the indicator, let’s combine the Coppock Curve with the Hull MA.

Below is the three-minute chart for Alphabet Inc. (NASDAQ:GOOGL) from June 30^th 2016.

During the second half of the trade, you can see that the Coppock Curve generated a bullish signal by trending above zero and this trend is supported by the Hull MA. Accordingly, we take a position near $698. Both the Hull MA and Coppock Curve maintained their bullish trend till the close of the day at which point we exited the position at $704.34.

Another thing to note in the below chart is that you see a very flat direction from the Hull MA curve during the mid-session of the trading, while the Coppock Curve has been rising above zero and then subsequently falling below zero after some time. Intraday traders can avoid such false signals by taking support from the second indicator of their choice.

Coppock Curve and Hull MA

Trading Coppock Curve with KST

Now let’s combine the Coppock Curve with the Know Sure thing indicator (KST).

We take a look at the three-minute chart of BlackRock, Inc. (NYSE:BLK) from June 30^th, 2016.

In the below image, you can see the bullish crossover in the Know Sure Thing indicator. Consequently, the Coppock Curve generated a buy signal by passing above zero. We take a position at $336.41. After trading more than two hours, we get the first sell signal from the Know Sure Thing indicator. By then the Coppock Curve started trending downwards. Traders could exit their long position here at over $339.

Coppock Curve and KST

Trading Coppock Curve with the MACD

Let’s now combine the Coppock Curve along with the most commonly used trading indicator - MACD to identify any trading opportunities for intraday traders. We take the Goldman Sachs Group Inc. (NYSE:GS) three-minute chart for June 30^th, 2016 and add the Coppock Curve and MACD.

Now, if you see the below chart, we get the first buying opportunity from the MACD crossover at around 11 am.

This trend is also supported by strong volumes.

Consequently, the Coppock Curve crosses above zero strongly confirming the bullish trend.

Accordingly, we take a long position at $146.11. After trading more than two hours, we receive misleading signals from the MACD.

However, the Coppock Curve is still maintaining a strong bullish momentum and maintaining above zero. We book our profit near $148.04 after the Coppock curve falls below zero. By then, the MACD has given the bearish indicator. Intraday traders could exit their position when they see the first signal from the MACD. But this choice depends on their preferred indicators, trading style and investment horizon.

Coppock Curve and MACD

On the other hand, to avoid the confusion in the sell signals (as this is where the Coppock Curve lags), we can use the third indicator to confirm the sell trend based on the trader’s preference.

Conclusion

• The Coppock Curve was developed by Edwin Sedge Coppock in 1965 to identify long-term buying opportunities in the S&P 500 and Dow Industrials.
• A buy signal is generated when the Coppock Curve crosses zero and enters into positive territory, while a sell signal is generated when the Coppock Curve falls below zero and enters into negative territory.
• The Coppock Curve could also be traded based on divergences, but we think it’s not a good idea for intraday traders as this could lead to many false signals.
• The Copper Curve also comes with its own shortcomings and gives a relative weak sell or short position signals as compared to the buy or long positions signal.
• The Coppock Curve could be used by intraday traders to identify the bullish trends. The indicator could also be traded along with Hull MA, Know Sure Thing Indicator and MACD.

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Balance of Power

Don Worden created the balance of power (BOP) indicator in the 1950’s to understand market activity between buyers and sellers.

Below is a chart of Goldman Sachs Group Inc. (NYSE:GS) with the balance of power displayed below the price action.

balance of power

Now, let’s see how the BOP is calculated.

Balance of Power = (Close price – Open price) / (High price – Low price)

Signals generated from Balance of Power

BOP is plotted above and below a zero line.

Ok, now you must be thinking that this indicator is similar to an oscillator.

No, you are wrong! It is not an oscillator. It does not swing up and down with the price. It goes its own way, quite independent against the price movement.

So how do we read the indicator?

When BOP is above the zero line, it is showing systematic buying.

When it is below the line, it is indicating systematic selling.

The key challenge when using the BOP is the identification of when a stock or market is trending.

Below is the five-minute chart of Apple from July 1^st and July 5^th, 2016. On the chart, we have highlighted the buy and sell signals as provided by the BOP.

You can see that during the initial hours of trading there is huge buying activity on July 1^st, 2016. However, the BOP indicator is showing heavy selling activity from the mid-session of July 1^st, which leads to the sell off on July 5^th.

Balance of Power Trade Signals

The next day, Apple began falling the morning of July 6^th, while the BOP started showing a strong buy trend from the prior session.

Balance of Power Trade Signals_2

As you see in the above chart, Apple prices continued to fall in the last hour on July 5^th, while the weak momentum continued in the initial hour of trading the next day.

Despite the conflict in price and BOP, the buying momentum came in on July 6th.

So now the real task ahead for us is how do we identify these bullish or bearish trends from the balance of power indicator?

Also, how do we know when a new trend is real or if it’s just a fake out?

For this we need to understand the divergences between price and the BOP in order to identify a potential trend reversal or ongoing trend continuation.

We identify these divergences based on two types– regular and hidden.

Regular Divergence

Regular divergences indicate a signal trend reversal, while hidden divergences indicate ongoing trend continuation. Let’s understand these divergences in detail!

Regular Bullish Divergence

A regular bullish divergence is when the market forms lower lows, while the BOP forms higher lows.

For the below Microsoft chart on July 6^th, 2016, we see that the stock fell during the initial hour and traded near the daily lows for an hour after the open.

At the same time, you see that the BOP was also forming new lows. This is a bullish divergence signal indicating that the stock would rise.  Accordingly, Microsoft prices started rising at 10:50am through the rest of the day.

Regular Bullish Divergence

Regular Bearish Divergence

A regular bearish divergence is when the market forms higher highs, while the BOP forms lower highs.

For the same Microsoft chart from July 1^st, 2016, you can see that the markets opened with a gap and formed a high within the first hour of trading.

However, the balance of power made lower highs while the price was consolidating, indicating a bearish divergence. Consequently, Microsoft began falling the rest of the day.

Regular Bearish Divergence

Hidden Bullish Divergence

A hidden bullish divergence occurs when the market forms higher lows, while the BOP formed lower lows. You can see this pattern in the below five minute Alcoa chart from July 6^th, 2016.

The stock has been volatile in the initial hours of trading and formed a low. For the same time frame you see that the BOP formed a lower low, as highlighted in the blue elliptical. From around 10:50 am, you see that the stock began recovering and closed on a positive note at the end of the day.

Hidden Bullish Divergence

Hidden Bearish Divergence

A hidden bearish divergence is when the market forms lower highs, while the BOP forms higher highs. To see this trend, let’s take the five-minute chart of Ford Motors on July 5^th, 2016.

You see that prices are in a bearish trend for the day. This trend is confirmed by the BOP indicator which formed a higher high for the day. You can see in the chart that prices continued to fall for the rest of the day after the development of the bearish divergence.

Hidden Bearish Divergence

Weaknesses/Cons of the balance of power indicator

Like any other indicator, the BOP has its own shortcomings. In fact, more cons, in my view.

The BOP tracks the activity between buyers and sellers and hence brings out the hidden patterns of accumulation or distribution. However, even expert buyers and sellers could be wrong about future price trends.

Also, the BOP offers an inside glimpse of informed accumulation or distribution, but that does not mean you should open a long or short position on every signal provided.

Moreover, the BOP indicator is not very accurate when identifying a trend.

Lastly, even though the balance of power provides bullish and bearish divergence signals, the indicator could quickly reverse after entering a trade.

You can see this behavior of the indicator in the charts above, where you have misleading or contradictory signals from the BOP indicator when trying to confirm a trend.

Intraday traders could avoid these false signals from the BOP by combining this indicator with other preferred indicators.

Conclusion

• The balance of power indicator can be used to understand the buyers and sellers pattern as the prices rise or fall depending on the systematic buying (accumulation) or systematic selling (distribution) by the traders
• BOP is not similar to an oscillator even though it is plotted above and below a zero line. The indicator is not impacted by the price movement.
• BOP indicates that there has been a systematic buying in the stock when it is plotted above the zero line. On the contrary, BOP signals systematic selling when it is plotted below the zero line.
• Balance of power could indicate the potential trend reversal or confirm an on-going trend based on two types of divergences- Hidden and regular.
• However, balance of power could not be used as a primary indicator to identify trends. The indicator generates many misleading signals and hence we believe that traders need to use the BOP indicator as an add on
• Traders can watch the clustered tops or bottoms from the balance of power indicator to support their positions.
• Day traders need to understand the historical success rate of the balance of power indicator for that particular stock. If the BOP signals identify trends with a good success rate, then traders can pay closer attention to signals provided by the indicator.

The post Balance of Power – Normal and Hidden Divergences appeared first on - Tradingsim.

What is the Hull Moving Average?

In addition to the numerous moving averages in the technical analysis realm, the Hull MA is popular amongst some day traders, as the indicator attempts to give an accurate signal by eliminating lags and improving the smoothness of the line.

Alan Hull, developed this moving average indicator and hence it’s called the Hull MA.

Now, let’s dissect how the Hull moving average is calculated.

The Hull MA involves the weighted moving average (WMA) in its calculation.

First, calculate the WMA with period (n / 2) and multiply this by 2. Remember ‘n’ is the time period configurable based on the trader’s requirement. The default setting in Tradingsim is 9.

Second, calculate the WMA for period “n” and subtract if from the first step. Thirdly, calculate the weighted moving average with period sqrt (n) using the data from the second step. You can take a look at the below formula:

Hull MA= WMA (2*WMA (n/2) − WMA (n)), sqrt (n))

Below is the Hull MA plotted on a 5-minute chart of Apple from July 6^th, 2016. The Hull MA is highlighted in blue color.

Hull MA

How does the Hull MA identify trends?

Like any other moving average, if the HMA is rising along with price, it indicates an uptrend. Conversely, if the HMA is falling along with price, it indicates a downtrend.

Traders can take a long position if prices are rising and the HMA is trending upwards. However, traders can take a short position, if the prevailing trend is falling.

In fact the Hull MA works well as a reversal filter, and, therefore, its exit signals are more reliable at times than the entry.

Going back to the Apple chart from July 6^th, 2016, we have highlighted the upward trend in blue and the downward trend in red.

Hull MA and Trends

Apart from the basic indication of identifying the trend lines, the Hull moving average cross overs with two different time periods can also give the uptrend/downtrend signals.

To identify the uptrend, the fast HMA needs to cross the slower one to the upside.

For identifying downtrends, the fast HMA needs to cross the slower one to the downside.

For instance, I have taken the HMA (9) (the fast indicator) and HMA (18) (the slow indicator) for Affiliated Managers Group, Inc. (NYSE:AMG). The HMA (9) indicator is highlighted in blue while the HMA (18) indicator is highlighted in green.

In the below chart, you can see that I have highlighted entry signals, when the HMA (9) crosses above the HMA (18). On the other hand, you can the short/sell signals as well, where the HMA (9) crossed below the HMA (18).

How the Hull MA is a better indicator when compared to the simple and exponential moving averages?

The simple moving average (SMA), exponential moving averages (EMA) and weighted moving averages (WMA) are all lag when identifying the trend.  Conversely, the Hull MA is a step above these indicators as it is more dynamic in regards to price activity, while maintaining a smooth curve.

The below example, shows the difference between the Hull MA and the simple moving average.

This is a five minute Microsoft chart from July 5^th, 2016. I have selected the Hull MA which is reflected in the top left corner of the chart. The default setting is 9 periods for the Hull MA. The Hull MA is highlighted in blue line, while the simple moving average (with a default setting of 9 periods) is highlighted with the red line.

Hull MA and Reversals

As you can see in the above chart, the Hull MA is providing signals well ahead as compared to the simple moving average indicator. Traders can leverage this gap for greater profits as compared to the other moving average indicator.

Now, let’s compare the Hull MA with the exponential moving average and weighted moving averages (WMA). For the same five minute Microsoft chart from July 5^th, 2016, I have highlighted the exponential moving average indicator in pink and the weighted moving average in green.

In the below image you can see on how the Hull MA gives a firm sell signal as compared to the exponential moving average and weighted moving averages, on the left side of the image. You can see the lag between the Hull MA versus EMA and WMA. This indicates that traders can gain a better success rate with the Hull MA versus the EMA and WMA.

Hull MA and Simple Moving Average

Before we get too excited about the Hull MA, it has its own shortcomings and gives false entries in range bound markets. In sideways markets it is difficult to identify a slope, so tread lightly.

Trading the Hull MA along with the MACD

Now, let’s combine the Hull MA along with another popular indicator, the MACD.

I have again taken Apple’s 5-minute chart from July 6^th with an HMA (9). I have also added the MACD indicator with a default setting.

If you notice in the bottom left side, we received an uptrend signal from the HMA. Within a few minutes we have a MACD crossover, indicating a “Buy” signal. Accordingly, we take a position at $94.90.

Around the mid-session, we see that the HMA (9) is choppy with a downtrend. After some time, we get a sell crossover signal from the MACD, indicating that it is time to exit our position. Accordingly, we close our position at over $95.46.

Hull MA and MACD

Trading the Hull MA along with the Volume and Stochastic RSI

Below is a two-minute chart of Alibaba Group Holding Ltd (NYSE:BABA) from July 7^th, 2016.

I have highlighted the trading action up to the mid-day session, to help focus in on the trade signals.

In the early hours of the trading session, the stochastic RSI indicated a buy signal as you can see with the crossover. I have highlighted this in blue.

This indicator is supported by the ongoing buy volumes (highlighted in green) from the volumes indicator. After a few minutes, we can see the Hull MA trend changing upwards confirming our trend. Accordingly, we take a position near $77.83.

After trading over half an hour, we get a sell crossover from the stochastic RSI coupled with huge selling activity as indicated from the volumes (note the huge red bar). This downtrend is confirmed with the Hull MA, and accordingly we close our long position at $78.33.

We again get a buy signal from the stochastic RSI confirmed with the Hull MA and volumes. Hence we again take a long position at $78.03. After over half an hour, we get a sell signal from the stochastic RSI, while the Hull MA and volumes confirms this after a few minutes. We cover our long position at over $78.70.

