Today we will go through the most significant levels in day trading – daily pivot points. When you finish reading this article, you will know the 5 reasons why day traders love using them for entering and exiting positions.

Pivot Points Explained

Daily pivot points are calculated based on the high, low, and close of the previous trading session.

There are seven basic pivot levels on the chart:

Basic Pivot Level (PP) – This is the middle and basic pivot point on the chart.

Resistance 1 (R1) – This is the first pivot level above the basic pivot level.

Resistance 2 (R2) – This is the second pivot level above the basic pivot point, and the first above R1.

Resistance 3 (R3) – This is the third pivot level above the basic pivot point, and the first above R2

Support 1 (S1) – This is the first pivot level below the basic pivot point.

Support 2 (S2) – This is the second pivot level below the basic pivot point and the first below S1.

Support 3 (S3) – This is the third pivot level below the basic pivot, and the firs below S2.

When you add the seven pivot levels, you will see five parallel horizontal lines on the chart.

Pivot Points

The above chart is zoomed out in order to show all 7 pivot levels.

Pivot Point Calculation

Let’s now discuss the way each of the five pivot points is calculated. First we need to start with calculating the basic pivot level (PP)– the middle line.

PP Calculation

Below is the formula you should use to determine the PP level on your chart:

Pivot Point (PP) = (Daily High + Daily Low + Close) / 3

R1 R2 S1 S2 Pivot Levels Calculation

Now that we know how to calculate the PP level, let’s proceed with calculating the R1, R2, S1, and S2 pivot levels:

R1 = (2 x Pivot Point) – Daily Low

R2 = Pivot Point + (Daily High – Daily Low)

S1 = (2 x Pivot Point) – Daily High

S2 = Pivot Point – (Daily High – Daily Low)

R3 S3 Pivot Levels Calculation

We are almost done with the pivot point calculation. There are two more levels to go – R3 and S3.

R3 = Daily High + 2 x (Pivot Point – Daily Low)

S3 = Daily Low – 2 x (Daily High – Pivot Point)

See that the formulas for R1, R2, R3, S1, S2, and S3 all include the PP value.

This is why the basic pivot level is crucial for the overall pivot point formula. Therefore, you should be very careful when calculating the PP level. After all, if you incorrectly calculate the PP value, your remaining calculations will be off.

Pivot Points 2

You are now looking at a chart, which takes two trading days. Each trading day is separated by the pink vertical lines. We use the first trading session to attain the daily low, daily high, and close.

Daily High = 14.39

Daily Low = 14.28

Close = 14.37

Then we apply the three values in the formulas above, and we get the following results:

PP = 14.35

R1 = 14.42

R2 = 14.46

R3 = 14.53

S1 = 14.31

S2 = 14.24 (not visible)

S3 = 14.20 (not visible)

How to Draw the Pivot Point Stock Market Indicator

The pivot point stock market indicator should be applied on the chart as follows:

• Apply the PP level
• Apply R1 and S1
• Apply R2 and S2
• Apply R3 and S3

When you follow this order there is a small chance that you might mistakenly tag each level. To avoid this potential confusion, you will want to color code the levels differently.

For example, you can always color the PP level black. Then the R1, R2, and R3 levels could be colored in red, and S1, S2, and S3 could be colored in blue. This way you will have a clear idea of the PP location as a border between the support and the resistance pivot levels.

Some trading platforms have a built-in pivot point indicator. This means that the indicator could be automatically calculated and applied on your chart with only one click of the mouse. This will definitely save you a ton of time.

How Pivot Points Work

Pivot points provide a standard support and resistance function on the price chart.

When price action reaches a pivot level it could be:

• Supported/Resisted
• Extended (breakouts)

If you see the price action approaching a pivot point on the chart, you should treat the situation as a normal trading level. If the price starts hesitating when reaching this level and suddenly bounces in the opposite direction, you can then trade in the direction of the bounce.

However, if the price action breaks through a pivot, then we can expect the action to continue in the direction of the breakout. When price clears the level, it is called a pivot point breakout.

Day Trading with Pivot Points

Now that we understand the basic structure of pivot points, let’s now review two basic trading strategies – pivot point bounces and pivot level breakouts.

Pivot Point Breakout Trading

To enter a pivot point breakout trade, you should open a position when the price breaks through a pivot point level. If the breakout is bearish, then you should initiate a short trade. If the breakout is bullish, then the trade should be long.

You should always use a stop loss when trading pivot point breakouts. A good place for your stop would be a top/bottom which is located somewhere before the breakout. This way your trade will always be secured against unexpected price moves.

You should hold your pivot point breakout trade at least until the price action reaches the next pivot level.

Pivot Point Breakout Strategy

This is the 5-minute chart of Bank of America from July 25-26, 2016. The image illustrates bullish trades taken based on our pivot point breakout trading strategy.

The first trade is highlighted in the first red circle on the chart when BAC breaks the R1 level. We go long and we place a stop loss order below the previous bottom below the R1 pivot point. As you see, the price increases rapidly afterwards.

We hold the trade until the price action reaches the next pivot point on the chart. When this happens, the price creates a couple of swing bounces from R2 and R1.

After bouncing from R1, the price increases and breaks through R2. This creates another long signal on the chart. Therefore, we buy BAC again.

There is a long lower candlewick below R2, which looks like a good place for our stop loss order. The price then begins hesitating above the R2 level. In the last hours of the trading session BAC increases again and reaches R3 before the end of the session. This is an exit signal and we close our trade.

Pivot Point Bounce Trading

This is another pivot point trading approach. However, this time we will stress the cases when the price action bounces from the pivot levels.

Here you should open trades if the price reaches a pivot point and bounces.

If the stock is testing a pivot line from the upper side and bounces upwards, then you should buy that stock. If the price is testing a pivot line from the lower side and bounces downwards, then you should short the security.

The stop loss order for this trade should be located above the pivot level if you are short and below if you are long.

Pivot point bounce trades should be held at least until the price action reaches the next level on the chart. This is how it works:

Pivot Point Bounce Strategy

Above is a 5-minute chart of the Ford Motor Co. from July 14, 2016. The image shows a couple of pivot point bounce trades taken according to our strategy.

Our pivot point analysis shows that the first trade starts 5 periods after the market opening. The price goes above R2 in the opening bell. Then we see a decrease and a bounce from the R2 level. This creates a long signal on the chart and we buy Ford placing a stop loss order below the R2 level.

The price enters a bullish trend and we will stay with the trade until Ford touches the R3 level. We close the trade when this happens.

However, the price bounces downwards from the R3 level. This is another pivot point bounce and we short Ford security as stated in our strategy. A stop loss order should be placed above the R3 level as shown on the chart.

After a short consolidation and another return and a bounce from the R3 level, the price enters a bearish trend. We hold the short trade until Ford touches the R2 level and creates an exit signal.

5 Reasons Why Day Traders Love Pivot Points

1) Unique for Day Trading

The pivot points formula takes data from the previous trading day and applies it to the current trading day. In this manner, the levels you are looking at are applicable only to the current trading day. This makes the pivot points the ultimate indicator for day trading.

2) Short Time Frames

Since the pivot points data is from a single trading day, the indicator could only be applied to short time frames. The daily and the 30-minute chart would not work, because it will show only one or two candles.

The best timeframes for the pivot point indicator are 1-minute, 2-minute, 5-minute, and 15-minute. Therefore, the indicator is among the preferred tools for day traders.

3) High Accuracy

The pivot point indicator is one of the most accurate trading tools. The reason for this is that the indicator is used by many day traders. This will allow you to trade with the overall flow of the market.

4) Rich Set of Data

Pivot points on charts provide a rich set of data. As we discussed above, the indicator gives seven separate trading levels. This is definitely enough to take a day trader through the trading session.

5) Easy to Use

The PP indicator is an easy-to-use trading tool. Most of the trading platforms offer this type of indicator. This means that you are not required to calculate the separate levels; the Tradingsim platform will do this for you. Your only job will then be to trade the bounces and the breakouts of the indicator.

Conclusion

1. The pivot points are levels on the chart which are attained from previous day data and concern only the current day.
2. The data which the pivot point indicator takes from the previous trading session is:

• Daily High
• Daily Low
• Close

3. To calculate the pivot lines you should then apply the following formulas:

• Pivot Point (PP) = (Daily High + Daily Low + Close) / 3
• R1 = (2 x Pivot Point) – Daily Low
• R2 = Pivot Point + (Daily High – Daily Low)
• R3 = Daily High + 2 x (Pivot Point – Daily Low)
• S1 = (2 x Pivot Point) – Daily High
• S2 = Pivot Point – (Daily High – Daily Low)
• S3 = Daily Low – 2 x (Daily High – Pivot Point)

4. Draw each of the levels one by one and color the levels differently in order to avoid confusions.
5. Two of the most popular pivot points trading strategies are:

• Pivot Point Breakout Trading
• Pivot Point Bounce Trading

6. Day Traders love the Pivot Point indicator because:

• It is unique for day trading.
• It uses short time frames.
• The pivot point levels are relatively accurate.
• The pivot point indicator gives a rich set of data – 7 levels.
• The indicator is very easy to use.