Hull MA and Stochastic RSI

Conclusion

• The Hull MA is an indicator that tries to give an accurate signal by eliminating lags and improve the smoothness of price activity.
• The Hull MA can provide more accurate signals if combined with other technical indicators to validate price movement.

The post How to Trade with the Hull MA appeared first on - Tradingsim.

False Signals with Technical Indicators

We have discussed many technical indicators on the Tradingsim blog. We have gone through many trading signals and strategies for increasing profit potential. However, nothing in trading is 100% and no one knows for sure the future of price action.

After all, if everyone could predict the trajectory of stock prices, we would all be millionaires and billionaires. The truth is that every technical indicator fails and we all need to know how to handle this reality.

Lagging Indicators

Lagging Indicators give you a confirmation signal. This is why they are called trend confirming, or trend following indicators. The signal from this indicator comes after the event occurred on the chart. In this manner, lagging Indicators “lag” the price action. The most popular lagging Indicators are the SMA and the MACD. These indicators give false signals for sure, but not that often. Let me show you:

Lagging Technical Indicators

Although the simple moving average is a lagging indicator it can also lure you in many losing trades in a row. The image above is the 2-minute chart of Oracle from May 5, 2016. The blue line on the graph is a 30-period simple moving average. This number of periods should reduce the noise; however, look what happens on the chart.

While the price tests our 30-period SMA as a support, it suddenly switches below the indicator. This gives a short signal on the chart. Six periods later, the price switches above the SMA, giving the opposite signal.

Then immediately we see Oracle slip back below and then above the SMA. We see one last false bearish signal before the price breaks the SMA upwards and enters a real trend.

In this example, we saw five false signals in a row caused by a 30-period SMA. Each of these false signals could lead to significant losses when trading on margin.

Now, let me show you a few false MACD signals:

Lagging Technical Indicators 2

Next we have the 2-minute chart of Ford. At the bottom of the chart you will see the MACD indicator, which gives three false signals.

The image starts with a price decrease. At the same time, the MACD indicator creates a bearish crossover. We interpret this as a bearish signal on the chart. However, the price enters a range and then begins to increase.

Later, the price creates two bearish crossovers after the price started increasing. Each of these two signals could be taken as a bearish indication on the chart. However, the price doesn’t start a bearish move and continues higher.

In this example, we have three bearish signals, which could lure us into three false trades in Ford. Each of these trades could bring a number of small losses to our account.

You will often see this type of trading activity during the midday trading session.  If you get caught in these nonsense back and forth price action, you will surely bleed your account.

This is why it is so critical to either lower your profit targets for midday trading or work to identify the small number of volatile issues.

Leading Indicators

These are the indicators which give you the trend signal right in the beginning of the move. This is why they are called leading - because they lead the price action. Isn’t that great? You are able to hop in the trend right in its beginning and ride it all the way up!

However, the leading indicators give many false signals. Two of the most popular leading Indicators are the stochastic oscillator and the relative strength index. These two indicators have their own struggles with accuracy. Let me demonstrate to you:

Leading Technical Indicators

This is the 2-minute chart of Amazon from June 17, 2016. At the bottom of the chart, you see the relative strength index.

The chart begins with a price decrease. At the same time, the RSI is decreasing as well.

Suddenly, the RSI line enters the oversold area. The line then quickly breaks the oversold zone upwards. This gives a long signal on the chart. However, instead of increasing, the price has a small drop. Three periods after the oversold signal, the RSI line enters the oversold zone again. This creates another oversold signal on the chart. Then the indicator breaks the oversold zone upwards, which accounts for the price increase.

This is another strong bullish signal on the chart. Yet, the price stays flat. Meanwhile, the RSI indicator increases slowly. This supports the bullish outcome on the chart. However, the price then ends the range and drops rapidly. If traded, this RSI signal was definitely a loser.

Let’s now review a few false signals from the stochastic oscillator:

False Technical Signals

Above is the 2-minute chart of Oracle from May 9, 2016. At the bottom of the chart is the stochastic oscillator.

The chart starts with a decrease when the stochastic suddenly provides a strong oversold reading.

Furthermore, three times in a row the indicator breaks the oversold area upwards. These are all buying signals; however, the price stays flat. Shortly after the third signal, the price actually falls sharply lower.

This is completely counter to the signals we receive from the stochastic oscillator.

Later we receive strong overbought signals. As you can see, these signals did little to pull down the price of Oracle.

If you are unable to identify when to ignore price signals, you will constantly run into this challenge when trading the markets.

Again, I especially see the manipulation of stock prices during midday trading.  This is when the volume is at its lowest, and smaller traders are able to move stocks higher and lower with ease.

Why Technical Indicators Fail

You should never forget that at their core, technical indicators gather past price data to determine oversold/overbought readings.

The technical data on the chart and the price action in general are formed by the clash of buyers and sellers of the respective stock. If there are more buyers, the price is likely to increase. If there are more sellers, the price is likely to decrease.

But who knows for sure who will win the battle? Nobody! We can only guess. In this manner, technical indicators always imply what might be the possible outcome. They technically cannot be 100% accurate.

Why is Technical Analysis Difficult?

In addition to all the factors we discussed above, we also need to briefly touch on the topic of high frequency trading.  20+ years ago, technical analysis worked somewhat reliably.  Many retail traders would read up on their favorite chart pattern and a good portion of the time, things would play out as intended.

Stocks would easily hit their targets for formations such as head and shoulders pattern or ascending triangles.

Well, fast forward to today and we now have machines placing millions of buy and sell orders every minute.  This in essence makes reading the tape and price action more difficult than ever.

Have you ever noticed how right when you place your order to sell short on a breakdown, the stock will inevitably reverse and go higher?  Even though the formation on the chart was perfect?

This is the reality of the world within which we live now and until our government’s do something about it, it will be the norm for the foreseeable future.

Does Technical Analysis Really Work?

Have you ever experienced downswings in trading? You definitely have!

I would bet many times, you have been lured into losing trades by technical indicators, right? Then you change the indicators you use and your strategy, but it is still not working! Many people who appear to be in this situation simply quit trading and give up. I bet that many times you have asked yourself the question “Does technical analysis really work?” It is normal to have doubts when things are not going your way.

On the web, many so-called “experts” will say “technical analysis is nonsense!” without actually having a clue why. Some people think that if a chart pattern fails once, then it will always fail! Thus, the next time you ask yourself this question simply remember this: technical analysis does work!

However, you never know in which case your technical indicator will give you a valid signal. So, how exactly can a technical indicator for day trading bring you profits? The answer to this question is very simple. You can profit from technical analysis by adding to your strategy the basic concept of risk management.

Risk Management

You should always know the success rate of your trading strategy. At the same time, you can always control the amount you risk with a stop loss order. This means, you have full control over your trading strategy in the long term. You maybe don’t understand this. Let me explain further.

No matter what your strategy or what technical indicator you use, you and only you determine how much you are going to lose per trade.

In this manner, you have to know your edge and figure out what strategy you can use for managing your losses that will result in a positive net return.

Still not believing me?

I have been using the same trading approach with the Nikkei for the last 3 months.  I would have some up days and some down days.  But my consistency was lacking due to the different market conditions and rules on the Nikkei compared to the US market.

Well, one day I decided that enough was enough.  I started to tighten my stops and quit for the day if I was up or down a certain amount.  This discipline regarding how much I risk per trade and per day, has resulted in a win rate on the day of 80%.

Now this does not mean I am winning 80% of my trades, but just that I am able to walk away with cash in my pocket 4 out of 5 trading days.

So again, I ask you, does technical analysis still work?

Conclusion

1. Technical Indicators will fail and fail often.
2. Leading Indicators fail more than lagging indicators.
3. Technical indicators fail because nothing in trading is 100%.
4. Technical analysis and technical indicators do work once you take responsibility for your trading decisions. Remember, you do not have to take every trade.
5. However, to succeed with your trading strategy you need to learn how to properly manage the risk on each trade.

The post Why Do Technical Indicators Fail? appeared first on - Tradingsim.

In this article, we will cover the dead cat bounce pattern, which is often a trap for traders looking to get long.

I will do a deep dive into how to trade the pattern and the deadly consequences of timing your entry incorrectly.

What is a Dead Cat Bounce?

The dead cat bounce is a chart phenomenon which occurs during bearish moves. Simply put, the dead cat bounce pattern is a long-awaited correction of a brutal bearish trend.

Imagine a stock is in a strong downtrend. Naturally, there are a large number of short sellers in the stock. However, some traders might decide that the stock has reached its lowest possible point.

These traders will look to close their short trades and some will even look to get long.

This of course leads to more buying pressure and the stock finds its footing. After this short bounce, the stock will once again proceed in the direction of the primary trend, leading to a swift sell off.

The below image depicts the dead cat bounce of Netflix.

Dead Cat Bounce

Above you are looking at the 3-minute chart of Netflix from June 20, 2016. The image displays a strong bearish trend, which started in the $95.80 range.

In the blue ellipse, you see that the price increases shortly and then returns back to its bearish trajectory. The increase in the blue area is the dead cat bounce zone.

As you see, “the Cat dies” first; then it hits the bottom and bounces higher. If you take a closer look, you will see that there are few more dead cat bounces in the further price decrease.

How to Spot a Dead Cat Bounce

Spotting the dead cat bounce pattern is very tricky. Therefore, I will now share with you a solid approach for how to spot a dead cat bounce on the chart.

The confirmation of the pattern does not present itself on the price bounce; this is only the first signal there is a potential dead cat bounce.

The signal confirmation of a dead cat bounce occurs when the price breaks the low of the previous bottom. Let’s explain this on a “fisher price” level:

1. Identify a stock in a strong bearish trend.
2. Spot a price increase, which breaks the slope of the downtrend. This bounce is minor in terms of retracing the down move from the most recent high.
3. Wait for the price to break the low set before step 2.

The below chart illustrates the three points above:

Dead Cat Bounce - Down Trend Lines

This is the same 3-minute chart of Netflix from the previous example. The blue lines on the chart represent the bearish downtrend that was eventually broken by the dead cat bounce.

Each black horizontal line represents the bottom on the chart prior to the dead cat bounce.

1. First we identify the existence of a strong bearish trend. This can be determined with the first bearish impulse on the chart, which leads to 1% drop in the value of Netflix.
2. Then we see that the price breaks in a bullish fashion.
3. The price reverses and breaks its last bottom.

If you manage to identify these three events on your chart, then you are most likely looking at a dead cat bounce.

How to Trade the Dead Cat Bounce

Now we need to discuss the steps for opening a dead cat bounce trade. It is crucial to mention that timing is very important when you trade this pattern. If you don’t stick to the trading rules of the dead cat bounce chart pattern, you might end up losing your shirt.

Opening a Dead Cat Bounce Trade

After you identify the dead cat bounce pattern, you should short the stock when the price action breaks the last bottom created.

The timing of your trade entry is crucial. If you don’t open your trade on time, you might miss a significant part of the price decrease. After all, the further decrease of the dead cat bounce formation is an impulsive move.

Dead Cat Bounce Stop Loss

The dead cat pattern could prove “deadly” if you don’t use a stop loss order. What if you are wrong and this is not a dead cat bounce pattern? What if you are actually short selling a stock, which has put in a significant bottom and ready to make a strong move higher.

When these reversal moves occur, they are sharp and fast.  This pain of course can intensify itself if you are trading on margin.

Trading a Dead Cat Bounce without a Stop Loss

In the image above, we see symptoms of a real-life dead cat bounce:

1. We identify a relatively strong bearish trend.
2. The price breaks the last impulse upwards.
3. The stock then closes a candle below the last bottom confirming the dead cat bounce pattern.

That is a sure deal right? So, why place a stop loss order?

Dead Cat Bounce - Trade Gone Wrong

When reviewing the above chart, you might say to yourself, “No big deal! It will definitely start dropping again!”

You think so?

Dead Cat Bounce - No Way Out

Now what? A simple continuation trade will lead to enormous financial and emotional pain. This sharp counter move higher all took place in less than an hour!

For this reason, you will always want to place a protective stop loss order when trading the dead cat bounce.

The correct location for your dead cat bounce stop loss is above the peak created during the bounce.

Since this might confuse you, I will show you where your stop loss should be in the previous trade demonstrations:

Dead Cat Bounce - Proper Stop Loss

As you can see, taking the quick loss is critical to staying in the game for the long-term.

Taking Profits - Dead Cat Bounce

When you discover a dead cat bounce pattern, you should aim for a minimum price move equal to the previous trend impulse. In other words, if the price starts dropping suddenly and you confirm a dead cat bounce pattern afterwards, then you should expect the price to drop at least with the same size. Have a look at the below example:

Dead Cat Bounce Targets

Yahoo starts with a strong bearish trend. We classify this first selloff as “Impulse 1” because it is simply the first impulse of a bearish trend. Suddenly, a dead cat bounce pattern appears on the chart.

The stock price attempts to pick up, but then it breaks the level of its last bottom, which leads to impulse 2.

Since the target for a dead cat bounce is the size of the prior range, we simply add this to the low that is broken.  As you can see in the above chart, we have highlighted where the pattern completed and you should book your profits.

Dead Cat Bounce Trading Example

Now that we discussed all the important rules regarding the dead cat bounce, I will now show you a real trading example with this chart pattern. We will apply the rules we discussed above in order to walk you through the trade.

Below are the steps for how to place the trade:

1. Identify a relatively strong bearish trend
2. Mark the bearish impulse with a bearish trend line
3. Price breaks the trend line and increases
4. Mark the level of the last bottom
5. Price breaks the last bottom, confirming the pattern
6. Short the stock
7. Place a stop loss order above the top
8. Stay in the market until the price creates a bearish move equal to the initial impulse

Let’s now see how these 8 trading rules look on a dead cat bounce chart:

Dead Cat Bounce - Real-Life Example

This is the 3-minute chart of Nokia from April 29, 2016. The image illustrates the steps of the dead cat bounce trading.

1. The image starts with a relatively strong bearish trend, which we have marked with the red arrow on the chart.
2. Then we put the blue bearish trend line on the trend’s impulse.
3. The price increases through the blue trend. We have marked the bullish price move with the green arrow on the image.
4. Since the blue trend is broken, we need to indicate the level of the last price bottom. This is shown with the black horizontal line on the chart.
5. In the red circle, Nokia’s price breaks the lowest point of the initial price impulse.
6. This is where we sell Nokia.
7. Then we place the stop loss order above the top created in the beginning of the new price decrease. We have marked the stop location with a red horizontal line.

Now, we need to see if the price is going to complete the last step (8) by reaching the minimum target of the pattern.

Dead Cat Bounce - Walking Through the Trade

Again, we mark the two bearish impulses with the blue rectangles on the chart.

After the price confirms the dead cat bounce pattern, the stock continues to trend in a bearish direction. When we apply the size of the first impulse over the second impulse which we are trading, we are able to identify a minimum target.

As you see, the price completes the minimum target less than 25 minutes after the pattern is confirmed. At the same time, our trade is constantly protected by our stop loss order.

It is important to emphasize that timing is crucial when trading a dead cat bounce. If we don’t enter the market in the right moment, there is a big chance that we miss a significant part of the further bearish move. Therefore, make sure you short the stock exactly in the moment when you see a candle closing below the last low of the stock.

Conclusion

1. The dead cat bounce is a pattern, which occurs during bearish price moves.
2. The pattern represents a price pick up in the time of the bearish trend. However, after the increase the price drops further, breaking its lower bottom.
3. The psychology behind the pattern is that the initial short sellers consider that the stock has hit a bottom. Therefore, some close their short trades. And others even buy the stock attempting to catch a reversal. This gives a better short entry for sellers, who open new short trades. This causes the stock to drop, sometimes even stronger.
4. To identify a dead cat bounce, you need to implement the following steps:

• Identify a stock which is in a strong bearish trend.
• Spot a price increase, which breaks the tendency of the previous trend impulse.
• Wait the price to break the last bottom created.

5. When you trade a dead cat bounce pattern you need to:

• Open a trade when the price breaks its previous low
• Put a stop loss above the created top
• Stay in the trade until the newly created impulse is equal to the initial impulse in terms of size.

6. Step-by-step Guide for Trading dead cat bounce stocks:

• Identifying a relatively strong bearish trend
• Marking the bearish impulse with a bearish trend line
• Price breaks the trend line and increases
• Marking the level of the last bottom
• Price breaks the last bottom, confirming the pattern.
• Shorting the stock
• Placing a stop loss order above the top created in the time of the breakout
• Staying in the market until the price creates a bearish move equal to the initial impulse.

The post How to Trade the Dead Cat Bounce appeared first on - Tradingsim.

We have discussed many trend trading strategies on the Tradingsim blog. In this article, we will examine the 5 steps for trading counter trends, which consists of impulsive and corrective price moves.

What is a Counter Trend Move

A counter trend move is a price correction opposite to the primary trend.  This move is generally smaller in nature, but may take more time to complete this consolidation pattern.

Below is the image of a counter trend price move:

Counter Trend Moves

Above you see the 2-minute chart of Twitter from July 11, 2016. The blue line indicates the support line of the uptrend.  Also illustrated are the three counter trend price moves, which are marked with the black arrows on the chart.

If you are able to identify this price action, you will be able to locate counter trend moves on any price chart.

5 Steps for Trading Counter Trend Moves

So, is it possible to trade counter trend moves successfully? Totally!

However, there are a set of rules you need to follow in order to achieve this goal.

Step 1 – The Opposite Candle Rule to Identify the Start of the Counter Trend Move

When a stock begins an impulse move, you first want to draw a trend line.  This support or resistance line will allow you to distinguish between impulses and counter trend moves.

While a stock is trending, you should constantly watch for opposite candles in order to identify when an impulse move is likely coming to an end.

In order to proceed to Step 2, you would first need to identify a candle which is opposite in nature to the primary trend.

This is the hardest step of the 5 step approach for trading counter trend moves.  You have to somehow know that the primary trend is ready to take a breather.

In all my years of trading, one thing is constant, any surprises in price action are generally in the direction of the primary trend.

Step 2 – The Confirmation

The confirmation of the pattern can occur in two ways. The first one is to get another opposite candle on the chart. The second method is the confirmation candle is part of a reversal pattern.

Another Candle Opposite to the Primary Trend

Notice that this rule will fail at times, since two opposite candles is not a strong confirmation signal. Yet, the success rate of this approach will be more than 50%, which is enough to implement a profitable counter trend strategy.

Reversal Candle Pattern

Other confirmation of the counter trend could be a candle, which completes a reversal candle pattern. This could be a single hanging man, or a shooting star on the chart. However, the candle could also be the second candle of a double or triple bottom candle pattern.

Example 1: Let’s say you get an opposite candle and you complete Step 1. Then you get another candle, which engulfs the opposite candle from Step 1. If this happens, you will have an engulfing reversal pattern on the chart.

Example 2: After the opposite candle on the chart, you get a candle, which is fully engulfed by the previous candle. In this case you will have a harami reversal pattern.

In both cases, you will have a confirmation of the impulse reversal and hence confirmation that a counter trend move is beginning.

Counter Trend - Reversal Candlestick

Above you see an impulse move, followed by a counter trend. At the end of the impulse, the price action creates an opposite candle.

Also, this candle engulfs the previous candle, which creates an engulfing reversal pattern. This gives us a bearish signal on the chart, which alerts us that a counter trend might emerge. As you see, the price decreases to the bullish support line.

Step 3 – Trade the Contrary Trend

After you confirm an emerging counter trend price move, you should look to open a position.

If the general trend is bullish, then the expected counter trend move will be bearish. In this manner, you should open a short position.

If the general trend is bearish, then the expected counter trend price move is bullish. This means that you should open a long position.

Step 4 – Counter Trend Stop Loss

I recommend you always set a stop loss when you trade a counter trend price move. The proper location of your stop order is as follows:

Bullish Trend – Above the top between the trend impulse and the expected counter trend move

Bearish Trend – Below the bottom between the trend impulse and the expected counter trend move

Step 5 – How to Book Profits Trading the Counter Trend

Now that we discussed how to confirm potential counter trend moves, when to enter the market and where to place the stop, we need to talk about how long you should hold your trade.

The rule here is simple. You should hold your trade until the price action during the correction touches the general trend line. You should close your trade once this occurs.

Counter Trend Trading Strategy

Now that we have covered all five steps for trading counter trend price moves, let’s now go through a real-life trading example.

Counter Trend Trading Example

Above is the 3-minute chart of Visa from July 6, 2016. The image illustrates a bullish trend and two counter trend trades.

The price action begins with a bullish impulsive move.

On the way up, the price action suddenly creates a bearish candle, which confirms the first step of our trading strategy.

This one candle is part of a dark cloud cover, which is a reversal candle pattern.

Thus, we also confirm the second step of our strategy and the potential beginning of a counter trend move, therefore we open a short position in Visa.

We place a stop loss right above the top created by the bearish candle. This is shown with the red horizontal lines on the image.

The price then begins decreasing. Fifteen minutes after we short Visa, the price drops to its bullish trend line and we close the position.

The price then bounces upwards and starts a new impulsive move higher; however, ten periods later the price action closes a bearish candle, fulfilling the requirements of step 1.

The bearish candle on the chart engulfs its predecessor, which means that we have a bearish engulfing pattern. Therefore, we receive confirmation for the emergence of a counter trend price move. This is another sell signal on the chart and we short Visa.

The stop loss order should be placed above the top of the engulfing pattern.

Visa begins to decrease again after the beginning of the counter trend move. Eight periods later, the price action touches the bullish trend line on the chart, creating an exit signal. We should use this indication to close our trade and to collect the paper profit on the trade.

Counter trend Trading with Fibonacci Retracements

Another method for trading counter trends is to enlist the help of Fibonacci retracements.

You can do this by tracking the standard Fibonacci levels as well as Fibonacci extensions.

Let’s say we have a bullish trend and the price is an impulse move.

In order to trade a potential counter trend move, you would need to know the end of the impulse and the beginning of the corrective move.

To do this, you place the Fibonacci retracement on the previous price counter trend. Then you will use the Fibonacci extensions to identify the potential end for the impulsive price move.

You then apply the rules from the 5 steps discussed above.

Fibonacci retracements can also be useful to confirm when to exit your counter trend trade. You do this by placing the indicator on the previous impulse move. Then you use the standard Fibonacci levels to determine potential support areas for the price action, which you can use to exit your trade.

Let me now show you how to trade counter trend price moves with Fibonacci retracement levels:

Counter Trend Trading - Fibonacci Levels

This is the 3-minute chart of Google, a.k.a. Alphabet Incorporated from July 13, 2016. The image shows how Fibonacci levels help identify the beginning of a counter trend price move.

The prevailing trend of the above price action is bearish. The light blue bearish line on the chart indicates the bearish trend.

First you have a counter trend move, followed by a bearish impulse. The end of the impulse is the beginning of a new counter trend price move, which we attempt to trade.

The colorful areas on the chart are the separate Fibonacci levels. Since we would like to trade the second counter trend, we would need to suggest a potential end for the impulse price move. In this manner, we stretch the Fibonacci levels on the first counter trend on the chart and we use the Fibonacci extension levels to determine a potential end of the bearish impulse.

See that an opposite candle is formed right after the price action touches the 161.8% Fibonacci extension level.

At the same time, this opposite candle is fully engulfed by the previous candle. In this manner, we confirm the presence of a harami reversal pattern on the chart. These are the two steps we need to confirm the pattern and to open a long trade with Google.

However, the bullish signal is even stronger since the price action found support at the 161.8% Fibonacci level. Thus, we buy Google placing a stop loss right below the 161.8% level.

Notice that the price returns to the 161.8% Fibonacci level, where it finds support again. The price then bounces upwards.

Fifteen minutes after we buy Google, the price increases and interacts with the blue bearish trend. This creates an exit signal for our trade and we close the trade collecting a profit.

Remember, Fibonacci levels are suggestive and price will not always conform nicely to the horizontal lines on your chart.  If you become too fixated on these levels, you will begin to ignore the obvious price action right before your eyes, which is the key to unlocking when to enter or exit a position.

When to Trade Counter Trend Moves

Counter trend moves are not easy to trade as you are going in the opposite direction of the primary trend. This will result in a number of false trade signals and overall frustration if you are not careful.

To avoid this level of pain, there are a few key points I would like to highlight.

First, avoid extremely volatile stocks.  Reason being, if you are wrong on when the counter trend starts, you do not run the risk of having your stop loss tripped.

Second, avoid trading counter trend moves during the first hour of trading.  This is when the retail traders are actively looking to close winning or losing positions and the price action often ignores all technical analysis rules.

In this sort of environment, the price action will not conform to the predictable price action required for counter trend moves.

Lastly, focus on trading during the midday.  This is when trading volume is light and technical analysis tends to work far greater then times of high volatility.

Full disclosure, I only trade the first hour of trading, so if you figure this one out, please let me know the secret sauce.

Conclusion

1. When price is trending it creates impulses and counter trends.
2. Counter trend moves are also known as corrections.
3. The counter trends are relatively hard to be trade, because they make relatively small price moves for the time they take.
4. Although hard to trade, counter trends also have great trading potential.
5. To trade a counter trend price move you can simply follow these 5 steps:

• Find an opposite candle during an impulse move.
• Confirm a reversal candlestick pattern, or another opposite candle.
• Open a trade against the primary trend.
• Place a stop loss beyond the spike created between the impulse and the emerging correction.
• Hold the trade until the price action reaches its trend line.

6. The Fibonacci retracement is a useful tool for counter trend trading.

The post 5 Steps for How to Successfully Counter Trend Trade appeared first on - Tradingsim.

The least square moving average (LSMA) calculates the least squares regression line for the preceding time periods, thus leading to forward projections from the current period.

Accordingly, the indicator has the ability to identify what could happen if the regression line continued.

Least Squares Moving Average Calculation

The indicator is based on sum of least squares method to find a straight line that best fits data for the selected period. The end point of the line is plotted and the process is repeated on each succeeding period.

The formula for calculating the line of best fit is

b = ( nΣxy - ΣxΣy ) / ( nΣx² - (Σx)² )

a = ( Σy - bΣx ) / n

Where n is the number of data points selected; y is the price; x is the date; a is the constant (the value when x equals zero); b is the slope of the line

Uses of Least Squares Moving Average

The least squares moving average is used mainly as a crossover signal to identify bullish or bearish trends.

In the below chart, we have selected the one-minute chart of iPath from July 12^th, 2016 and have applied the least squares moving average indicator (blue line).

We have applied the default settings of 25 periods - LSMA (25, 0).

Least Squares Moving Average

The least squares moving average generates signals, when the price deviates from the indicator.

Now, like any other moving average, we need to assess when the least squares moving average is indicating a change in trend.

If the signal changes to an uptrend along with recovery in prices, a buy signal is generated. If the signal changes to a downtrend along with a fall in price, a sell signal is generated.

For instance, you can see these buy/sell signals from the same one-minute chart for iPath highlighted in the blue and red circles respectively.

Least Squares Moving Average - 2

Let’s combine the least squares moving average with the most commonly used simple moving average and exponential moving averages on the same iPath chart.

However, this time we selected a three-minute chart to assess the differences between these moving averages.

To further align the moving averages, I have adjusted the least squares moving average to 9. The exponential moving average is highlighted in orange while the simple moving average is highlighted in pink.

LSMA - Exponential and Simple Moving Averages

As you can see in the above chart, the simple moving average and exponential moving average are closer to the price as compared to the least squares moving average.

On the other hand, the least squares moving average is signaling the trends slightly ahead of both indicators. You can see this in the above chart where the least squares moving average is showing the uptrend signal (first rectangle highlighted in blue), before the simple moving average and exponential moving average (second rectangle also highlighted in orange).

The least squares moving average is also used with different time periods. Similar to other moving averages, the crossover of a faster moving average indicator with a slower one can indicate a buy or sell signal.

Below, is the three-minute chart for the QQQs, where we have chosen the two LSMA lines – 9 and 18. The LSMA (9, 0) is highlighted in blue while the LSMA (18, 0) is shown in orange. You can see that we have shown the sell or buy signals near the crossovers based on the trends.