The post 5 Reasons Day Traders Love Pivot Points appeared first on - Tradingsim.

In this article, we will do a deep dive into 3 types of thrusting line candlestick patterns.  We will then explore a few trading examples, so you can apply these techniques in Tradingsim.

What is a Thrusting Line Candlestick Pattern?

A valid thrusting line pattern starts with a bearish candle on the chart, followed by a “thrusting” bullish candlestick.  This pattern leads to further downward pressure on the stock.  So, as a trader in most cases you will look to get short once the pattern develops.

It is crucial the opening price of the second candle gap down from the closing price of the previous candle. The other important requirement is the closing level of the second candle not cross the mid-point of the first candle’s body.

When these two requirements are met, you have a thrusting line candlestick pattern.

Thrusting Line Candlestick Pattern

It is important to mention that the thrusting line candlestick pattern is not a reliable standalone signal, as two candlesticks is not enough to bet on future price moves.

Therefore, you will need to combine the indicator with other trading techniques, in order to make consistent profits.

3 Types of Thrusting Line Candlestick Patterns

1) Strong Continuation Thrusting Line

The thrusting line with a strong continuation of the bearish trend displays the following characteristics on the chart:

• The opening of the second candle is relatively lower than the close of the first candle.
• The closing of the second candle is barely touching the close of the first candle.

Strong Continuation Thrusting Line

2) Medium Continuation Thrusting Line

The medium continuation thrust line pattern has the potential to send prices up or down. This type of thrust line pattern has the following structure:

• The opening of the second candle is relatively distanced (downwards) from the close of the first candle.
• The closing of the second candle is relatively distanced from the mid-point of the first candle; however, both candles need to overlap.

Medium Continuation Thrusting Line

As you probably noticed, the second candle exhibits a stronger bullish move compared to the strong reversal thrusting pattern, hence less reliability of a potential continuation of the pattern.

3) Reversal Thrusting Line

It is also called a bullish thrusting line, or a weak continuation thrusting line. This type of thrusting line candle formation is more likely to reverse the price action, rather than continue in the direction of the bearish trend. To get a valid bullish thrusting line, the pattern needs to exhibit the following characteristics:

• The opening of the second candle is almost on the same level with the close of the first candle.
• The closing of the second candle is almost on the same level with the middle point of the first candle.

Reversal Thrusting Line

In this case, the second candle is even higher than in the previous example. However, the pattern still responds to the basic thrusting line requirements. The second candle gaps down from the close of the first candle. Also, the close of the second candle does not cross the middle point of the first candle’s body.

Trading the Bearish Thrust Line Pattern

Now that we have discussed the parameters and the structure of the thrusting line pattern, it is time to trade the setup.

Bearish Trusting Line Trade Entry

Prior to entry, you first need to confirm the pattern. This happens when a third candle is created and closes below the body of the second candle. This means that the third candle should be bearish. When this candle closes below the body of the second candle, we have received confirmation of the bearish thrusting pattern on the chart.

At this point, you are free and clear to open a short position.

Bearish Thrusting Line Stop Loss

The proper location for your bearish Thrusting Line continuation pattern is above the upper candle wick of the second candle.

I know the stop loss section of the article is pretty short, but please take it seriously.  Trading without a stop is a sure way to experience unnecessary pain.

Profit Target - Bearish Thrusting Line

There isn’t a fixed target when trading the thrusting line continuation pattern. After all, a continuation pattern can run without stopping.

Therefore, I recommend you use price action rules and the time and sales for deciding where to close your thrusting Line trade.

Trading the Bullish Thrusting Lines Candlestick Pattern

Now it is time to discuss the opposite scenario related to the thrusting line pattern – the bullish thrusting line pattern.

Bullish Thrusting Line Trade Entry

If you have the reversal version of the thrusting line, then you should be prepared to tackle the pattern with a long trade.

However, you would first need to attain the confirmation of the pattern. Again, this happens with a third candle. This time, the third candle needs to be bullish and it needs to break the middle line of the first candle. If the third candle closes above this level, then you would need to go long.

Bullish Thrusting Line Stop Loss

Again, it is necessary to secure your bullish thrusting line trade with a stop loss order. The stop loss approach of the bullish thrusting strategy is opposite to the one used for the bearish thrusting strategy. The right place for your stop loss would be below the lower candle wick of the second candle.

Profit Target - Bullish Thrusting Line

The profit target rules for the bullish thrusting line strategy are same as for the bearish thrusting line. To find the right exit point of your bullish thrusting trade, again, I recommend you use price action rules and time and sales.

Thrusting Line Pattern and Trend Lines

We will now approach a trading strategy, where we combine the thrusting line with the trend line indicator.

We will open the trades and place a stop loss order according to the thrusting line trading approach.

In addition, we will seek assistance from a trend line in order to close our trades.

Bearish Thrusting Line and Trend Lines

Above is the daily chart of Twitter from Nov, 2015 – Feb, 2016. The image illustrates a standard bearish thrusting line trade.

In the green circle, we see a strong continuation thrusting line and its confirmation candle. This makes three candles in the circle. The first two are bearish, followed by a bullish candle, which gaps down and closes almost at the close of the first candle in the pattern.

The third candle is the confirmation, which breaks the lower level of the second candle’s body.

Therefore, we have confirmation of a bearish thrusting line on the chart and we short TWTR.

We also place a stop loss above the second candle in the thrusting line as shown on the image. Now our trade is protected against unexpected price moves in the opposite direction.

The price enters a bearish trend afterwards. We have no reason to close the trade since we only see lower highs on the chart. Therefore, we draw a bearish trend line through the tops on the chart as shown on the image.

We stay in the trade until the price action breaks the blue bearish trend in a bullish direction. This is shown in the red circle on the chart. We close our Twitter trade and collect profits.

Next, let’s see how the bullish thrusting line performs in combination with the trend line indicator:

Bullish Thrusting Line Pattern

Above is the daily chart of Goldman Sachs from Jan – Feb, 2015.

The image starts with a bearish price trend. As you see, we have marked the decreasing tops on the chart with a red bearish trend line.

Suddenly, the price action creates a thrusting candle line on the chart, which is shown in the green circle.

The pattern starts with a bearish candle and continues with a bullish candle, which creates a tiny bearish gap downwards and closes near the mid-point of the first candle. This is a classical bullish thrusting line on the chart.

The next candle is bullish and it breaks the mid-point of the first candle from the pattern. At the same time, the next candle also breaks the red bearish trend line on the chart. This creates a strong long signal on the chart and we buy GS and place a stop loss below the second candle of the pattern.

Next, we draw a bullish trend line (blue) at the bottom of the price action. We use this bullish trend to determine an eventual exit point of our long GS trade.

We close the position when Goldman Sachs closes below the blue bullish trend.

Conclusion

1. The thrusting line is a double candlestick pattern associated with bearish price trends.
2. A valid thrusting line pattern should respond to the following characteristics:

• The first candle is bearish.
• The second candle gaps down and is bullish.
• The second candle closes below the mid-point of the first candle’s body.

3. There are three types of thrusting line candlestick patterns:

• Strong Continuation Thrusting Line
• Medium Continuation Thrusting Line
• Reversal Thrusting Line

4. Bearish Thrusting Lines should be traded as follows:

• Identify a bearish thrusting line.
• Confirm the pattern with a third candle which breaks the lower body of the second candle.
• Open a short trade.
• Place a stop loss above the second candle of the pattern.
• Use price action rules to determine your exit.

5. Bullish Thrusting Lines should be as follows:

• Identify a bullish thrusting pattern
• Confirm the pattern with a third candle which breaks above the mid-point of the first candle.
• Open a long trade.
• Place a stop loss order below the second candle of the pattern.
• Use price action rules and time and sales to exit your position.

6. The thrusting line pattern is not a good standalone indicator. Therefore, it is good to confirm its signal with an additional indicator.
7. A good indicator to trade with the thrusting line is the trend line.

• When you open a trade based on a thrusting line, attempt to measure the price action with a trend line.
• Stay in the trade until the price action breaks the trend line indicator in the opposite direction.

The post 3 Types of Thrusting Line Candlestick Patterns appeared first on - Tradingsim.

If you are a fan of the moving averages, then you will definitely enjoy reading this article. Today we will discuss one of the most important patterns related to moving averages – the golden cross (GS).

What is a Golden Cross in Trading?

A golden cross in trading occurs when a faster moving average crosses a slower moving average. Sounds simple enough right?  However, you should know there are few golden cross stock screeners, as the pattern is considered to be long-term and not applicable to day trading.

In order to fully understand a golden cross, let's discuss moving averages, which are required to create the trading signal.

Moving Average Explanation

The moving average consists of a line, which smoothes price action by taking the average closing price over “x” periods.  This “x” period is defined by you the trader and really comes down to what suits your needs.

If the moving average is over 5-periods, it will take the closing prices of the previous 5 candles in order to give you an average value for the current period.

Let’s now take a look at a basic example for performing the calculation of a 5-period moving average:

$3.00
$3.20
$3.80
$4.00
$5.00

If you have these 5 closing prices of a security, then a simple moving average will give you the following average value with the opening of the 6^th period:

(3.00 + 3.20 + 3.80 + 4.00 + 5.00) / 5 = 3.80

So, on the opening of the 6^th candle in this series, the simple moving average would have a value of $3.80.