LSMA - Exponential and Simple Moving Averages 2

Why the Least Square Moving Average is complicated for Retail Traders

Now, you must be thinking that the indicator is better than the most commonly used indicators like the SMA and EMA based on the above write-up.

Relax! LSMA has its own weaknessed, and gives false signals like any other indicators. In fact, the indicator could give more false signals than its counterparts, especially when trying to identify a shift in trend.

You can see this in the below three minute QQQ chart for July 8^th and 11^th, 2016. We have highlighted two false signals in red. Here, you see that the least squares moving average indicator is showing a sell trend while the prices were in an uptrend.

Least Square Moving Average False Signals

Also, be cautious of the least squares moving average signals in case prices widely deviate from the indicator.

We can see this wide deviation in the July 12^th three-minute chart of the QQQ. The least squares moving average is indicating a downtrend while prices were rising.

Wide Gaps and Least Squares Moving Average

More confusion when combining the indicator with other momentum indicators

Let’s try to see if we can avoid the false signals from the least square moving average by combining it with other indicators.

We have the three-minute chart of ADR from July 6^th and July 7^th, 2016. We have applied two least squares moving averages. We have selected the LSMA (15, 0) and LSMA (25, 0).

The LSMA (25, 0) is highlighted in blue while the LSMA (15, 0) is highlighted in blue.

We have applied the commodity channel index (CCI) as the second indicator.

During the initial half an hour of trading on July 6^th, you can see the contradictory signals given by the CCI indicator and two LSMA indicators.

The CCI is showing a downtrend, while both the LSMA (15, 0) and LSMA (25, 0) are trending up. However, you can see that the stock was range bound during this period.

At around 10:03 am, you can see the crossover, where LSMA (15, 0) crossed below the LSMA (25, 0) generating a sell signal. On the other hand, you see that there is a slight recovery towards an uptrend from the commodity channel index (CCI).

The stock was trading near $124 at this point of time and crossed $126 later on.

After this, you see a false buy signal from the moving averages cross over. LSMA (15, 0) crossed below the LSMA (25, 0) generating a buy signal.

By then, the short-term uptrend momentum ended and the CCI again indicated a downtrend supported by declining prices. Within a span of 15 minutes, we noticed the LSMA (15, 0) crossing below the LSMA (25, 0) generating a sell signal and prices negan to fall.

So, here you can see the LSMA is giving a slightly delayed signal and not supporting any signal generated from our selected primary indicators.

Momentum day traders could face a tough decision, because by the time the indicator generates a signal, the trend in the stock has already ended or coming to an end.

LSMA and CCI

We could see the least square moving average indicator behavior for the rest of the day as well, which eventually generated false signals or provided trade signals when the trend has ended.

Next there is a slight range bound session in the stock from 12:00 p.m. for about half an hour, where you could see certain false or lagging signals from the least squares moving average indicators.

The CCI failed to generate a definite signal during this period, as we all know that all indicators have their own shortcomings.

However, the CCI again started rising after 12:10 p.m. supported by the slight recovery in prices. But we did not receive a buy signal from the least squares moving average crossover until 20 minutes later.

However, at around 1:30 p.m. we got a sell crossover from the least squares moving average indicators supported by the CCI. Accordingly, we could go short at over $126.20 and cover the position at over $124.50.

But the real challenge here is to identify whether the least squares moving average indicator is giving a false signal or not.

You must be thinking that the LSMA would be beneficial if we combine the indicator with the very popular RSI and MACD indicators.

We have a three-minute chart of BHP from July 6^th, 2016. We are using the MACD (12, 26, close, 9) and RSI (14) (default indicators).

As you can see in the below chart, we received a definite buy signal from the MACD with a strong crossover signal. By then, we received a signal from the RSI, which was also confirming the buy trend (as highlighted in blue near the indicator). BHP eventually rose post the crossover from the MACD and closed on a positive note during the day.

However, we don’t see any definite signal from our least squares moving average indicator which showed a flat trend during that time period. We have highlighted the flat trend from LSMA in orange as you can see in the below chart.

LSMA - RSI - MACD

Now, let’s compare the least square moving average indicator with its counterpart, exponential moving average and see if they are still giving better signals then the LSMA.

For the same three-minute chart of BHP Billiton Limited (BHP) from July 6^th, 2016, we have added the exponential moving average and highlighted the indicator in pink.

You can note the difference clearly between the exponential moving average and least squares moving average indicator. The EMA has shown an uptrend on par with the support indicators, MACD and RSI, as well as ahead of its counterpart, LSMA.

LSMA - RSI - MACD 2

Conclusion

The least square moving averages is also known as the end point moving average indicator and is calculated based on the least squares regression line for the preceding time periods.

Like any other moving average, the least square moving average also generates a bullish or bearish trends based on crossovers of itself with two different periods. However, we believe that retail traders should be careful with the least squares moving average signals if the price deviation from the indicator is quite high.

The least square moving average gives a lot of misleading signals to traders and hence we think trader’s need to be cautious while using this indicator. Even if the indicator is combined with the any other trading indicator, we could not confirm a definite trend from the LSMA.

We recommend day traders avoid using the indicator.

The post How to Day Trade with the Least Square Moving Average appeared first on - Tradingsim.

In today’s article, we will cover ascending tops, which is one of the most reliable chart patterns you can leverage when trading bullish price movements.

The reason ascending tops are such a predictable pattern is due to the amount of time and price action required to complete the formation – thus increasing their reliability.

In this article, we will also do a deep dive into a simple trading strategy that consists of three tips for trading the ascending tops pattern.

What are Ascending Tops?

The answer to this question is hidden in the name of the pattern.

Simply, ascending tops consists of price action, where each top is higher than the one before.

Below is an image illustrating the ascending tops pattern:

Ascending Tops

There are 4 tops present in the above price chart of Oracle.  As you see, after each slight retracement, the stock is able to exceed and close higher than the previous high.

Another key point to note is that the pullback low after each new high does not breach the low of the prior high’s swing low.

That was a bit complicated, I admit.  Trust me though, things will begin to clear up as you read further.

Ascending tops are a strong bullish signal on a price chart.

It’s just a matter of probability to be honest with you.  If you see a stock consistently making new highs, then odds are in your favor that the stock will continue to perform in a bullish manner.

Believe it or not, sometimes in trading, things are as they appear!

3 Tips for How to Trade Ascending Tops (Successfully)

Now that you are familiar with the structure of ascending tops, I will now discuss a simple, yet effective way for trading ascending tops.

The key word here is “successfully” trade, as there are a ton of methodologies floating around on the web.

Tip #1 – How to Enter the Trade

First you need to confirm that an ascending top pattern is actually present on the chart - no sense in you opening a trade based on poor analysis out the gate.

The first thing you will need are a minimum of two ascending tops and two higher lows.

Once the second high is reached, there is a price correction.

It is your job to determine the best buying opportunity on this retracement.

The simplest way to do this is not to pull out your handy Gann support numbers or some complicated least squares figure.  How about simply identifying a support level based on a trend line or a candlestick reversal pattern.

Seems too simple uh?

Well, a picture is worth a thousand words, so let’s review the below chart of Oracle.

Ascending Tops Support

You are now looking at an ascending top chart pattern example.

After the second top is put in, Oracle pulls back into a gravestone doji reversal pattern. Then Oracle begins to print a bullish candle directly after the doji.  What you cannot see in this image, since it is and end of day chart, is the price action after the doji.

Assuming you would have been watching the price action like a hawk, your first shot at entering a long trade would have been once the high of the doji was breached.

Once the high of the doji was exceeded, Oracle never looked back and continued its bullish run.

Tip #2 - How to Place your Stop Loss Orders

While we are a fan of the high reliability of ascending tops, it like any other trading formation can take your house and the shirt off your back if not traded properly.

Therefore, you will want to always and let me repeat, always have a stop loss when trading this pattern.

The proper location of the stop loss is below the low created after the second top.

Please see below for a working example:

Ascending Tops Stop Loss

Makes sense right?

Tip #3 – When to Book Profits

Tip #3 is what separates the losers from the winners.  It doesn’t matter if you are some super smart chart guru walking around with your trend lines and an ego.

At the end of the day, if you are unable to take money out of the market and place it into your pockets, you are a wannabe.

I know that sounds harsh, but none of us are trading for Facebook likes.  We are in the game of trading to make money!

So, how long do we stay in a winning trade before we call it quits?

There is one simple rule you can use, which is stay in the trade anticipating a price move at least the same size as the prior impulse move.

Clear as mud?

This is how the price target looks when applied to the previous trade example from above:

Ascending Tops Price Target

The blue rectangles on the chart measure the size of the trend impulse between Top 1 and Top 2.

As you can see, we apply the size of the previous impulse to the low of our entry candle.

Once the price approaches the top of the rectangular box, we exit our position.

You of course can hold on, but coming from a person that has placed thousands of trades, I have always made the most money when I’m not being greedy.

Pulling it Altogether – Real-Life Ascending Top Trading Examples

Now that we are familiar with the rules for trading ascending tops, let’s look at the application of these principles.

Again, we will use tips 1 through 3 as our guidelines for placing these trades.

Trade Example #1:

Ascending Tops Real-Life Trading Example

Above is a 5-minute chart of Oracle displaying a clear ascending tops pattern.

We identify the first top shortly after the market opens.

After this top is in place, there is a slight retracement and Oracle then shoots higher to top #2.

Again, Oracle puts in a lame excuse for a pullback, which really looks like a consolidation zone. This consolidation zone is resting on the support line, which we have marked with the blue horizontal line.

While resting on support, Oracle printed a harami reversal candlestick.

The next candle after the harami is bullish and we use this as an opportunity to open our long position.

Never forgetting the market can be a cruel animal, we place our stop loss a few cents below the support (red line).

The price quickly resumes the bullish trend and Oracle continues its climb higher.

Before we become too excited and call out sick from work, let’s identify our price target for the move.

We measure the size of the previous impulse which is located between top 1 and top 2. The size of this move is indicated by the blue rectangles on the chart. We then apply the size of the rectangles from the low of our entry bar.

As you can see, using this methodology for price targets, we were able to nail the next swing high within a few pennies.

Trade Example #2

Ascending Tops Real-Life Trading Example 2

This time we have the 10-minute chart of Hewlett-Packard. The image shows another ascending top chart pattern.

Again, we first start by identifying the first two tops on the chart.

After the second top, the price has a slight pullback.

The blue horizontal line represents the pullback from this resistance area.

Suddenly, the price action creates a bullish engulfing candlestick pattern. Therefore, we use this candle as a trigger to go long in order to catch the impulsive move higher.

We then place a stop loss right below the blue support area on the chart.

Please note, if you are unwilling or do not desire to place a stop loss when day trading, please do yourself a favor and do not get involved.  You will inevitably blow up your account.

I know that was a bit negative, but trust me when I say I just saved you a ton of financial and mental pain.

Ok. Time to shift back to more positive thoughts!

Lastly, we need to derive our price target for the formation. To do this, we measure the size of the previous impulse between top 1 and top 2.

We then apply this target from the support area, which is all displayed in the blue rectangles.

Ten periods after we buy Hewlett-Packard, the price increases through the upper level of our blue rectangle and provides us with our exit signal.

Therefore, we close the long HP trade, completing the minimum target of the ascending top pattern.

Key Takeaways from the Two Trade Examples

In both examples, the trading conditions were the same.

We were able to use price action rules in order to determine the long entry point on the chart. In the first example, the pattern was a harami, and in the second example, it was an engulfing candlestick.

At the end of the day it doesn’t matter the type of reversal pattern – only that one prints on the chart.

Conclusion

1. The ascending tops pattern is a chart pattern, where each top is higher than its predecessor.
2. The ascending tops pattern has a strong bullish characteristic. Since the price creates higher highs, the chance that the price creates another high is likely.
3. You should confirm the ascending tops pattern by using the following steps:

• Find two tops, where the second top is the higher than the prior one and has a higher low.
• Wait for the price to decrease after creating the second top.
• The decrease should have a corrective nature and not display a sharp move downwards.

4. After you confirm the pattern, you can trade the ascending tops pattern based on the following price action:

• Find a support area after the pullback from the second top.
• Identify a reversal candle pattern at the time price is testing a support area.
• Buy the stock when a bullish candle breaks above and confirms the candle pattern.
• Put a stop loss below the support area of the bottom after the most recent high.
• Stay in the trade until the price completes a move equal to the previous impulse.
• In some cases, you will have the chance to extend your gains by holding on the position (remember to be cautious with this approach).

The post 3 Tips for How to Day Trade Ascending Tops appeared first on - Tradingsim.

The rounding bottom pattern is a technical setup for the patient trader.  This is because the pattern can take quite a bit of time to develop before any significant price moves begin.
In this article, we will walk you through a step-by-step guide for how to trade the pattern and the key things to look for as you manage your position.

What is a Rounding Bottom Formation?

The rounding bottom is a reversal chart pattern, which develops after a price decline.

As a stock is trending lower, the rate of the decline will begin to slow down.  This is followed by a range pattern, which ultimately shifts into a slow gradual increase.  This increase ultimately leads to a bullish move.

The pattern will appear symmetrical in nature when comparing the bearish and bullish sides of the formation.

Rounding Bottom

As you see, the price gradually switches from bearish to bullish. Note that this chart pattern could be found on any time chart.  The pattern is truly relative to the time frame you are trading.

However, the one thing that each timeframe has in common is that the formation takes a lot of time to complete.

There are other chart patterns which are first cousins to the rounding bottom, such as the saucer bottom and half-pipe bottom pattern.

Volume Indicator on Rounding Bottom Pattern

Volume is a key indicator for identifying and validating the rounding bottom pattern.

The pattern will start with higher volume as the stock experiences its final plunge lower.  This high volume event is then followed up with lower volume as the stock consolidates in a range. Lastly, the volume will begin to pick up again as the stock begins its bullish move higher.

Let’s now review the same chart, but now we will include the volume indicator:

Rounding Bottoms and Volume Indicator

The volume indicator is displayed at the bottom of the chart. As you can see in the formation, high volume in the beginning, flat in the middle and volume increase on the way out.

A simple method to visually validate the pattern is to draw a line connecting the tops of the volume indicator for each price period.

You will notice that volume will also mirror the same rounding pattern. Pretty cool uh?

Profit Target for the Rounding Bottom Formation

The potential of the rounding bottom chart pattern is bullish. After the trend switches from bearish to bullish, the expectation is for price to continue expanding higher.

But the question we all want answered is, how much higher?  The simple answer is the move higher will be at least the size of the rounding bottom formation.

Rounding Bottom - Neck Line

To measure the potential of your rounding bottom, you should first identify the neck line of the pattern.  To do this you should draw a line across the top of the bearish trend and the bullish trend before the breakout occurs.

Then take the distance between the neck line and the lowest point of the pattern. This distance is the size of the rounding bottom pattern.

When the price action breaks the neck line, you should open a long position.

The blue rectangles on the image illustrate the size and the target of the pattern. The green checkmark indicates the moment when the price action completes the minimum potential of the pattern.

The good thing about the rounding bottom pattern is that while it takes a long time to develop, it has a very high success rate.

It’s true that good things come to those who wait!

Step by Step Guide for How to Trade the Rounding Bottom Pattern

Now that you are familiar with the rounding bottom pattern, let’s do a deep dive on how to trade the pattern. In our walkthrough we will use the daily charts, but the same concepts will apply to any timeframe.

1)    Confirming the Rounded Bottom Figure

To confirm the pattern, you need to find a price decrease, which slowly switches to a range followed by a price increase. The strongest confirmation comes when the volume indicator shows high volumes on the decline, flat volumes on the range and increasing volumes on the reversal.

2)    Rounded Bottom Neck Line

After you identify the pattern, you need to draw the neck line.  To do this, you need to draw a horizontal line across the top of the bearish and bullish sides of the rounding bottom pattern.

3)    Rounded Bottom Breakout

The rounded bottom breakout happens when the price penetrates the neck line in a bullish direction.  In simpler terms, the stock should show strength as it crosses through the neckline. This strength should display itself in the form of price expansion and increased volume.

4)    Round Bottom Trade Entry

A trader should look to get long once the stock is able to break through the neckline.

5)    Round Bottom Stop Loss

If you read the Tradingsim blog, you know I do not believe in trading without a stop loss.

Although the rounding bottom pattern is relatively reliable there are no exceptions to the rule of protecting your capital. After all, nothing is 100% in the stock market.

So, now that I have scared you to death, let’s talk about where to place your stop loss order.  The answer to this question is in the midpoint of the pattern.

A more conservative approach would be below the low of the breakout candle.  This way if the stock fails, you can quickly exit the position and look for better trading opportunities.

6)    Rounding Bottom Target

The minimum target for the pattern is equal to the size of the pattern when added to the breakout.  Once the price hits your target, you should look to exit the position.

Rounding Bottom Trading Example

Let’s now apply the 6 steps listed in a real-life trading example.

Rounding Bottom Trading Example

Above you see the daily chart of Coca-Cola from July through Oct, 2014. The image illustrates a rounding bottom trading example, where we go long on the breakout above $41.

First, the stock started with a gap down, which lead to a price decrease down to $39 dollars with high volume.  The stock then traded sideways with a slight drop in volume. Coca-Cola then had a nice surge higher, which was the first indication that a bottom might be in place.

The price then retraced slightly lower, before creeping higher.  This slow increase created the bullish side of the trend.

We then drew a neck line across the high of the pattern.  Finally, and I say finally, because it took forever to form the formation – we enter a long position on a break of the trend line.

Now that we are in the trade, we need to determine the target of our position. Therefore, we measure and apply the distance between the neck line and the lowest point of the pattern.

We apply the size upwards starting from the moment of the neck line breakout.

The price starts increasing after we go long with Coca-Cola. Initially, the bullish trend is not that impulsive, but this is where you have to be confident in your analysis to hold onto the trade.

This patience would have paid off once the trend started shooting higher.

We then exited the trade once the price touched the high of the blue rectangle.

A Variation of the Rounding Bottom Pattern

One of the variations of the rounded bottom chart pattern is the cup and handle trading formation.

The cup and handle pattern has one slight deviation from the rounding bottom is that there is a slight decrease prior to the breakout.

Cup and Handle

The cup and handle pattern is essentially traded the same way as the rounding bottom. However, there are a few differences, which we will now discuss one-by-one:

• There is a slight bearish pullback before the price breaks out.
• The size of the pattern is the distance between the top of the handle and the bottom of the figure.
• The pattern target is the size of the pattern applied from the moment of the breakout.
• Your stop loss should be placed right below the lowest point of the handle.

Let’s now approach a real-trading example of the cup and handle pattern:

Real Life Cup and Handle Example

This is the daily chart of General Motors from April through May, 2016. The image illustrates a cup and handle pattern, which we traded to the upside.

The graph starts with a price decline during relatively high trading volumes. After this price decrease, the volume dried up and the stock went flat.

Then there is a slight up move higher, which looks like the stock is ready to breakout.

Suddenly, the price has a bearish correction, which creates a handle on the chart.

Once the stock breaks higher, we have confirmation that there was a handle and the stock shot up higher.

We place a stop loss order right below the lowest point of the handle as shown on the image.

The blue rectangles on the chart shows how we calculate the target for the trade.

We hold onto the trade until this target is reached.

Conclusion

• The rounded bottom pattern represents gradual price shift from bearish to bullish.
• The strongest confirmation of the pattern comes with the volume indicator. A valid rounding bottom starts with higher volumes during the decline, flat volumes during the range, and increasing volumes at the reversal.
• The rounding bottom pattern has strong bullish potential. The expected price move equals the size of the pattern.
• Although the pattern has a high success rate, it is relatively rare.
• To trade the rounded bottom, you should follow these steps:
• a) Identify a potential Rounded Bottom pattern.
• b) Draw the Neck Line.
• c) Confirm a Rounded Bottom breakout.
• d) Enter a long trade on the breakout.
• e) Put a stop loss in the middle of the pattern.
• f) Stay in the trade for a price move equal to the size of the rounding bottom pattern.
• A variation of the rounding bottom is the cup and handle chart pattern.
• The cup with handle breakout appears when the price breaks the slight bearish pullback at the neckline.
• The size of the pattern is the distance between the top of the handle and the bottom of the figure.
• The pattern target is the size of the pattern applied from the moment of the breakout.
• Your stop loss should be placed right below the lowest point of the handle.

The post Step-by-Step Guide to Trade the Rounding Bottom Pattern appeared first on - Tradingsim.

One of the most powerful trading setups is the short squeeze.  A short squeeze occurs when you have a crowded trade on the short side.  Here's the key with these types of setups.  You want to be able to throw gasoline on the fire.  What do I mean by this?  Well, having a high short interest ratio is one thing but coupling that with a low float stock can create explosive moves very quickly.  Our job is to first identify good candidates for this type of trade and then create a game plan and execute it.

You may ask why a high short interest can lead to huge squeezes.  After all, stocks with high short interest are most likely terrible companies on their way to bankruptcy, right?  Possibly, but we don't care.  The short squeeze is a supply/demand dynamic which exploits a whole bunch of traders who believe there is free money shorting this stock.  When you have well defined areas of strong resistance in a chart and those levels get broken, you end up having a whole bunch of traders in a losing position.  This triggers stop loss orders to cover the stock.  High short interest = lots of shares which need to be covered (or bought on the open market).  Well, imagine having a huge number of buyers with not enough shares available to buy.  Buyers end up having to pay sellers whatever they want.   Therefore, the large number of buyers is the fire and the lack of supply or liquidity is the gasoline being thrown into the fire.

My research involves identifying stocks which heavy short interest (typically above 25%) and looking for stocks that have low float (~below 100 million shares).  Here is a good site with this information:  http://www.highshortinterest.com/.  Next, I will evaluate the chart pattern and look for heavy areas of resistance and good chart setups.  As you will see in the video below, identifying these levels is 80% of the job.  Then, intraday trade execution is the other 20%.

The video you see above was created using our own Tradingsim Market Replay tool.  Feel free to take our free 7 day trial and improve your day trading skills and money management approach.  We have over 2 years worth of data you can practice against.  We are essentially a trading DVR!

The post Day Trading a Short Squeeze | Tradingsim Video Lessons appeared first on - Tradingsim.

52 Week Range Definition

The 52-week range is a technical indicator, which pinpoints the low and high of a stock during a 52-week period.

In other words, you identify the high and low over the past year.

52-Week Range

This is a 52-week range example. The vertical lines on the chart measure a 1-year period from July, 2014 until July, 2015.

The high point of the range is from September, 2014 and it is located at $53.45 per share. The low point of the range is from February, 2015 at $39.57.

3 Techniques with the 52-Week Range Indicator

At this point, you might be thinking, “How can I use the 52-week range when trading?”

This is a great question. Before we dig into the three techniques, I first want to impart on you the importance of the 52-week range.

First and foremost, large institutions track the 52-week range low and high.  This means that you will see either buying or selling pressure around this key area as it translates to a company’s ability to turn a profit on a year-over-year basis.

Secondly, retail traders will place their stops at these levels when going counter to the primary trend.  For example, if a stock has been crushed and then has a technical rally, many retail traders will buy into that event and then place their stop slightly below the yearly low.

Therefore, you will see a ton of orders hovering around these yearly levels.

Well, enough preaching, let’s now dig into the three techniques.

#1 - Defining Trade Targets with the 52-Week Range

So how does the 52-week range indicator provide a potential profit target?

Let me show you the math behind this statement.

Average Weekly Size = (A – B)/52

A: 52-Week High

B: 52-Week Low

In other words, we simply identify the size of the 52-week range by subtracting the 52-week low from the 52-high. Then we divide this value by 52 in order to find the average weekly move of the price.

Let’s say the 52-week high of a stock is located at $452.00 per share and the 52-week low is $374.00 per share.

Average Weekly Size = (452 – 374)/52

= 78/52 = 1.5

This means that the average weekly move of the stock is equal to $1.50 per share.

Before all of your Ivy League statisticians start jumping down my throat, this is simply a method for gauging future price movement based on historical action.

In reality, a more accurate method for gauging price action is to use the daily values versus weekly.

It acts the same way with defining the average weekly price move, but this time, you divide the size of the range by 252.

I bet you are wondering why we divide by 252 instead of 365.

It’s a pretty simple answer, the markets are not open 7 days a week.

Furthermore, every country has official holidays, when their respective markets are closed. Hence we have approximately between 240 and 252 trading days a year depending on the country you trade.

Let’s further explore the math behind the average daily size.

Average Daily Size = (452 – 374)/252

= 78/252 = 0.3095238095238095, which equals approximately $0.31.

Therefore, the average daily size of our stock equals $0.31 per share.

Now that we know the daily size of our stock, we can take this amount as an average expected during the day. If you manage to catch a trend, you may stay in your trade for a move of at least $0.31 per share, or until the market closes.

Let’s now measure the size of a few daily ranges and compare their size from the result of the average daily size formula:

52-Week Daily Ranges

This is the daily chart of Kraft Foods. The image shows a 52-week range between February, 2014 and February, 2015. The high of the range is $67.70 per share and the low of the range is $50.51.

Let’s now calculate the average weekly size with the help of our formula:

Average Weekly Size = (A-B)/252

A (high) = 67.70

B (low) = 50.51

Now let’s apply these parameters to the formula:

Average Weekly Size = (67.70 – 50.51)/52

Average Weekly Size = $0.33

#2 - 52-Week Range Breakout

Once you have identified the 52-week range, you can begin hunting for breakouts at this level.

The easiest way to spot a breakout in the 52-week range is by monitoring the size of the range (A-B) as discussed above.

A simple method to trade is to look for stocks that are approaching huge psychological levels. For example, levels such as $10, $25, $50 or $100.

These levels are critical as some asset managers have minimum price requirements before they can add to their portfolio.  This is often the case once a stock clears $10.

My personal favorite is $100.  This is a classic number which when broken will often lead to a nice rally.

The key thing about trading breakouts on any timeframe is to keep your hand close on the trigger in the event things fall apart.

Remember, just as quickly as these stocks shoot higher, they can reverse on you in a heartbeat.

52-Week Bearish Breakdown

Above is the daily chart of CBS on the NYSE from August 18, 2014 through August 18, 2015. This period is also our 52-week range indicator.

The price action begins to hover around the low for approximately two weeks.  Then the break happens and CBS slams lower in an impulsive pattern.

Notice that when trading 52-Week Range breakouts, the size of the range changes in every next period after the breakout. In our case, the low point of the range changes with every next period, which is lower than its ancestor.

When trying to determine the target for the breakout, you can assume the size of the range.  If the range is extremely large, you can then target half of the range or a third for when to exit your position.

#3 - 52-Week Range Middle Line Breakout

This technique includes the usage of a middle line in the 52-Week Range. When you define the size of the range, you should simply add a line, which goes right through the middle. You can use the following formula to get the middle line:

(High + Low)/2

Next you need to scan for breakouts or stocks that find support at this middle line.

• If the middle line is broken in a bullish direction, then we expect the price to increase to the upper level of the range.
• If the middle line is broken in a bearish direction, then we expect the price to decrease to the lower level of the range.
• If the price retraces to the middle line and bounces from this level, you can trade in the direction of the bounce until the price reaches the low/high of the range.

52-Week Range Middle Line

Above you see the daily chart of the Toronto Dominion Bank from February, 2014 through July, 2015. The image illustrates three 52-week time frames, which share the same high and low point (black circles). Each of the three 52-week ranges is marked with different colors – red, yellow and black. The 52-week high is located at $53.45 per share. The 52-week low stays at $39.57. To calculate the middle line you simply subtract the low from the high and divide by 2 (High – Low)/2.

(53.45 + 39.57)/2 = 46.51

For this reason, the middle line (blue) is located at $46.51 per share.

The first middle line signal comes when the price creates a real breakout through the blue level.

The breakout is bearish. Therefore, the signal is in a bearish direction.

As you see the price enters a sharp downtrend after breaking the middle line of the 52-Week Range indicator. Two months after the breakout through the middle line, the price reaches the lower level of the yearly range.