Got it?

Golden Cross Indicator

Now let’s get back to the golden cross indicator. As we previously stated, the GS occurs when a faster (shorter period) MA crosses a slower (longer period) MA.

The bigger the difference between the two SMAs, the more powerful the golden cross signal.

The classic setup for a golden cross signal is when a 50-period SMA crosses above a 200-period SMA.

Golden Cross

The above chart displays a classical golden cross trading example. The blue line on the chart is a 50-period SMA, while the red line is the 200-period SMA.

The chart begins with a strong downtrend, where the price action stays beneath both the 50-period and 200-period SMA.

Suddenly, the direction of the trend changes and the price begins increasing. Naturally, the 50-period SMA reacts faster to the price change. This is because the blue SMA takes into consideration less periods, making it more sensitive to price moves compared to the 200-period SMA.

Once the 50-period SMA crosses the 200-period SMA to the upside, we have a golden cross.  We have highlighted this in the pink circle in the above chart.

Profit Potential of the Golden Cross Pattern

The golden cross pattern has a pretty straightforward price expectation and that is higher!

Since the signal takes into account so many periods (200), the expectation is that the move higher should be in direct correlation to the amount of time it took to generate the signal.

Therefore, we would not want to use a golden cross for a scalp trade for example.

Bullish Golden Cross Pattern Example

Again, we have a bullish golden cross stock pattern when the faster SMA on the chart breaks the slower SMA in a bullish direction.

Bulish Golden Cross

This is the same golden cross trading signal from the previous chart we discussed. However, this time we demonstrate the strength of the signal and the potential run a stock can make after a golden cross materializes.

In this particular example for First Energy Corporation, the stock went on a 9.2% run in 6 trading days.

Not a bad one-week return for all my swing traders out there.

3 Ways to Use the Golden Cross Indicator

Until now, we have only been using the SMA Golden Cross indicator to make our decision to enter a long trade.

However, the simple moving average is not the only indicator you can use to identify a golden cross.

Why the additional moving averages? In theory, depending on the stock you are trading, another trend indicator may provide more accurate and timely signals.

This of course will also come down to your preferences in terms of sensitivity of price and your risk tolerance levels.

Strategy #1 - EMA Golden Cross Trading

The exponential moving average (EMA) is another option for identifying a golden cross signal on the chart.

The difference between the SMA and the EMA is that the EMA places more emphasis on the most recent periods on the chart.

To get an EMA golden cross, I recommend you stick to the classic 50-period and 200-period rule, since these are common moving averages used by traders.

Bullish Cross and Death Cross

The above chart illustrates a few golden cross trading opportunities utilizing the 50 and 200-period EMAs.

The first golden cross is bearish (death cross) and the price starts a sharp decrease after creating the signal. The second one is a bullish golden cross, which sends the price in bullish direction. The third signal is another death cross, which indicates the start of another leg down.

Each of these three signals could be used to open a new trade and thus closing the previous one.

One point to note, you do not want to always be in the market, so you will need to apply some validation technique to guide you on when to take the trade.

I have yet to see a trading technique that wins by always keeping you in the market.  You have to use some sort method for staying in cash until the “best” trading opportunity presents itself.

Strategy #2 - VWMA Golden Cross Trading

Now we will use the volume weighted moving average (VWMA) to trade golden cross stocks.

The VWMA takes into consideration a certain number of periods. However, the indicator places emphasize on the periods with higher trading volumes. This is why “volume” is in the name of the indicator.

We will now use a 50-period VWMA and a 200-period VWMA to attain golden cross signals. Let’s see how this works:

Bullish Golden Cross with the VWMA

The chart above shows a couple of golden cross indicators based on crossovers of the VWMA. When the blue 50-period VWMA breaks the red 200-period VWMA, we get a bullish signal on the chart.

After this signal, the security enters a long bullish trend. See that the two VWMAs appear to “wiggle” or appear “curlier” than the EMAs and SMAs used in previous examples.

This “wiggle” is caused by higher trading volumes at these points, which makes the VWMA react faster. In this manner, the VWMAs can sometimes create a golden cross signal earlier than the other MAs.

So, all of you traders out there that would like to enter a trade somewhat early, the VWMA could be a method you add to your toolkit to give you a slight edge over other traders.

Strategy #3 - VWMA + SMA Golden Cross Trading

The next trading strategy in my opinion is the most reliable of the methods discussed thus far.

Here I suggest you use a simple moving average as your slower moving average and a VWMA as your fast line.

In this manner, we will use a 50-period VWMA and a 200-period SMA. Since the faster MA is a VWMA, it will be even more sensitive due to higher trading volumes. I believe this is a good approach since it is the trigger MA – the one which creates the golden cross.

Bullish Cross-VWMA-SMA

The blue line on the chart is the 50-period volume weighted moving average. The red line is the 200-period simple moving average.

Notice that we have a third moving average on the chart. This is a 50-period simple moving average.

We have placed this MA on the chart, just so we can see the difference between the VWMA and the SMA signals.

As you see, the blue and the yellow lines differ slightly because the VWMA also reacts to trading volumes.

The entry of the trade comes when the blue 50-period VWMA breaks the red 200-period SMA. This creates a bullish golden cross on the chart.

See that the 50-period SMA (yellow) reacts slower to the price action. In this manner, this indicator would have placed us into the trade later, which would have cost us part of the bullish price move.

The price then enters a deep bullish trend. On the way up, the red and the blue MAs pretty much move together in harmony.

The price then decreases the intensity of its bullish move. Suddenly, the bullish trend is interrupted and the stock breaks through the red 200-period SMA. At the same time, the 50-period VWMA also breaks the 200-period SMA, creating a bearish golden cross. This creates an exit signal from our trade.

Notice how the 50-period SMA takes more time to break the 200-period SMA.

The good thing is that while the VWMA provides an earlier signal, it’s not so early that you may jump the gun before the SMA makes a cross higher.  Therefore, this could give you a slight edge over the other traders or are waiting for further confirmation before opening the trade.

Lastly, since the VWMA is based on trading volume, I think it’s safe to say that volume is always a great indicator of where price will ultimately go for the short-term.

The one item we did not cover in this article is when to place a stop loss.  Assuming you will not stay in the market 100%, you will need to determine when it’s time to exit the trade.

A simple approach could be to use the most recent swing low as a point to get off the bus if things start to go against you.

Conclusion

1. The golden cross formed by two moving averages. When the faster moving average breaks a slower moving average, we get the golden cross signal.
2. The most common moving averages for trading the golden cross pattern is by using:

• 50-period MA as a faster moving average
• 200-period MA as a slower moving average

3. There are two types of golden cross indicators based on their potential:

• Bullish Golden Cross – occurs when the faster MA breaks the slower MA upwards. This creates a bullish signal on the chart.
• Bearish Golden Cross (Death Cross) – occurs when the faster MA breaks the slower MA downwards. This creates a bearish signal on the chart.

4. Three other averages you can use to spot a Golden Cross:

• 50-period EMA + 200-period EMA: The EMA indicator has the same functions as the SMA, but it places emphasis on the more recent periods.
• 50-period VWMA + 200-period VWMA: The VWMA indicator differs by placing emphasis on periods with higher trading volume.
• 50-period VWMA + 200-period SMA: The VWMA will react better to important price impulses, while the SMA will give you a peak into what the “herd” is up to. This method will provide you a slightly earlier trade signal versus using two SMAs.

If you want to take a deeper dive into the historical significance of the golden cross and the broad market, check out this article from the big picture.  The data goes all the way back to 1930!

The post Golden Cross – 3 Simple Strategies for Trading the Pattern appeared first on - Tradingsim.

If you trade the opening bell, then you are quite familiar with the morning gap.

What you might not be so accustomed to is the gap that fails and when I say fails - fails miserably.

This type of gap is known as the exhaustion gap.  In this article, I will cover the 7 steps to recognize one and how to then turn a profit when trading the pattern.

What is the Exhaustion Gap?

The exhaustion gap resembles most other gaps in the morning, but what makes the gap special is the swiftness of the reversal.

The exhaustion gap usually appears at the end of longer price trends.

When day trading, you can truly make the most money if you are able to catch a stock right when it’s starting a new price trend. This is what makes exhaustion gaps so attractive to day traders.

Psychology of the Exhaustion Gap

The exhaustion gap represents the herd mentality at its worst.  Everyone is running to sure profits without any thoughts of the potential pain of being wrong.

We’ve all seen it on the chart.  The huge 6% 5-minute up bar that closes at the high.  It’s so easy to give into this temptation and click the buy button and hop on the “money train”.

The combination of the lack of conviction when opening the trade and the rabid greed is what ultimately leads to the fierce selloff.

Once the stock begins to stall, everyone and I mean everyone realizes that the downside risk is too great.  No one of course thought through this as they were entering the position.

The lack of instant gratification and the newly perceived risk, leads to a number of retail traders all sending sell orders to the market.

At first, traders will attempt to enter limit orders, but the pain will be too great as the bright red background color lights up the time and sales window.  This is when the pattern really begins to hurt people.

Traders will then start entering sell at market.  This need to just get out is what drives prices lower with no regard for human life.

Volumes are crucial for recognizing the pattern. It is likely that the volumes are at a moderate level on the opening gap.  This price and volume action doesn’t last long as traders become anxious with the lack of further price movement.

Once the exhaustion gap begins, the volumes will pick up significantly.

Enough theory, let’s dig into a real-life example:

Exhaustion Gap

The chart begins with a gap through $27.30.  Everything looks normal until the price action creates a bullish gap with relatively low to moderate trading volumes.

Although volumes are low, the price continues to increase. This is a possible indicator that move up is fueled by retail traders.

Then you see a number of candles with long upper wicks, which is a sign that the bulls are unable to sustain any positive momentum.

Then the inevitable starts and Genpact begins to selloff with high volume. The exhaustion gap literally started a two-day selloff eclipsing the start of the up move.

Types of Exhaustion Gap

There are two types of exhaustion gap patterns based on the direction of the trend and their potential - bearish and bullish.

Bearish Exhaustion Gap

The bearish exhaustion gap develops at the end of strong up trends.

Exhaustion Gap 2

Does the above chart look familiar?  Well it should, it was the last example we covered, which is a great example of a bearish exhaustion gap.

Bullish Exhaustion Gap

The bullish exhaustion gap develops at the end of strong bearish trends.

This gap implies that the sellers are losing momentum and buyers are picking up steam. This creates long opportunities on the stock chart.

Bullish Exhaustion Gap

Notice the gap occurs at the end of a bearish trend with low volumes. Then the price reverses and at the same time volumes increase. This confirms the presence of a bullish exhaustion gap pattern.

7 Steps to Recognize and Trade the Exhaustion Gap

Now that you are familiar with the structure of the exhaustion gap, we will cover the 7 steps to recognize and trade the setup.

Step 1: Find a Trend

The pattern cannot be valid in the absence of a trend. Therefore, the first step you should take is to find a trending stock.

Step 2: Identify Low Volumes during a Gap

The next time you see a gap in the direction of the primary trend, you should closely analyze the trading volumes of the stocks. If the volume is light, this should spell potential trouble on the horizon.

Step 3: Identify Volume Increase during Reversal

If the price begins to roll and the trading volume begins increasing relative to the opening gap – then a reversal is highly likely.

However, this is not enough to confirm the pattern and to open a trade.

Step 4: Confirm the Exhaustion Gap

There are two methods for confirming the pattern.

The first one is by spotting a gap, which is in the opposite direction of the exhaustion gap. When the trend reverses, the opposite force is so strong that the price gaps opposite to the trend.

This sometimes creates an island reversal candle pattern on the chart. If you manage to spot an opposite gap, or even an island reversal candlestick pattern, then you have the strongest confirmation of the exhaustion gap.

The second way you can confirm the pattern is with a breakout through the opening gap range.

When the price action breaks the range opposite to the prior trend, then you have confirmed the pattern.

Example: If the previous trend was bullish and you get a bearish exhaustion gap, then the confirmation comes when the price breaks the lower level of the gap.

Exhaustion Gap Confirmation

The blue horizontal line on the image above shows the high point of the bearish exhaustion gap. The confirmation of the pattern comes in the red circle when the price action breaks the gap high upwards.

Step 5: Open a Trade

After you confirm the validity of the exhaustion gap, it’s time to open a trade.

If the exhaustion gap is bearish, then you should open a short position.

If the exhaustion gap is bullish, then you should open a long trade.

Simple enough, right?

Step 6: Create a Stop Loss Order

Make sure you always use a stop loss order when trading the pattern.

You have to remember that you are trading a high volatility stock.  This means that if things start going against you, they can do so in a hurry.

If you have a bullish exhaustion gap, your stop should be located below the bottom created at the time of the reversal.

If you have a bearish exhaustion gap, which you trade short, your stop should stay above the top created during the reversal.

Exhaustion Gap Stop Loss Order

The image above shows where your stop loss order should be placed. After the price action breaks the gap high and gives confirmation, you are supposed to buy the stock. At the same time, you should place a stop loss order below the bottom in the moment of the reversal. This is shown with the red horizontal line on the image.

Step 7: Exiting the Trade

The classical gap trading approach suggests that you exit your trades when the price action completes a move equal to the size of the gap. However, when trading the pattern you are likely entering a position right at the beginning of a new trend.

So, if you are looking for a conservative trade, exit your position at a price move equal to the size of the gap.

However, if you are looking to open yourself up to more risk, monitor price action and support/resistance levels for when to get out of the trade.

Exhaustion Gap Trading Example

Now that we discussed all 7 steps to recognize and trade the exhaustion gap, I will show you a real trading example of this pattern.

Refer to the image below:

Bearish Exhaustion Gap Trading Example

Above you see the 5-minute chart of Dominion Resources for June 7, 2016. The image illustrates an exhaustion gap trade.

• The image starts with a bullish trend, which is marked by the green bullish arrow on the chart.
• Suddenly, the stock creates a bullish gap, which is in the direction of the trend. Meanwhile, the trading volumes are very low, yet the stock keeps creeping higher.
• The price action then reverses while the volumes are increasing.
• The confirmation of the bearish exhaustion gap comes when the price action breaks its lower level.
• We need to sell the Dominion the moment of the breakout through the gap low.
• The stop loss order of this trade should be located at the top above the gap as shown on the image.
• See that the price creates lower highs on the way down, which indicates a bearish trend. Suddenly, one of the price’s highs gets broken upwards and we close our trade.

Conclusion

1. The gap signalizes that the trend might be exhausted, which creates a strong reversal potential on the chart.
2. Therefore, traders use the exhaustion gap to trade trend reversals.
3. The gap represents a big decrease in the people who trade with the trend, followed by a strong opposite force.
4. There are two types of exhaustion Gaps:

• Bearish: starts with a bullish trend, bullish gap and a bearish reversal.
• Bullish: starts with a bearish trend, bearish gap and a bullish reversal.

6. The 7 steps for recognizing and trading the Exhaustion Gap are:

• Find a Trend
• Identify Low Volumes during a Gap
• Identify Increasing Volumes During the Reversal
• Confirm the Exhaustion Gap
• Open a Trade
• Place a Stop Loss
• Exit the Trade

If you are interested in more real-life examples, I was able to find another write-up by a trader named Matt Trivisonno.  He did a pretty good job laying out the details of the pattern.

The post Exhaustion Gap: 7 Steps to Recognize and Trade the Pattern appeared first on - Tradingsim.

Today we will discuss one of the most popular continuation formations in trading – the rectangle pattern.

How can something so basic as a rectangle be one of the most powerful chart formations?

Well, wait no further, we will show you how to identify the pattern and the 5 essential steps to trading the rectangle formation.

The Meaning of the Rectangle Pattern in Technical Analysis

The rectangle figure is a trading pattern which can appear during bullish and bearish trends. The pattern consists of tops and bottoms, which are parallel to one another.  The other key point to illustrate is that the highs and lows are all horizontal.

Rectangle Pattern

This is a simple sketch of the rectangle chart pattern. The image shows how after a trend the price enters a range which has a rectangular shape.

Types of Rectangle Patterns

Bullish Rectangular Pattern

The bullish rectangle is a continuation pattern that develops during a strong uptrend.

Once the pattern is established, a break to the upside would imply a continuation of the bullish trend.

Bullish Rectangular Pattern

The sketch begins with strong uptrend that then flows into a consolidation period.

The power of the rectangle is that it creates a battle between the bulls and bears, that’s once resolved leads to a powerful move.

For all of my Richard Wyckoff fans, this is what we like to call “cause”.  It’s hard to see “cause” on a candlestick chart, but if you pull up a point and figure chart, you will see the price projection based on the number of x’s/o’s is huge!

Therefore, once the pattern breaks, the stock can really begin to run.

the price increase and ends up with a consolidation with the shape of a rectangle.

Bearish Rectangular Pattern

The bearish rectangular pattern is the mirror image of the bullish pattern.

Bearish Rectangular Pattern

As you see on the sketch above, the bearish rectangle figure starts with a price decrease. The price action then changes to a range with a rectangular shape.

If you spot a confirmed bearish rectangle, you should open a short position, once the stock breaks the bottom of the range.

5 Steps to Trading the Rectangle Formation

Now that you are familiar with the pattern, let’s walk through how to trade the rectangle formation.

Step 1: Identify the Rectangle Pattern

To identify the rectangle pattern, you first need to find a trending stock that is experiencing a consolidation period.

You will need to identify a minimum of two tops and two bottoms that are horizontal with one another.

These two tops and bottoms will create the support and the resistance levels of the rectangular range.

Identifying the Rectangular Pattern

This image shows the two tops and bottoms you need in order to identify a rectangular pattern on the chart. See that the image starts with a bullish trend, which becomes overextended and begins to go flat.

The pause in trend creates the first top. The next three price swings create a bottom, another top, and another bottom respectively. This stock behavior creates the impression that the price is locked inside a box.

When you see the price action hesitating, or bouncing for second time from the lower level, then you have confirmed the pattern.