TD’s price then returns to the middle line at $46.51.

As you see, the blue level is tested as a resistance.

However, the price action does not succeed in breaking the middle line. As you see, the TD security gets sustained by the middle line and the price bounces in a bearish direction. This creates a signal on the chart that the price might return to the low level of the range again.

The price then enters a bearish trend. It takes the TD security a couple of months to reach the lower level of the 52-week range on the chart. When the price reaches the $39.57 level, then the target of the trade is completed.

Conclusion

• The 52-week range is 52-week high and 52-week low of the price.
• You measure the size of the 52-week range by subtracting the High from the Low: (High – Low).
• There are three techniques to use when trading with the 52-Week Range Indicator:
• Defining Trade Targets:
  1. Average Weekly Size: (High – Low) / 52
  2. Average Daily Size: (High – Low) / 252 {and not 365}
• Identifying 52-Week Range Breakouts:
  1. Look for nice round numbers to trade
  2. Remember to keep your stops tight
• Middle Line Breakouts:
  1. Build a line in the middle of the range. (High + Low) / 2
  2. When the price breaks the middle line, you expect the price to continue in the direction of the breakout until the range level is reached
  3. When the price bounces from the middle line, you expect a return to the range level

The post 3 Techniques for Trading the 52-Week Range appeared first on - Tradingsim.

In this article we will cover three basic trading strategies you can use with above the market order types.  You maybe thinking that order types is too negative, but you will be surprised to know that in some trading examples, you are required for example to sell a stock short on a bid up and not at market.

If this sounds a bit confusing, don't worry as we will detail out the trading strategies you can use with above the market orders and not worry too much about special maintenance requirements from your broker.

Above the Market Pricing Definition

Above the market is an order type that executes above the current market price. This order can be to buy or sell a security at a higher price.

For example, imagine Google is trading at $650.00 per share.

Well, you believe that if Google breaks the psychological level of $700, the stock is off to the races.

Unfortunately, you are going on a vacation with your family and are unable to watch the market.

Therefore, you place an order to automatically buy 100 shares of GOOG once the stock is able to penetrate $710.00 per share.

At this point, one of two things will occur:

• You go on your vacation, Google reaches $710 and the order is automatically executed to buy 100 shares.
• You go on your vacation. However, Google never climbs to $710 and the order is never executed.

Now that we have covered the basics, let’s dig a little further.

Types of Orders Above the Market

Buy Stop Order

This is the order to buy the stock at a price, which is above the current price levels as discussed in the Google trade example.

If you place a buy stop market order, then your broker will automatically execute an order to buy at market once the price is reached.

You will not know at what price your order will fill, but given the right level of liquidity, it should be close to your buy stop order price.

As a trader, you will want to place a buy stop order to open a long position on a breakout, or to close a short position that is going against you.

Always remember, that you can play the market on both sides of the trade.

Sell Limit Order

This is the second above the market order type. When placing a sell limit order type, you believe that the market will run to a specific level and then fail.

Therefore, you could be looking to either sell a long position to close your trade, or open a short position in anticipation for a price decrease.

Again, remember you can always play both sides of the market.

Let’s say you believe that Google will face very strong resistance at $700.00 and will enter a bearish trend.

So, you place a sell limit order at $700 dollars to sell short 100 shares, which your broker will fill at this price.

Above the Market Pricing Examples

Now that we have discussed the two above market order types, let’s walk through a trading example of both.

Buy Stop Order Example

Buy Stop Order Example

Above is a 5-minute chart of MasterCard from April 27, 2016. The green lines on the image indicate price action resembling a double bottom chart pattern.

As you probably know, in case the price breaks the top between the two bottoms, we would expect MasterCard to increase. Unfortunately, we are unable to follow the market at this time for whatever reason (watching kids, meeting for work, etc.).

Therefore, we place a buy stop order above the neck line of the pattern. Let’s see what happens next.

Buy Stop Order Example with Double Bottom Pattern

Well, MasterCard breaks the desired level and the buy stop order is executed. The price then goes on a run and exceeds our target profit level.

Sell Limit Order Trading Example

Now let’s approach the other above the market order type – sell limit order. The image below will show you how this type of market execution works.

Sell Limit Order - Above the Market

This is the 5-minute chart of Proctor and Gamble from May 25 – 27, 2016. As you can see, there is strong resistance in the $81.75 area.

After watching Proctor and Gamble trade all day, we see that the stock is building support in the $81.20 range (blue horizontal line).

It is clear as day that if PG breaks $81.40, which is the high of this small range, the stock will likely rally up to resistance at $81.75.

Therefore, we place a sell limit order at $81.75 with the expectation PG will once again fail at this level.

One point to note, is that if a stock has already tested a horizontal resistance level three times, I will not short the fourth.

This is because if a stock continuously tests a level, at some point it is likely to breakthrough and the last thing you want is to be short on a stock that’s having an impulsive move.

Well, let me get back to the trade example.

After placing our sell limit order, PG does not reach our target of $81.75 to open a short position.  So, we go about our business for the remainder of the day and the next trading day, where do you think PG ran to in the morning?

That’s right, $81.75.  So, our sell limit order is executed at $81.75 and to our delight, the stock immediately began to roll over.

Sell Limit Order after Morning Gap

The key thing I would like to highlight, is that the sell limit order allowed us to (1) sell PG at a higher price and (2) execute a market order from the previous day without us having to do anything.

This type of order is great if you are a day trader watching a large number of stocks in real-time, or if you are a swing trader that does not have time or quite frankly want to stare at a screen all day.

Chart Patterns and Above Market Order Types

Above market orders are just the execution method for placing your trades.  Well, I would like to cover the chart examples that fit nicely with these order types, that way you can marry the technicals with the order execution methods.

#1 - Symmetrical Triangles and Buy Stop Orders

The buy stop order is very useful when trading chart patterns with bullish potential.

Let’s look at a symmetrical triangle pattern and how we can use a buy stop order to enter the trade.

Buy Stop Order and Symmetrical Triangle

Above is a 2-minute chart of General Electric from June 17, 2016. The image illustrates a symmetrical triangle (blue).

The last time the price decreases to the lower level of the triangle we can place a buy stop order above the previous top of the upper level. This way, we will automatically enter a long trade in case of a breakout, which is confirmation that the triangle has terminated and a new uptrend is in play.

As you can see, the breakout occurs and we are filled in $30.57 range. The price then enters a bullish trend and runs until the end of the trading session.

#2 - Early Morning Ranges and Buy Stop Orders

The buy stop order is also very efficient for trading early morning range breakouts.

If the price breaks the top of the range, there is a very high likelihood that the price will continue higher in the same direction.  How much the stock will continue higher we do not know, but the point is the stock will continue higher.

Let’s walk through a trading example, so you can better understand how to use a buy stop order during early trading.

Buy Stop and Early Range Breakouts

This is the 2-minute chart of Deutsche Bank from June 21, 2016. The image illustrates a big bullish gap on the opening bell followed by a bearish fill. This gives us a great opportunity for a buy stop order above the high of the gap.

The price finally rallies higher and our buy stop order is executed above the high of the day.

As you see, the price increases afterwards until the end of the trading session. If you are day trading, you should close the trade a few minutes before the end of the trading day.

#3 - Sell Limits and Bearish Trends

Imagine the price of a stock is trending lower. After a number of corrective moves higher, you can draw a downtrend line across these resistance levels.

Therefore, you can place a sell limit order at this downtrend line in anticipation for the price to rollover and continue its downward move.

Sell Limit Orders and Bearish Down Trends

This is the 3-minute chart of Twenty-First Century Fox from June 20, 2016. The image illustrates a bearish trend (blue), which the price bounces off of 5 times in a row!

We do not trade the first two impulses, because they are needed to confirm the down trend.

The confirmation comes when the price touches the trend line for a third time. We place our sell limit order at the trend line, which is executed when FOX touches the line.

You will then want to book profits after a set percentage retracement, or a reading from another technical indicator.

You essentially can repeat this process over and over again, until the price action tells you otherwise.

Conclusion

• To trade above the market means to set an order, which will be executed if the price reaches the desired level on the chart.
• There are two types of above the market orders:
• Buy Stop: Buys the stock, when a specific price above the current price is reached.
• Sell Limit: Sells the stock, when a specific price above the current price is reached.
• The above the market order execution type is a very convenient way to trade the markets, when you are not hawking every tick (remember the vacation example).
• Remember to align the chart patterns and trading strategies with the above the market order types. After a while, it will become second nature when placing your orders.

The post 3 Above the Market Trading Strategies that Work appeared first on - Tradingsim.

If you have been trading longer than a few months, you have probably asked yourself this question. I myself have labored over this topic for hours upon hours, yet on the surface it’s such a simple thing.

Well by the end of this article, I will give you my perspective on this question and what has worked well for me when day trading breakouts.

Why Even Ask the Question?

Before we dig into the what I do, let’s first explore why we even ponder the question.  As day traders, your entire job is to make money.  While we all have had the stretches where we were just making our brokers rich putting on loser after loser.

The real point of active trading is to turn a profit.  Just to be clear, not just a profit, but the most amount of profit per trade.

How do we turn a profit?

What action do we have to take as traders to turn a profit?  If you couldn’t guess it, we have to close our position.

That means selling long trades and buying back our shorts.

As you will learn, if you haven’t already, no one and I mean no one has any idea how far a stock will go. I don’t care if you use Fibonacci, Elliott Wave Theory or the best indicator in the world.

We simply do not know what will happen next in the market.  This inability to predict the true profit potential will inevitably result in us looking back at our trades only to notice they have gone beyond our exit.

The pain of seeing money left on the table is a close second to an actual loss.  Especially when you only need a few big winners per month to turn a decent profit.

So, this is why we ask ourselves the question, it’s just a matter of time and how aggressive we are in our daily goals before we start to look for answers.

Halves, Thirds and by Touch

After you come to the conclusion that there is more money to be made.  Your next step will be to start doing things like selling half of your position on the first pop after you go long.  You will then hold onto the second half of your position for a loftier target.

On quick glance, this makes perfect sense.  You are exiting your trade with a profit, which puts money in the bank and reduces your risk exposure if things go against you on the second half.

This also allows you to take the edge off as well on the second half, so you can sit through the back and forth.

Well, now that we have covered how things work in the academic world, let’s talk reality.

First, while you may take a small gain on half your position for winning trades, for your losers, you take a hit on your entire position. Over an extended period of time, this sort of math does not bode well for your risk to reward ratio.

Also psychologically, you will feel beaten down as your winners just feel tiny compared to your losers. This will only further exasperate the need to make more money per trade.

Next, on the second half of the position, why would you ever want to get comfortable in a trade. When day trading, there is no such thing as letting your profits run.

When a volatile stock hits its turning point, there are no yellow signs flashing. Your winner can easily drop 3% or more in less than a minute.

If you have somehow decided to take it easy on the second position and not worry about things, you will give back the gains.

This brings me to my last point.  I would always give back the majority of my gains on the second half of the position.  Often times, I would end up exiting the trade near my first exit on the second half.

After going back and forth with yourself on selling half, you might land on the thirds option.  This means that you sell your position on each spike or run that goes in your favor.

Again, this sounds great on paper, but when day trading, there is no need to hold onto a stock all day.

Many studies have shown that stocks only trend the entire day 20% of the trading sessions.  That means in the course of one month, you will be lucky to have 4 days where stocks just go up or down all day.

So, why not focus on the 80%, where you can get the most amount of profit per trade?

Once you get exhausted with the thirds option, you may land on the “by touch” method.  Essentially, you just sell a portion of your position based on how you feel about the market.

If a stock is going really well, you may sell in quarters.  If you do not like the price action and things feel too risky, you may sell out of your position in halves.

The problem with this approach is that it is not consistent.  The one thing I know about the markets is that you have to approach each trade exactly the same way. Once you start opening yourself up to taking any opportunity, or trying to form your thoughts so it accounts for every scenario in the market – you might as well hang it up.

So where does this leave us?

Sell it All

Got it?  That’s right folks, sell the entire position.  If you feel something is wrong in the trade, or that you need to take your profits, why not just sell it all.

Take that in for a moment and try not to react.

Let me be crystal clear.  I have made the most money when I exit the position the minute I feel things are either going too well or just don’t feel right.

I don’t worry about the money that I would have made if I had held on. I am thankful for the money I have in my hand.

Not to mention, I am now in cash, ready to jump on my next opportunity.

As a day trader you have to remember you are not married to a stock.  You are not looking to essentially do a buy and hold for an entire day.

You make money when you are in the stock with the greatest profit potential.

That does not mean greatest profit potential over the course of the day, but the greatest profit potential at that point in time!

As a day trader, we have to learn to live in the moment and not worry about what the next hour, minute or second will bring.

The other item for you to remember is that you also have a clear mind when you close the position.  I’m not going to go down the “trading is stressful” rabbit hole.  But I will say that trading requires an enormous amount of focus.

If you are not focusing when day trading, then you have yet to reach your true potential.

This level of intense focus takes the mental strength of a normal eight our work day and condenses it down to one or two hours.

In order to maintain this level of focus, you do not need the additional headache of a third of a position still floating around out there, while you are in the process of opening a new trade.

Just Because Everyone Else is Doing It Doesn’t Make It Right

After you read this article, I can pretty much guarantee you that every post or YouTube video you watch will show you people selling a portion of their trade.

While I am not here to say my method is the best, because I truly believe that any method, if perfected can turn a consistent profit in the market.

I am just here to lend a voice to those of you out there that are uncomfortable with selling pieces of your position.

It is ok to be totally uncomfortable carrying $2,500 dollars of a $10,000 position. It is totally ok to question why you are holding on to that last quarter of your position, in hopes of letting it ride all day.

There are other options out there and simpler ones (i.e. just sell the entire position).

See for Yourself

At the end of the day, you need to assess which method puts the most money in your pocket. Over thousands of trades in both Tradingsim and my live account, I have been able to prove without a shadow of a doubt, that I make the most money when I sell the entire position.

Not only do I make the most money, but I also make the most amount of money consistently.