Step 2: Spot a Rectangle Pattern Breakout

If the rectangle is bullish, you would need to see a breakout through the upper level of the pattern. This will confirm that the bullish move is resuming.

If the rectangle is bearish, then price would need to break the lower level of the figure for confirmation. In this case, we will have a signal on the chart that the price could initiate a new bearish move.

Rectangle Pattern Breakout

The image above shows how the breakout should look on a bullish rectangle. Notice that in our example we use two tops and two bottoms to form the pattern. However, the tops and the bottoms could sometimes be three or four on each level.

Step 3: Enter a Rectangle Trade

To open a position, you would first need to spot a rectangle breakout in the direction of the paused trend. Then you simply buy the stock if the rectangle is bullish, or you sell the stock if the rectangle is bearish.

Step 4: Secure Your Rectangle Trade with a Stop

You should not leave your rectangle trades to chance.

Like any other trading formation, you should use a stop loss order for managing your position.

When you spot the rectangle breakout you should measure the distance between the rectangle resistance and support. Then you should put your stop loss in the midpoint of this length.

This way your trade will be secured. Then you will know that the maximum you can lose from this trade is equal to half the size of the pattern.

This is how a stop loss order should be placed in a rectangle trade:

Rectangle Pattern Stop Loss

After you buy a security on a rectangle breakout pattern, your stop loss should be positioned as shown on the sketch above.

The reason we place the stop at the midpoint is because the breakout will likely have a shakeout before continuing the trend.

Therefore, if you place the stop right at the breakout point, the “smart” money will likely hit your stop to acquire more shares, before starting the run higher.

Step 5: When to Exit the Rectangle Pattern

There is a clearly stated rule about the minimum target of the rectangle trades.

When you trade the rectangle pattern, you should stay in your trade for a minimum price move equal to the size of the pattern.

This means that the distance between the support and the resistance of the rectangle, should be applied on the chart starting from the breakout moment.

Since your stop loss is in the middle of the rectangle range, this means that your target equals twice the size of the stop. This creates a win-loss ratio of 2:1.

Rectangle Pattern Profit Target

The yellow lines on our sketch show the minimum potential we need to expect when trading rectangles.

However, this is not all of it. In most of the cases the price action continues with a further move in the direction of the trend.

Sometimes we will be entering the second leg of the run, which can at times outpace the first leg up.

If you notice the stock is becoming really impulsive, then you can use swing lows or other indicators like a moving average to determine when to exit the position.

Rectangle Trading with Ascending Tops and Descending Bottoms

Let’s now explore how you can hold onto a trade beyond the initial target of the size of the rectangle.

If the rectangle is bullish, we will hold the trade as long as the price action is creating ascending bottoms on the chart. We will close the trade when we see descending tops and descending bottoms.

If the rectangle is bearish, we will stay in the trade as long as the price is printing descending tops. We will close the trade when we see ascending tops and ascending bottoms

Let’s now approach a real trading example of a bearish rectangle:

Rectangle Pattern Ascending Tops and Ascending Bottoms

Above you see the hourly chart of Intel. The image illustrates the day of April 14, 2016 and it shows the potential of the rectangular chart pattern.

The chart starts with a price decrease and a consolidation which has a rectangular shape.

The pattern is marked with the blue lines on the chart. As you see, the price creates three bottoms and three tops which are lined up on horizontal levels.

Therefore, we confirm the presence of the pattern and we short INTC when a breakout through the lower level appears.

We then place a stop loss in the middle of the pattern as shown on the image with the red horizontal line.

After we sell Intel, the price enters a strong downtrend.

As you see, the price action creates four descending tops, which are shown with the black lines on the image.

After the fourth descending top, the price action prints a higher high. At the same time, a higher bottom also develops on the chart.

These are shown with the brown lines on the image. Therefore, we received our exit signal based on these bullish developments and we exit the Intel trade.

Let’s now approach a bullish rectangle chart pattern:

Rectangle Pattern Ascending Tops and Ascending Bottoms 2

Above is the 2-minute chart of General Electric from June 14, 2016. The image shows a bullish rectangle top pattern.

The pattern is marked with blue lines on the chart. We need to buy GE the moment the price action breaks through the upper level. This happens after the bounce at the second bottom inside the pattern.

Therefore, we buy GE and place a stop loss order in the middle of the rectangular range.

One hour later, General Electric completes the minimum target of the bullish rectangle.

On the way up, the price action creates an ascending bottoms pattern. Each of the lows on the chart is higher than the previous one. This indicates the presence of a bullish trend on the chart.

Suddenly, the price action creates a descending bottom on the chart. However, the tops are still ascending.

In order to close the trade, we need to see descending tops and descending bottoms on the chart.

This would indicate the exhaustion of the bullish trend. The price action, though, does not give this signal on the chart.

The green lines on the image illustrate this behavior. This is an expanding triangle, which has bullish potential. Therefore, we hold our long rectangle trade.

The next bottom on the chart is ascending, which indicates that the bullish trend is still present on the chart. The price then creates another bullish impulse before the market closing.

We only exit the trade because we are day trading and do not want the risk of holding a trade overnight.

Conclusion

1. The rectangular pattern is one of the basic chart figures in trading.
2. Rectangles in trading have trend continuation character.
3. You have a rectangle on the chart when the stock interrupts a trend and creates at least two tops and two bottoms on horizontal levels. This way the price action looks like being locked in a box.
4. There are two types of rectangle patterns:

• Bullish Rectangle: It relates to bullish trends and has the potential to continue this bullish trend.
• Bearish Rectangle: It concerns bearish trends and it is likely to continue the bearish trend.

5. The 5 steps to trading the rectangle formation are:

• Identify a rectangle on the chart.
• Spot a rectangle breakout.
• Enter a rectangle trade in the direction of the breakout.
• Put a stop loss in the middle of the rectangular range.
• Stay in the trade until the price action completes at least once the size of the pattern. You can hit for further profit if the price action rules allows it.

6. One of the best indicators to trade rectangles is the Ascending Bottoms and the Descending Tops indicator.

• Stay in your bullish rectangle trades as long as the price action creates ascending bottoms. Close the trade when the price action confirms descending tops and descending bottoms.
• Stay in your bearish rectangle trades as long as the price action creates descending tops. Close the trade when the price confirms ascending tops and ascending bottoms.

Looking for more information on the rectangle pattern?  Check out this brief blog post from Peter Brandt, where he shows how the pattern not only works for equities but also the commodities markets as well.

The post Rectangle Pattern: 5 Steps for Day Trading the Formation appeared first on - Tradingsim.

Have you ever wondered why a stock will continue higher, even though the indicators are all rolling over? Well, this my friend is what we call divergence.

In this article, we will cover three indicators and a real-life example for how to trade the setup.

What is Divergence?

Divergence in trading is the contradiction between price action and indicators on the chart.

Since indicators themselves are based on price action, if the price is going contrary to the indicator, this is a clear sign that trouble is on the horizon.

This conflict of price and technical indicators is one of the strongest signals in trading.

The strength in the signal is related to the fact that a potential trend reversal is on the horizon.  From experience, you can make the most money if you are able to catch a trend at the very beginning.

Types of Divergence in Trading

There are two types of divergence on the chart – bullish and bearish.

Bullish Divergence

A bullish divergence is created when the price action is moving lower on the chart, while your indicator of choice is creating higher lows.

If you see this setting up on the chart, a trader should begin looking for opportunities to get long.

Bearish Divergence

A bearish divergence is created when the price action is moving higher, while your indicator of choice is making lower highs.

If you seeing this sort of discrepancy on the chart, you should begin looking for opportunities to open a short position.

3 Indicators you can use to Identify Divergence Signals

Now, we will walk through three different indicators you can use to trade the setup.  Each one will have their own sets of strengths and weaknesses.

It will be up to you to determine which method works best for your trading style.

1) MACD Indicator

The moving average convergence divergence consists of a faster and a slower line which are constantly interacting with each other and the zero line.

The most common trigger when using the MACD is when the fast line crosses through the slow line.  If the cross is up, then you have a bullish signal.  If the fast line crosses below, then you have a bearish signal.

Pretty simple if you ask me.

Now one additional point to make is that the bigger the distance between the two lines, the stronger the signal.

Divergence

When it comes to price discrepancies, the MACD will provide a bearish signal if the price action is increasing and the MACD lines are decreasing.

Conversely, if the price goes down and the MACD is trending higher, you have a bullish MACD divergence.

MACD Bearish Divergence

This chart illustrates a bearish MACD divergence. See that in the beginning of the chart, the price creates higher highs, while the MACD is decreasing.

This creates the bearish divergence on the chart. As you see, this signal is a precursor for the start of a new bearish trend.

2) RSI Indicator

RSI is the abbreviation for the relative strength index. The indicator is considered part of the oscillator family and is comprised of a line which fluctuates in three areas.

These three areas are the oversold zone below 30, the overbought zone above 70, and a neutral zone between 30 and 70.

RSI

The RSI gives a sell signal, when the line goes in the overbought zone above 70. Conversely, we receive a buy signal when the line goes in the oversold zone below 30.

RSI Bullish Divergence

This chart shows a bullish divergence with the RSI.

See that the price action creates lower bottoms on the chart. At the same time, the RSI sets higher bottoms in the indicator area. This creates a strong bullish divergence on the chart.

Once this discrepancy resolves itself, the price begins a strong bullish trend higher.

3) Stochastic Indicator

The stochastic is another tool from the oscillator family.

Similar to the RSI, the two stochastic lines fluctuate in three areas located in a 0-100 zone. These are the oversold area between 0 and 20, the overbought area between 80 and 100 and the neutral zone between 20 and 80.

The main signals of the stochastic oscillator (SO) are the overbought and the oversold signals. We receive a sell signal when the lines enter the overbought area between 80 and 100. Opposite to this, we receive a buy signal when the lines enter the oversold area between 0 and 20.

Stochastic Oscillator

The pink area is the neutral zone. The upper and the lower white areas are the overbought and the oversold zones respectively.

The stochastic divergence works the same way as the other two tools we discussed. The signal comes when the direction of the price action and the direction of the SO are different.

Stochastic Divergence

Above you see a chart and the stochastic attached to the bottom of the chart.

See that the price action is increasing while the stochastic tops are decreasing. This creates a bearish divergence on the chart.

As a result of this discrepancy, the price action reverses and enters a bearish trend.

Divergence Trading Strategy

Now that you are familiar with the concept of divergence, we will now discuss a day trading strategy you can use to profit from this setup.

Trade Entry

When you spot a disparity on the chart, you shouldn’t just hop blindly into your trade. You should first wait for price action to confirm the divergence signal.

This usually happens when the price breaks its trend line, signalizing a reversal. Another entry signal is when price breaks through support or resistance.

Once you receive either of these signals, you should use this an opportunity to initiate the trade.

Stop Loss

You don’t want to be surprised by an unexpected move against your trade, right? You can do this by using a simple stop loss order.

The right place for your stop loss order is above/below the top/bottom created by the reversal.

In theory, if you were able to catch the new trend as it is starting out, the previous swing point should not be breached.

Still think you can go without a stop loss? Well, have a look at this article by Drasko Kovrlija, where he highlights why traders should be careful using market divergence signals.

Profit Target

The first profit target method you can use is to draw trend lines on the chart.  As long as the stock honors the trend line, you should stay in the trade.

Another method you can use is to look for when a stock begins to make lower highs or higher lows.

This is an indication that you may have a new divergence developing, which is in the opposite direction of your position.

As you can see, it’s not so much about getting the quick buck, but more about initiating a trade at the start of a new trend and then riding it for all its worth.

Divergence - Trading Example

Divergence - Trading Example

You are now looking at the 10-minute chart of Netflix from Aug 16-23, 2016. The image illustrates the way we trade a bearish divergence. It is created by the price action and the MACD indicator.

The image starts with a price increase, which is marked with a green bullish channel. At the same time, we notice that the MACD indicator is creating lower highs on the chart. Thus, we confirm the presence of the bearish MACD divergence.

We cannot enter a trade just because we have a bearish divergence on the chart. We need confirmation of the reversal and we wait on the price action to give us that signal.

Suddenly, the price action breaks the lower level of the green bullish corridor. The break could be seen in the first red circle on the chart. We use this breakout to short NFLX.

At the same time, we place a stop loss order above the top created before the reversal. The stop is marked by the red horizontal line on the chart.

Netflix quickly enters a downtrend, which we have marked with the pink downtrend line.

The black arrows show the moments when the price tests the trend line as resistance.

Suddenly, the price action breaks the pink bearish trend line with the opening bell on Aug 23, 2016. This is a strong price action signal that the trend might change direction. Therefore, we close our short trade.

Conclusion

1. Divergence is created when the price action contradicts with the movement of an indicator.
2. Divergence is a powerful reversal signal, as it can identify the start of a new trend.
3. There are two types of divergence:

• Bullish Divergence – created when the price action is bearish and the indicator creates higher lows.
• Bearish Divergence – created when the price action is bullish and the indicator creates lower highs.

4. Three of the most powerful tools to identify divergence are the following:

• MACD Indicator
• RSI Indicator
• Stochastic Oscillator

5. A good system for day trading Divergence is:

• Enter a trade when you see a discrepancy, confirmed by a broken trend line, support/resistance or a reversal chart pattern.
• Place a stop loss above/below the top/bottom formed in the time of the reversal.
• Stay in the trade until you receive an opposite signal from the price action on the chart.

The post Divergence: How-To Day Trade the Setup with Three Popular Indicators appeared first on - Tradingsim.

The moving average is one of the most widely used indicators in all of trading. There are different types of moving averages based on calculation method and duration (periods).

Today we will discuss one of the most popular of all moving averages – the 200-day moving average. We will describe its structure and 5 tips for using the 200-day moving average when trading.

Ready to dive in?

Exactly How does the Moving Average Work?

The moving average smoothes the price action of a stock or financial instrument by taking the mean or average price movement over a given number of periods.

This way, instead of tracking every price movement like a tick chart or highs and lows of a candlestick; the moving average simply calculates its value based on the closing price.

This of course distills the price action down to one point for a period, thus providing a simple lens into the price action.

In theory, this provides you the trader, a straight forward, simplistic view of where the price has been and is likely to go in the short-term.

You can customize your moving average by changing the periods. For example, if you want to measure the price movements over a shorter duration, you will likely want to go with 10 periods or less.

If you are more concerned with the longer term view, you will want to go 50 periods or greater.

Let’s now review an example of how the simple moving average is calculated in the below table:

This table gives an example of 25 periods.

You could use these periods to calculate the simple moving averages for the 5-period SMA, 10-period SMA, 15-period SMA and the 20-period SMA.

The 5-period SMA needs 5 periods to begin printing a value. Therefore, the first 4 entries in the 5-Period SMA column are empty.

The 10-period SMA needs 10 periods to begin printing a value. Therefore, the first 9 entries in the 10-Period SMA column are empty. It works the same way for the 15 and 20-period SMAs.

When you visualize the data, you see 5 lines on the chart: the price action, 5, 10, 15, and 20-period SMAs.

Price and Moving Averages

The thick line illustrates the actual closing price values.

The other lines are the moving averages. Note that each of these starts with a delay because it needs preliminary values in order to start the calculation.

The 20-period simple moving average (pink) is barely visible in the right of the chart. After all, this SMA needs 20 periods in order to start printing values This means, that periods from 1 to 25 contain only six 20-period SMA values. These are the values from the periods (1-20), (2-21), (3-22), (4-23), (5-24), and (6-25).

Since there is a minimum number of price periods required to calculate the moving average, the indicator clearly falls in the lagging indicator column.

Hence the greater number of periods, the greater the lag.

All clear so far?

200-Day Simple Moving Average

The 200-day simple moving average is one of the most important tools when trading.

The simple reason, all traders and I mean all are aware of the number of periods and actively watch this average on the price chart.

Since there are so many eyes on the 200-day SMA, many traders will place their orders around this key level.

Some traders will look for the 200-day to act as resistance, while others will use the average as a buying opportunity with the assumption major support will keep the stock up.

For this reason, the price action tends to conform to the SMA 200 moving average quite nicely.

The 200-day SMA refers to 200 periods on the daily chart. This takes 200 trading days into consideration – which is a ton of trading days.

Remember, there is only about 251 trading days in a year, so the 200-day SMA is a big deal.

This is how a 200-day moving average looks on the chart:

200-Day Simple Moving Average

The blue line is the 200-day simple moving average. See that the line acts as a support at some points and conversely can trigger significant selling when breached to the downside.

One rule of thumb is when price breaks the average, it tends to continue moving in the direction of the breakout with vigor.

Signals of the 200-Day SMA

There are two basic signals in relation to the 200-day moving average:

1) If the price is above the 200-day SMA this is a bullish signal.

2) If the price is below the 200-day SMA this is a bearish signal.

Now, before you go running off and shouting how you are an expert, this is just the fisher price level of understanding.

Let’s dig a little further.

200-Day SMA Buy Signals

Bullish Breakout: When the price action breaks the 200-day SMA upwards it gives a strong long signal.

Support Bounce: When the price action meets the 200-day SMA as a support and bounces upwards, it creates a strong buy signal.

200-Day SMA Sell Signals

Bearish Breakout: When the price action breaks the 200-day SMA downwards, it creates a strong short signal.

Resistance Bounce: When the price action meets the 200-day SMA as a resistance and bounces downwards, it gives a very strong short signal.

It is important to mention that the 200-day SMA usually foretells long-term price moves. This makes it a very attractive technical tool for long-term investors.

5 Tips for Using a 200-Day Moving Average

1) Make sure the price action respects the 200-day moving average

Before you do anything with the 200-day moving average, you first need to see if the traders controlling the stock care.

In any stock, there are the traders which are controlling the price movement.  Therefore, you need to see if these traders are looking at the 200-day SMA or if they are looking at some other chart formation or indicator to make their trading decisions.

So, again, is the price action respecting the 200-day?  If yes, great, move on to tip #2.

If not, find out what your pool of traders is tracking and get on board.

2) Use the Volume Indicator when trading the 200-day SMA

Volumes are crucial when trading with the 200-day moving average. If volumes are high, then the stock is likely to be more volatile and more certain in its breakout.