That’s one area I forgot to cover in more detail, the mental pain of losing.

When you sell that second portion of your position at a lower price than the first half.  Even though you are still net up on the trade, on some level it feels like a loss. You never remember how you feel when you close the first half, you just remember the pain of the second half.

My friend, if you haven’t realized it yet, losing in the markets can be very painful if not kept in check.  If you don’t think so, try executing a system that’s 40% right, but profitable on paper and see if you can turn that profit.

Remember, we are human beings not machines!  No one likes to feel like a loser day in and day out.

So, with all that said, selling the entire position will get you in the rhythm of winning which is critical for successful trading.

In Summary

You will need to find out what exit strategy works best for you.

For the active day trader, that specializes in breakouts, selling the entire position definitely put me on the path of success.

Much Success

• Al

The post Should I Sell a Portion or All of My Position? appeared first on - Tradingsim.

What is the Hull Moving Average?

In addition to the numerous moving averages in the technical analysis realm, the Hull MA is popular amongst some day traders, as the indicator attempts to give an accurate signal by eliminating lags and improving the smoothness of the line.

Alan Hull, developed this moving average indicator and hence it’s called the Hull MA.

Now, let’s dissect how the Hull moving average is calculated.

The Hull MA involves the weighted moving average (WMA) in its calculation.

First, calculate the WMA with period (n / 2) and multiply this by 2. Remember ‘n’ is the time period configurable based on the trader’s requirement. The default setting in Tradingsim is 9.

Second, calculate the WMA for period “n” and subtract if from the first step. Thirdly, calculate the weighted moving average with period sqrt (n) using the data from the second step. You can take a look at the below formula:

Hull MA= WMA (2*WMA (n/2) − WMA (n)), sqrt (n))

Below is the Hull MA plotted on a 5-minute chart of Apple from July 6^th, 2016. The Hull MA is highlighted in blue color.

Hull MA

How does the Hull MA identify trends?

Like any other moving average, if the HMA is rising along with price, it indicates an uptrend. Conversely, if the HMA is falling along with price, it indicates a downtrend.

Traders can take a long position if prices are rising and the HMA is trending upwards. However, traders can take a short position, if the prevailing trend is falling.

In fact the Hull MA works well as a reversal filter, and, therefore, its exit signals are more reliable at times than the entry.

Going back to the Apple chart from July 6^th, 2016, we have highlighted the upward trend in blue and the downward trend in red.

Hull MA and Trends

Apart from the basic indication of identifying the trend lines, the Hull moving average cross overs with two different time periods can also give the uptrend/downtrend signals.

To identify the uptrend, the fast HMA needs to cross the slower one to the upside.

For identifying downtrends, the fast HMA needs to cross the slower one to the downside.

For instance, I have taken the HMA (9) (the fast indicator) and HMA (18) (the slow indicator) for Affiliated Managers Group, Inc. (NYSE:AMG). The HMA (9) indicator is highlighted in blue while the HMA (18) indicator is highlighted in green.

In the below chart, you can see that I have highlighted entry signals, when the HMA (9) crosses above the HMA (18). On the other hand, you can the short/sell signals as well, where the HMA (9) crossed below the HMA (18).

How the Hull MA is a better indicator when compared to the simple and exponential moving averages?

The simple moving average (SMA), exponential moving averages (EMA) and weighted moving averages (WMA) are all lag when identifying the trend.  Conversely, the Hull MA is a step above these indicators as it is more dynamic in regards to price activity, while maintaining a smooth curve.

The below example, shows the difference between the Hull MA and the simple moving average.

This is a five minute Microsoft chart from July 5^th, 2016. I have selected the Hull MA which is reflected in the top left corner of the chart. The default setting is 9 periods for the Hull MA. The Hull MA is highlighted in blue line, while the simple moving average (with a default setting of 9 periods) is highlighted with the red line.

Hull MA and Reversals

As you can see in the above chart, the Hull MA is providing signals well ahead as compared to the simple moving average indicator. Traders can leverage this gap for greater profits as compared to the other moving average indicator.

Now, let’s compare the Hull MA with the exponential moving average and weighted moving averages (WMA). For the same five minute Microsoft chart from July 5^th, 2016, I have highlighted the exponential moving average indicator in pink and the weighted moving average in green.

In the below image you can see on how the Hull MA gives a firm sell signal as compared to the exponential moving average and weighted moving averages, on the left side of the image. You can see the lag between the Hull MA versus EMA and WMA. This indicates that traders can gain a better success rate with the Hull MA versus the EMA and WMA.

Hull MA and Simple Moving Average

Before we get too excited about the Hull MA, it has its own shortcomings and gives false entries in range bound markets. In sideways markets it is difficult to identify a slope, so tread lightly.

Trading the Hull MA along with the MACD

Now, let’s combine the Hull MA along with another popular indicator, the MACD.

I have again taken Apple’s 5-minute chart from July 6^th with an HMA (9). I have also added the MACD indicator with a default setting.

If you notice in the bottom left side, we received an uptrend signal from the HMA. Within a few minutes we have a MACD crossover, indicating a “Buy” signal. Accordingly, we take a position at $94.90.

Around the mid-session, we see that the HMA (9) is choppy with a downtrend. After some time, we get a sell crossover signal from the MACD, indicating that it is time to exit our position. Accordingly, we close our position at over $95.46.

Hull MA and MACD

Trading the Hull MA along with the Volume and Stochastic RSI

Below is a two-minute chart of Alibaba Group Holding Ltd (NYSE:BABA) from July 7^th, 2016.

I have highlighted the trading action up to the mid-day session, to help focus in on the trade signals.

In the early hours of the trading session, the stochastic RSI indicated a buy signal as you can see with the crossover. I have highlighted this in blue.

This indicator is supported by the ongoing buy volumes (highlighted in green) from the volumes indicator. After a few minutes, we can see the Hull MA trend changing upwards confirming our trend. Accordingly, we take a position near $77.83.

After trading over half an hour, we get a sell crossover from the stochastic RSI coupled with huge selling activity as indicated from the volumes (note the huge red bar). This downtrend is confirmed with the Hull MA, and accordingly we close our long position at $78.33.

We again get a buy signal from the stochastic RSI confirmed with the Hull MA and volumes. Hence we again take a long position at $78.03. After over half an hour, we get a sell signal from the stochastic RSI, while the Hull MA and volumes confirms this after a few minutes. We cover our long position at over $78.70.

Hull MA and Stochastic RSI

Conclusion

• The Hull MA is an indicator that tries to give an accurate signal by eliminating lags and improve the smoothness of price activity.
• The Hull MA can provide more accurate signals if combined with other technical indicators to validate price movement.

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The most dynamic and active period of the trading day is the opening range. Since this is the most volatile time frame during the trading day, we believe it deserves special attention from our side.

In this article, we will cover three methods for trading the opening range. After reading this material, you will feel more confident when attempting to trade during a time when the market feels the most chaotic.

Open Range Definition

The opening range is simply the high and low of a given period after the market opens.  This period is generally the first 30 minutes or first hour of trading.

During this period, you want to identify the high and low of the day.  In addition, you will also want to account for the pre-market highs and lows, as these levels will often act as magnet on price action after the bell rings.

Since the opening bell is associated with big trading volumes and volatility, this time of the session provides many trading opportunities. In this manner, traders use the opening range to set entry points on the chart and to forecast the price action for the day.

Size of the Opening Range

The first thing you need to do before attempting to trade the opening bell is to measure its size.

When the market opens and you spot the open range of a stock, there will be two candles which will help you measure the size of the range.

The first candle is the one which is last from the yesterday’s trading session. The second candle is the first one created when the market opens. To get the range size you need to take the high/low of the yesterday’s closing and the high/low of the today’s opening candle. The distance between these two prices is the size of the opening range. Now see how we measure the size of a range:

Opening Range

The image above illustrates an opening range. The black horizontal lines measure the size of the range. The upper line shows the opening range high and the lower horizontal line is the opening range low.

For a more conservative range, you could just look at the price action after the open, but this will mask the inherit risk of trading a 15% gap for example.  While the morning range could be pretty tight in this scenario, if the stock decided to close the gap from the previous day, you essentially are ignoring the fact there is 15% of space between your entry and the floor of the move.

Opening Range Breakout Calculator

The most important part of the opening range trading is the breakout from the range.

In many cases, the opening range breakout determines the further price direction. When the price breaks out of the range, there is a big chance that the price action will continue in the same direction. Therefore, in most opening range trading strategies traders use the range breakout to set entry points on the chart.

Opening Range Breakout Calculator

This is a real opening range breakout. The size of the range is marked with the black horizontal lines on the chart. The range breakout is located in the red circle. As you see, the price shoots up after the opening range breakout.

Opening Range Trading Strategy

The stock market opening bell is a specific on-chart phenomenon, which can be approached in many ways. Now that we have covered the technical structure, let’s dig further into the day trading strategies.

Strategy #1 - Early Morning Range Breakout

This is probably the most popular opening range success formula. The early morning range breakout puts emphasize on the size of the gap, as well as on the break through its low/high. According to this strategy, when we identify the boundaries of the gap, we need to trade in the direction of the breakout.

One point to note is that breakouts later in the day should be taken with caution.  Light volume and skilled professionals is a cocktail I don’t like to partake in often.  Therefore, pull the trigger when the retail/inexperienced traders are most prevalent, which is in the morning.

You should always use a stop loss order when trading the early morning range breakout. The right place for your stop loss would be the mid-point of the gap.

You should stay in your trades for a minimum price move equal to the size of the gap. However, if the price shows symptoms to continue the trend, you can use price action rules to extend your gains or to exit a position earlier than expected.

Early Morning Range Breakout

The picture above shows the 5-minute chart of Royal Caribbean, which exhibited an early morning range breakout.

The opening range is outlined with the two parallel lines in the beginning of the chart. We enter a long trade when the price breaks the upper level of the Early Morning Range. The stop loss of this trade should be located in the middle of the range.

Ten periods after we buy RCL, the price completes the minimum target which equals the size of the opening range. However, the price increase continues and we stay in the trade for further gains.

Suddenly, the price begins to trade in a horizontal fashion. We close the trade when the price action closes a candle through this support level.

Strategy #2 - Chart Pattern Gap Pullback Buy

The gap pullback buy is another popular approach for trading the opening range. However, this trading strategy is applied only on bullish gaps.

When you spot a bullish gap on the chart, the price could immediately start moving contrary to the direction of the gap.

This phenomenon is called a pullback. Since the gap is bullish, the pullback would be bearish.

The purpose of this trading strategy is to predict the end of the pullback.

The tricky part is knowing when to purchase the pullback. This can be done in many ways; however, a simple way to get your feet wet is to look for a reversal candlestick pattern.

After identifying a reversal, wait for confirmation and then enter a long trade.

When you use this opening range trading strategy, you should use a stop loss order to protect your trades. The proper location of your stop is below the lowest point of the opening range.

You should hold your trade for a minimum bullish move equal to the size of the gap.

Now, let’s do a review of a gap pullback trading opportunity:

Gap Pullback

You are looking at the 1-minute chat of Citigroup from June 15, 2016. The image illustrates a gap pull back trading strategy.

As you see the chart starts with a bullish gap.  Shortly after the open, the price begins to pull back to the previous days’ close.

Then Citi prints a strong bullish candle, which engulfs the previous two, and we take a long position with the anticipating the stock will make a new high.

Full disclosure, buying the pullback is my least favorite of the three strategies. This is because the high has not been broken.

I can’t tell you how many times I have purchased the pullback only to have the stock rollover or go flat.

For me, when I buy the high or sell the low, I at lease know something is supposed to happen.  Reason being, there could be many traders that are looking for a certain level after a pull back, but it’s really anyone’s guess which level will trigger a move higher.

However, everyone and I mean everyone knows the high and low for the day.

As you can see on the chart, Citigroup began a nice steady climb higher and got close to breaching $43.

We exited the trade when the price action breaks its blue bullish trend line.

Strategy #3 - Gap Reversal

The gap reversal is another way to approach the opening morning range of a stock. We have a gap reversal when the price creates a gap, but the range is broken in the opposite direction.

If the gap is bullish, we have a gap reversal when the price breaks the lower level of the opening range. If the gap is bearish, we have a gap reversal when the price breaks the upper level of the opening range.

The trigger of a trade with this opening range trading method is the breakout through the opposite level. When you open your gap reversal trade you should also secure the trade with a stop loss order. The right place for your gap reversal stop loss is again the mid-point of the opening range.

When you trade the gap reversal, you should hold the trade for a minimum price move equal to the size of the gap. You could hold the trade further if the trend continues in your favor, but again will need to have a clear method for knowing when to exit the trade (i.e. time and sales).

Gap Reversal

Above is the 5-minute opening range breakout of Boeing from April 18, 2016.

The image starts with a bearish gap. However, the price action suddenly reverses and breaks the opening range upwards. This creates a gap reversal pattern on the chart. Therefore, we buy BA the moment the stock makes a new high.

On a side note, these are one of my favorite setups. Essentially, you have a pullback below the low of the current day, which looks pretty bearish on the chart.

Only to have price perform a “v” move up through the high. This sort of quick impulsive move higher traps the weak bears.

The price breaks maybe short lived, but if you are able to time your exit, you can make some pretty consistent gains.

Time and Sales – My Way Out

My preferred off-chart indicator for trading opening ranges is the time and sales or the tape.  The action is fast of course, but the time and sales is the one tool that keeps me “safe” in the morning.  Every other indicator, leading or lagging, just isn’t fast enough and I would tend to get myself in some tricky spots.

The point I’m trying to make is that you need some method or indicator for knowing when to get out of the trade.  The mid-point stop is just a last resort, but it should never be your only option.

Conclusion

1. To measure the size of the range you should take the distance between the:

• High/low of the closing candle in the previous trading session
• High/low of the opening candle in the new trading session

2. The most important part of the opening range trading is the breakout from the opening range.

• When the stock breaks the opening range upwards, the price action is likely to continue in a bullish direction
• When the stock breaks the opening range downwards, the price action is expected to continue in a bearish direction.