If the price meets the 200-day moving average with low volume, then the average is more likely to suppress the price action or provide support on a pullback.

Just to be clear, high or low volume are neither negative nor positive.  It all depends on which way you are trading the market in order to determine if the volume action proves to be a friend or foe.

3) Trade Breakouts through the 200-day moving average only if volumes are high

200-Day Simple Moving Average Breakout

In the image above, you see that a small bounce appears during low volumes. The 200-day SMA acts as support, but a significant move is not created due to the absence of volumes. The real move appears when the price breaks the SMA during high trading volumes.

After the high volume break lower, a significant price move ensues.

4) Bounces give a higher Win-Loss ratio

While breakouts feel great when you are on the right side of the trade, remember the market only trends impulsively about 20% of the time.

So, if you want to make consistent profits, you will also need to understand how to trade the other 80% of the times.

Therefore, when you see the 200-day moving average, but ready to pull the trigger on bounce trades off the 200-day.

The beauty of playing the 200-day is that you can place tight stops on the other side of the trade as the price action begins to congest around the 200-day moving average.

The ability to place this tight stop loss is the reason the win-loss ratio is so high with the bounce patterns.

5) Exercise Patience with 200-Day Moving Average Breakouts

You should be cautious when trading breakouts with the 200-day SMA.

Let me quantify patience. If you see the price breaking the 200-day moving average, wait to see if it is able to close above the average.  In trading, you don’t get a medal for being the first person to jump into a trade.

Let the bulls or bears prove they are in control, then enter the trade on the next candlestick if the price continues in the same direction.

Patience when trading 200-day moving average

On this image you see the difference between valid and a fake breakout with the 200-day SMA.

Notice how a valid breakout appears during high volumes.

After the breakout, the price has the momentum to continue much higher.

200 SMA Trading Example

200-Day SMA Trading Example

Above is the stock chart of JP Morgan Chase & Co. from February through June. The blue line is the 200-day SMA.

The 200-day moving average chart starts with a bullish breakout through the blue line with high volume.

The price then creates a top above the breakout zone and ultimately pulls back to the 200-day SMA. On this pullback, you notice that the volume is drying up.

This is a sign to you that any bearish activity is being used by the major players to accumulate more of the stock.

We open a long trade and place a stop loss below the low prior to the break of the 200-day moving average.

The volumes then decrease and the price action returns to the 200-SMA for another test. The price bounces quietly from the line with relatively low volume.

Suddenly, the price breaks a pink flag upwards during with high trading volume.

JPM then begins a strong impulsive move higher, which lasts for three months. We exit the trade the moment the price breaks the blue bullish trend line downwards.

This one trade would have net over 10% in profit with a low beta Dow stock.

Not bad if you ask me!

Conclusion

1. Moving averages are arguably the most popular indicator in all of technical analysis.
2. One of the most important moving averages is the 200-day SMA.
3. There are many eyes looking at the 200-day SMA, which makes it a significant psychological level.
4. The two basic trading rules for the 200 SMA are:

• When the price is above, you should be long.
• When the price is below, you should be short.

5. There are two groups of 200-day SMA signals;

• 200-day SMA buy signals
  1. Bullish Breakout
  2. Support Bounce
• 200-day SMA sell signals
  1. Bearish Breakout
  2. Resistance Bounce

6. Our 5 Tips for Using the 200-day moving average:

• Make sure the price action respects the 200-day moving average
• Use the Volume Indicator when trading the 200-day SMA
• Trade breakouts through the 200-day moving average only if volumes are high
• Bounces give a higher win-loss ratio
• Exercise Patience with 200-day moving average breakouts

The post 5 Tips for How to Trade with the 200-Day Simple Moving Average appeared first on - Tradingsim.

What is the Accumulation Distribution Indicator

The accumulation distribution indicator (A/D) is an instrument which gives information about the money flow in a stock. The word “accumulation” refers to how much equity of the stock is bought. Contrary to this, the word “distribution” refers to how much equity of the same stock is sold.

In this manner, the A/D is a volume based indicator.

The A/D is a single line tool from the oscillator family. The accumulation distribution Line (ADL) fluctuates above and below a zero (0.00) level.

This is an image of an accumulation distribution oscillator. See that the line can fluctuate quite rapidly, which, is a result of the indicator reacting to the trading volumes of the security.

Traders use the A/D indicator to validate trade entries and exits.

Accumulation Distribution Calculation

The calculation of the A/D consists of three formulas - money flow multiplier (MFM), money flow volume (MFV), and ADL.

The first formula involved in the calculation is the MFM:

MFM = ((Close – Low) – (High – Close)) / (High – Low)

Then we need to calculate the MFV:

MFV = MFM x Volume on the Period

Lastly, we have the ADL:

ADL = Previous Period ADL + Current MFV

Let’s now walk through an example:

Close = $650.00

Low = $648.00

High = $651.00

Volume on Period = 9,500

Previous Period ADL = 180,000

Let’s now add the values to the formulas:

MFM = ((650 – 648) – (651 – 650)) / 3

MFM = (2 – 1) / 3

MFM = 0.3333

MFV = 0.3333 x 9500

MFV = 3,166.35

ADL = 180,000 + 3,166.35

ADL = 183,166.35

Let’s now visualize it:

ADL Value

In other words, when you apply the parameters used in this example, this is how the ADL prints on the chart. Now see what happens if we add 10 more values to our calculation.

These are the values:

184328
185123
186000
179000
175000
181000
183500
189000
194000
186000

And now, let’s visualize it!

ADL Change

This now looks more like the real thing, right? The point is that the A/D determines these values based on the high, low, close, and volume of the respective period. In this manner, volumes and volatility are crucial for the technical performance of the tool.

4 Trading Signals Using the Accumulation Distribution

There are two basic signals created by the A/D tool. These are the trend confirmation signal and divergence.

ADL Trend Confirmation

The trend confirmation signal is very easy-to-understand. It also consists of two types:

               1) Bullish ADL Trend Confirmation

The bullish trend confirmation signal comes when the A/D line increases during high volumes. This means that a great amount of money flow is being accumulated. This is likely to cause an increase in the price of the security.

               2) Bearish ADL Trend Confirmation

The bearish trend confirmation signal comes when the A/D line decreases during high volumes. This means that a great amount of money flow is being distributed. In this manner, the respective security is likely to decrease in price.

These two signals are crucial for the success of the A/D oscillator. Traders use them to set entry and exit points on the chart in order to hop into emerging trends and to exit in the right moment.

ADL Divergence

The ADL divergence is another very important feature of the accumulation/distribution indicator. There are two types of ADL divergence based on their potential:

               3) Bullish ADL Divergence

To get a bullish ADL divergence we need to identify a couple things on the chart. The first thing you need is a bearish price action. The second thing is an increasing ADL. These create a strong bullish signal on the chart.

               4) Bearish ADL Divergence

To get a bearish ADL divergence we need to identify exactly the opposite situation. The first thing you need is a bullish price action. The second thing is a decreasing ADL. These create a strong bearish signal on the chart.

On Balance Volume vs. Accumulation Distribution

An indicator which is considered similar to the ADL is the On Balance Volume (OBV). This is another volume-based oscillator, which is used to measure the strength of the buying and selling forces.

It pretty much looks the same way as the A/D and the signals it gives are interpreted the same way. In this manner, the two tools could be combined into a trading strategy.

However, the two indicators could sometimes diverge. The ADL could move upwards, while the OBV could move downwards.

So, why would the two indicators diverge if they are both volume based?

The answer to this question is due to the differences in the formulas of these indicators. The ADL compares the current close with the current high and current low. The OBV compares the current close with the previous close.

The potential divergence between the two tools could create a very lucrative trading opportunity. It is very important to use the trading volumes in this situation. If the volumes are high, then the price action is likely to create a big candle on the chart.

But, the real question is what direction will the stock go after the divergence emerges?

Well, the volume indicator could provide the answer to this question.

Check out if the stock is trending first. If it is, then have a look at the volume indicator. If the volumes are high, then the trend is valid. In this manner, the divergence between the ADL and the OBV should be traded in the direction of the trend.

On Balance Volume versus Accumulation Distribution Indicator

Here we have a classic divergence between the OBV and ADL. The two lines cross creating a divergence. Fortunately, the trend is bearish and is confirmed with relatively high trading volumes. Therefore, we get a bearish signal on the chart.

Accumulation Distribution Trading System with the OBV

Let’s now discuss the trading rules involved when trading with the ADL versus the On Balance Volume:

ADL & OBV Trade Entry

Enter a trade when you get a matching signal between the two indicators, accompanied by higher trading volumes.

This also concerns the divergence between the two indicators. You should enter an ADL OBV divergence trade, when the two indicators contradict during high volumes. In this case you enter in the direction of the trend.

ADL & OBV Stop Loss

Make sure you always protect your trades with a stop loss order. After all, this type of investing involves volatile trading on high volumes, which in many cases happen on margin (all you day traders out there).

Well, you want to be protected in these trading scenarios.

To determine the right place for your S/L order, you should use the price action rules. If you are entering a long trade, you should find a support prior to the trade signal. Then you place your stop loss underneath. If you are going short, you do the exact opposite; find a resistance level established prior to the signal and place your stop order above this level.