3. Three of the most popular opening range trading strategies are:

• Early Morning Range Breakout – Enter a trade when the price action breaks out of the opening range. Open the trade in the direction of the breakout. Place a stop loss in the middle of the opening range. Stay in the trade for a minimum price move equal to the size of the morning gap.
• Chart Pattern Gap Pullback Buy – Open a trade when the price action finishes a pullback after the creation of a bullish gap. Confirm the end of the pullback with a chart pattern or a candle pattern. Open a long trade - in the direction of the expected pullback reversal. Place a stop loss below the bottom at the end of the pullback. Stay in the trade for a price move equal to the size of the gap, starting from the upper level of the opening range.
• Chart Pattern Gap Reversal – Open a trade when the price action breaks the level of the opening range, which is opposite to the direction of the gap. Open the trade in the direction of the breakout. Place a stop loss order in the middle of the opening range. Stay in the trade at least until the price action completes a move equal to the size of the gap.

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What is the Shooting Star Candle?

The shooting star is a single bearish candlestick pattern that is common in technical analysis.

The candle falls into the “hammer” group and is a first cousin of the – hanging man, hammer, and inverted hammer.

The shooting star has a small body and a very long upper candle wick.

shooting star candlestick

As you see, the candle has a small body located in the lower part of the pattern.

However, this also looks like an inverted hammer candle pattern. So, how can we distinguish the two? The answer to this question is hidden in the price direction before the creation of the candle.

The shooting star candle is a reversal pattern of an upwards price move.

Shooting Star Candle Potential

If a stock is in a bullish uptrend and you identify a shooting star candle, then there is a solid chance that the trend will reverse. For this reason, traders use this candle to enter short trades on the assumption that the bullish move is running out of steam.

shooting star candlestick potential

Once you are able to identify the shooting star, you should look to open a short position on a break of the low of the candle.

The expectation for the profit potential for the shooting star is 3:1 the size of the candlestick.

Reliability of the Shooting Star Candlestick

The shooting star candlestick is considered one of the most reliable candlestick patterns. One of the reasons for this is the unique structure – a small body with a high upper candlewick.

The psychology of the trade has many layers of complexity.

First, buyers are enjoying their gains as the stock shoots to a short-term high.  As this euphoric moment begins to set in, short traders begin to sell the stock on a flurry of buy orders.

At this point, the longs who were late to the party begin to get scary and start to sell out as well. This panic long selling and short selling leads to a sharp reversal in the price action, thus generating a small candlestick body on the chart.

It is important to mention that the shooting star candlestick pattern is even more reliable when it develops after three consecutive bullish candles.

This creates exponential bullish pressure on the chart. In such cases, the shooting star candle is likely to have an even bigger upper candlewick. This implies that the price is about to reverse with even bigger strength.

Trading the Shooting Star

1)    Trade Entry

To enter a shooting star trade, you should first confirm the pattern.

To do so, you will first need to identify an active bullish trend. Then you need to spot a candle with a small body and a big upper candlewick. When you identify a shooting star candle during a bullish trend, you will need to wait for another signal. You will also need a bearish candle to break the low point of the shooting star body. This will confirm the validity of your shooting star on the chart.

If you are able to identify the presence of these signals, then you should short the security. After all, you are anticipating an upcoming bearish price move.

2)    Stop Loss

You should always use a stop loss order when trading the shooting star candle pattern. After all, nothing is 100% in stock trading and you will definitely experience false signals when trading the shooting star pattern.

You should place the shooting star candle pattern above the upper wick of the pattern.

3)    Taking Profits

The price target for the shooting star is equal to the size of the pattern.

Therefore, we place a stop loss to contain a price loss equal to the size of the pattern. At the same time, our target is for a price move equal to three times the shooting star.

Shooting Star Trading Strategy

Now that we have the shooting star rules in front of us, we will combine these three basic steps into a trading strategy.

shooting star trading strategy

This is the 2-minute chart of Hewlett-Packard from June 10, 2016. The image illustrates a classical shooting star trading example.

Our trading analysis starts with identifying that the price is trending upwards.

Suddenly, a shooting star candlestick appears, which is marked with the green circle on the chart. We have a small candle body and a big upper candlewick, which confirms the shape of the pattern.

The next candle after the shooting star is bearish and it confirms the pattern.

Therefore, we sell the security after the pattern confirmation. At the same time, we place a stop loss order above the upper wick of the shooting star candle in order to secure our short trade.

Now, if the price creates an unexpected bullish move caused by high volatility, we will be protected.

Our maximum loss will be equal to the distance between the level we short HPQ and the level of the stop loss order.

The first blue arrow on the image measures the size of the candlestick. According to our shooting star trading strategy, we should seek a target equal to three times the size of the pattern.

Thus, we apply the size of the pattern three times starting from the lower candle wick. This is how we get the big blue arrow, which points out the minimum target of our trading strategy.

Now we need to stay in the trade until the price action closes a candle beyond the minimum target.

The price reverses after we short Hewlett-Packard. On the way down, the price creates one correction during the bearish move. The downward activity then resumes and 18 periods after we short HPQ, the price action closes a candle below the minimum target of the pattern. Luckily, this candle is relatively big and goes way beyond the minimum target.

As you see, the shooting star candle pattern gives us an indication that the trend might reverse. This creates a nice premise to short HP right in the beginning of an emerging bearish trend. Despite the correction on the way down, the shooting star reaches the target of three times the size of the candlestick.

Let’s now try this strategy one more time on another shooting star trading example:

shooting star trading strategy 2

We now have the 1-minute chart of Apple from December 22, 2015.

The chart starts with a price increase – Apple creates higher highs and higher lows. On the way up, the price action completes a shooting star candlestick pattern on the chart. You can see the figure in the green circle on the image. Now we have a reason to believe that the price action could be reversed. We wait to see if the next candle is going to confirm the authenticity of the shooting star reversal pattern.

Fortunately, the next candle is bearish and breaks the low of our shooting star candle on the chart. This gives us a strong bearish signal and we short Apple at the end of the bearish candle. At the same time, we place a stop loss order at the highest point of the shooting star – above the upper candlewick.

Now, the trade is protected against rapid price moves contrary to our trade.

The blue arrows on the image measure and apply three times the size of the shooting star candle pattern.  After we short Apple, the price enters a downtrend.

After the first bearish impulse on the chart, the price creates a range between $107.30 and $107.40 per share. The range is then broken and the price action creates a new bearish impulse on the chart. This impulse leads the price to complete a total bearish move of three times the size of the shooting star pattern. This is the minimum target for our trade and we close the position.

This is another short deal caused by the shooting star trading candle. As you see, the minimum target of the pattern is completed after a short hesitation by Apple.

Conclusion

• The shooting star is a single candlestick pattern used in trading.
• This is among the most popular bearish candlestick patterns.
• The shooting star falls into the “Hammer” candle family.
• The identical twin of the shooting star candlestick pattern is the inverted hammer.
• The shooting star candle pattern has a strong bearish potential on the chart. Thus, traders use the shooting star to set short entry points on the chart.
• One of the most reliable single candle patterns is the shooting star because:
• It has unique structure – small body with long upper candlewick
• There is a strong psychology factor behind the shooting star – exponentially growing bullish pressure, which quickly frazzles and ends up sending the price down.
• There are three basic tricks for trading the shooting star candlestick figure:
• Sell the security after the creation of a bullish trend, a shooting star candle, and a bearish confirmation candle.
• Put a stop loss right above the upper candlewick of the shooting star figure.
• Stay in the short trade for a bearish price move equal to at least three times the size of the shooting star candle including the upper and the lower candlewick.
• This shooting star trading strategy contains around 3:1 Win-Loss ratio.

The post How to Day Trade the Shooting Star Candlestick Pattern appeared first on - Tradingsim.

What is a Descending Top Pattern?

Descending tops develop when the price action produces lower tops between swing lows.

As the tops are lowering with each successive move, a bearish trend is forming right before your eyes. Therefore, traders use descending tops to enter short trades.

How to Identify a Descending Top Pattern

To identify a descending top pattern, you first need spot at least two tops on the chart, which are descending. Then you draw a line connecting these tops.

Descending Tops Pattern

If you manage to do this, you will have a bearish line, which you can use to project the price movement lower.

Classic Descending Tops Trading

Let’s now walk through how to trade the descending top pattern.

Entry - Descending Tops

The entry point for the descending top pattern is fairly straightforward. After identifying the first two tops, you will need to wait for a third test of the downtrend line.  On this reaction higher, you will want to enter a short trade on the down trend line.

Stop Loss - Descending Tops

You should never enter a descending top trade without a stop loss order.

What if the price action moves quickly against you? What if the company you are trading releases a positive data and the price bounces to the roof?

For this reason, you should always be protected with a simple stop loss order.

The good place for your stop is above the third top.

Profit Target - Descending Tops

There are two options for exiting a descending top trade. The first one concerns the usage of a bearish trend line. The second one is related to the descending tops on the chart.

Trend Line Breakout

If you are able to draw a bearish trend line through your descending tops, your trade exit will be very easy to attain. Simply stay in your trade until the price action closes above the bearish trade.

Ascending Top

If you are unable to draw a trend line due to uneven descending tops on the chart, you have a second option to exit your trade.

Carefully follow the price action on the chart and close your short trade when you see an ascending top on the chart. In other words, if the price action breaks the level of the last top on the chart, you exit the trade.

Descending Tops Trading Example

Let’s now apply these rules into a complete descending tops trading strategy:

Descending Tops Trading Example

Above is the 5-minute chart of Netflix from July 21, 2016. The image starts with the beginning of a selloff and ultimately a confirmation of a descending tops pattern (3 black arrows).

After the pattern is confirmed, we short NFLX and place a stop loss above the confirmation (third) top. The price starts decreasing afterwards and a bearish trend line is created (blue).

We stay in the trade until the price action breaks the bearish trend line in a bullish direction.

Two Simple Ways to Trade Descending Tops

Now that you are familiar with the descending tops pattern, I will now show you how to combine the pattern with two additional trade indicators.

These two indicators are:

• Channel Indicator
• Descending Tops Breakout Indicator

Strategy #1 - Descending Tops Channel Trading

This is a trading strategy where we use the descending tops in a combination with the channel indicator. The descending tops channel trading can act as a leading indicator for opening short trades.

Descending Tops - Channel Entry

The first thing you need to identify on your chart to enter a trade is two tops where the second is lower than the first.

Notice that we are only using two descending tops and not three as before.

You will then need to identify the bottom between the two tops and draw a horizontal support line. You can then use a break of the support line as a trigger for opening the short position.

But why so early?

Since you have two descending tops on the chart you are able to draw a bearish line.

Once the price breaks the support line, you can then draw the support line for the pattern.

The downtrend line of the two tops and the support line of the lows creates the downtrend channel.

Descending Tops Channel - Stop Loss

A good place for your stop loss in this strategy is above the second top on the chart. As the stock continues to make lower lows, you will want to place your stop above the most recent high.

Descending Tops Channel – When to Exit the Trade

As you know, you cannot stay in your trades forever. Therefore, we will now approach a way to exit a descending tops channel trade.

Simply follow the price behavior on the upper channel level. Whenever you see a candle closing above this level, you should exit your trade on an assumption that the price might reverse.

Descending Tops Channel - Trading Example

Now let’s walk through these trading rules in more detail:

Descending Tops Trading Channel

Above is the 1-minute chart of Apple from December 22, 2015. The image shows a descending top channel trade.

See that we have marked the bottom between the two tops with a blue horizontal level. This is our support, which is the trigger for our short trade. If the price breaks this level downwards, there is a high likelihood the price will create a lower low on the chart.

The price breaks the blue support and we short AAPL on the speculation that the stock will create a lower low

We place a stop loss above the last top as shown on the image. The price then drops and creates a lower bottom, thus confirming the bearish channel on the chart (pink parallel lines).

The channel continues further and the price bounces up and down. The interactions with the channel levels are pointed with the black arrows on the chart.

We hold the trade until the price closes above the upper level of the descending channel. This happens in the red circle on the chart and we exit our short trade.

Strategy #2 - Descending Tops Breakout Trading Strategy

Another descending top trading strategy is to trade the breakout. In other words, you are trading the reversal move at the end of the descending tops pattern.

Descending Tops Breakout - Entry

To enter a trade, you should wait until the price action breaks the trend line of the descending tops pattern. If you are unable to put a straight line through the price’s tops, then you should identify an ascending top to enter a breakout trade.

Descending Tops Breakout - Stop Loss

In this case, your stop loss order should be placed below the last bottom on the chart.

Descending Tops Breakout – Taking Profits

You should stay in the trade as long as the price is making higher lows.

If the price action breaks a bullish trend line – you close the trade. If the price action creates a lower low – you close the trade.

Descending Tops Breakout

Above you see the 2-minute chart of Oracle Corporation. The image covers July 25, 2016.

The chart starts with a descending tops pattern, which is marked with a perfect blue bearish trend line on the chart. If you consider the trend line as a reliable indicator, you should buy ORCL as shown on the image.

If you don’t trust the trend line, you should buy the stock the moment the price action breaks the black resistance, which marks the last top on the chart. The breakout through resistance creates a higher top.

On the way up, the price action enters a bullish trend. We have two alternatives to exit this trade. The first one is to stay until the price action is above the trend line. In other words, you should close the trade when you see a candle closing below the pink trend.

If you don’t trust the trend line, then you should hold the trade until the price action breaks the small black support, which marks the last bottom during the trend. This would mean that the price action creates a lower bottom, indicating a reversal.

Conclusion

1. The descending tops chart pattern is associated with bearish trends.
2. To identify descending tops, you need to spot a price top, followed by a lower top.
3. The confirmation of the descending top pattern comes with the third top, which is supposed to be lower than its ancestor.
4. To trade a descending top pattern, you have to follow these rules:

• Open a trade when the price creates a third lower top and bounces downwards
• Place a stop loss above the last top
• Stay in the trade until the price action breaks the bearish trend line (if any), or until an ascending top appears on the chart

5. Two methods for trading descending tops is by applying the following indicators:

• Channel Indicator
• Descending Tops Breakout Indicator

The post Two Simple Ways to Day Trade Descending Tops appeared first on - Tradingsim.