Profit Targets using the ADL and OBV

If the ADL and the OBV are increasing on high volumes, you should hold your long trade.

If the ADL and the OBV are decreasing, then you should be short for the same period of time. However, if the indicators change their attitude during your trade, you need to close your trade and take your profits.

Another approach is to adjust your stop when you see opposite signals on the chart.

Accumulation Distribution Strategy Example

Now let’s approach a strategy which will combine these rules into a complete trading system.

Accumulation Distribution Trading Strategy

We have the 2-minute chart of Amazon from August 26, 2016.

The chart starts with a range from the leftmost side. The ADL and the OBV indicators are concentrated in the upper area. Suddenly, the price begins to decrease.

At the same time, the two indicators decrease as well while volumes are increasing. The decrease of the indicators gives you a short signal on the chart. The increasing volumes are used to confirm the validity of the signal. Therefore, we short AMZN.

The stop loss for this trade should be placed above the last resistance prior to the price decrease. This stop loss area is highlighted with the red horizontal line on the chart.

After we sell AMZN, the price begins to decrease. The drop is so strong that the stock even gaps down 4 periods after we enter the market.

In the middle of the bearish trend, the two indicators enter a range phase. We outline the levels of the range with the two black lines in the area where the indicators are plotted.

At the same time, the volumes are decreasing as well. Then the two indicators start increasing and the A/D line breaks the upper level of the range. At the same moment, the price action creates a bigger bullish candle. We can use this candle to exit our short trade. See that the price switches directions afterwards.

Let’s now review a trading example of a divergence between the ADL and OBV indicators:

On Balance Volume - Accumulation Distribution Indicator - Divergence - Trading Example

Above you see the 2-minute chart of Oracle from Aug 22, 2016. The image shows a contradiction between the accumulation/distribution and the OBV.

After a drop, the price attempts to enter a bullish trend. The two indicators have been moving toward each other until they cross.

The interaction (green circle) is represented by the red and the green lines in the indicator area. At the same time, the trading volumes have been increasing.

Since the price is attempting to enter a bullish trend, we trade in the bullish direction. We open a long trade right after the crossover of the two indicators.

The stop of this trade should be placed below the bottom created at the beginning of the trend reversal. The location of the stop is shown with the red horizontal line.

The price increase continues afterwards with increasing volumes.

Suddenly, Oracle explodes in a bullish direction. The increase is rapid and is contained by only two candles. At the same time, the two indicators also increase and reach relatively high values. Then the ADL and the OBV start dropping, which is shown in the red square.

While the indicators are beginning to fall, the volume also has a dramatic drop. This is the signal we were waiting on for confirmation to exit our trade.

Conclusion

1. The accumulation distribution is a volume based oscillator.
2. It consists of a single line, which fluctuates above and below a zero level.
3. The accumulation distribution Calculation consists of three formulas:

• MFM = ((Close – Low) – (High – Close)) / (High – Low)
• MFV = MFM x Volume on the Period
• ADL = Previous Period ADL + Current MFV

4. The 4 tips to trade signals using the Accumulator Distribution Indicator are:

• Bullish Trend Confirmation
• Bearish Trend Confirmation
• Bullish Divergence
• Bearish Divergence

5. The three important rules to trade with the ADL and the OBV are:

• Open a trade when you find matching signals. Open a trade in the direction of the trend if the two indicators contradict (diverge, cross) during high or increasing volumes.
• Place a stop above/beyond a support/resistance level created prior to the signal.
• Stay in the trade as long as the two indicators are supporting your trading decision.

The post How to Day Trade using the Accumulation Distribution Indicator appeared first on - Tradingsim.

The bump and run chart pattern is a rare formation. So, to make things simple, we will walk you through 5 simple steps for identifying the pattern.

I am not going to stop there though. I will also provide you a clean strategy to trade this pattern for profits in the market.

What is a Bump and Run Chart Pattern

The bump and run reversal chart pattern a.k.a. BARR is formed when the price trend creates an impulsive move higher on the chart. The price action then reverses and the stock has a rapid decrease, breaking its trend line.

The bump and run pattern is mostly visible on larger time frames such as the daily.   However, the setup can work just as well on intraday charts, you will just have to search long and hard to find the pattern is it is a rare formation.

bump and run

Above you see a standard bullish trend line. The trend consists of four bullish trend impulses. As you see, the first three are relatively on par with one another.

However, the last impulse is relatively big, thus creating the “bump” on the chart.

After the bump is completed, the price starts losing its bullish characteristic. Suddenly, the price action pulls back rapidly, breaking the green bullish trend. The rapid reversal of the trend is the “run” component of the pattern.

Types of Bump and Run Patterns

The bump and run chart pattern has a very strong reversal characteristic.

There are two types of bump and run patterns – bearish and bullish.

Bearish Bump and Run

The bearish bump and run pattern starts with a standard bullish trend.

Suddenly, a relatively big bullish trend impulse appears on the chart – the bump. After new highs are reached, the price action reverses, tests the support line and breaks it with a vengeance.

This line break is the start of the run and if you are able to catch a stock at this point, you stand to make a significant gain on the trade.

Bullish Bump and Run

The bullish bump and run is the same setup of the bearish pattern, just on the opposite side of the trade.

The bullish bump and run pattern starts with a standard bearish trend. Suddenly, a relatively big bearish trend impulse appears on the chart – the bump. After new lows are reached, the price action reverses, reaches the bearish trend line and breaks it upwards to start a fresh bullish move – the run.

5 Tips to Confirm a Bump and Run Chart Pattern

The structure of the bump and run pattern is very specific. Therefore, you should carefully examine the chart pattern before placing a trade.

1) Angle of the General Trend

First, you need to identify a trending stock. The inclination of the pattern should be anywhere between 30 and 45 degrees on the chart.

2) Angle of the Bump

The bump on the chart should definitely be steeper. After all, it is a trend impulse, right? The valid bump would have an inclination anywhere between 45 and 60 degrees on the chart.

3) Trading Volumes

Volumes are crucial for the validity of the bump and run formation. During the preceding trend, the volumes are usually low. Then the bump appears on the chart and volumes will tend to spike higher.

This helps the stock accelerate higher, creating the actual bump on the chart.

4) Bump and Run Pattern Sizes

Another crucial aspect of the bump and run structure is the size of the bump compared to the previous impulses.

S1: The first size is the vertical distance between the top of the price action prior the bump and the leading trend line.

S2: The second size is the vertical distance between the top of the bump and the leading trend.

Then you need to compare these two sizes. To confirm the validity of the bump and run pattern, S2 needs to be at least twice the size of S1.

5) Confirmation of the Bump and Run Reversal

The actual confirmation of the pattern comes with the breakout through the leading trend line. After the bump is created, the price is expected to initiate a move toward the trend line. When the trend is reached, it is possible that the price action hesitates for a while. However, if the pattern is valid, you will see a breakout through the trend. If the breakout appears, then the pattern is valid and you have confirmation to pursue its potential.

bearish bump and run pattern

Above you see a bullish trend and a BARR pattern. Our bump and run analysis manages to find the 5 rules needed to confirm the validity of the pattern:

1) We have a 30 Degrees bullish trend (green).

2) Suddenly, the price shoots up to 60 degrees, creating the bump (blue).

3) The trading volumes were decreasing during the creation of the leading rend. In the red square we see that the volumes are picking up in the time of the bump creation.

4) We measure the two sizes and we confirm that the bump size is more than twice the size of the last impulse prior to the bump.

5) We get a confirmation of the pattern in the moment when the price action reverses and breaks the leading trend. This is shown in the red circle on the chart.

Since we have these five symptoms on the chart, we confirm the validity of the bump and run pattern.

Bump and Run Trading System

Now that you have the five tips to confirm a bump and run chart pattern, we will dive into a trading strategy.

Bump and Run Trade Entry

The rule here is clear. You need to open a trade the moment you confirm the validity of the pattern and spot a breakout through the leading trend.

If the bump and run indicator is bullish, then you should trade the bullish breakout with a long position.

If the bump and run indicator is bearish, then you should trade the bearish breakout with a short position.

Bump and Run Stop Loss

The bump and run formation involves high trading volumes. Therefore, your trade is likely to be subject to a lot of volatility.

Therefore, if the price decides to move against you, this could happen in a flash. Therefore, I advise you always to protect your bump and run trades with a stop loss order.

A good place for your stops when trading bumps and runs is the midpoint between the top of the bump and the moment of the breakout.

bump and run stop loss

The above image illustrates the proper placement of the stop loss when trading the bump and run pattern.

We take the distance between the level of the big candlestick and the moment of the breakout. Then we place the stop in the middle of this distance.

Bump and Run – Profit Target

The expected price move during a BARR trade is indefinite. In this manner, we do not have a clear picture of how long the reversal could last. For this reason, I recommend you to apply price action rules when trading with the bump and run reversal indicator.

Stay in your trades as long as the price action creates tops and bottoms inclined in your favor. Also, watch out for reversal chart patterns. A valid reversal chart pattern could always provide an on-time exit point from a trade.

Bump and Run Trading Example

Since we have covered how to identify the bump and run pattern, plus the trading rules, it is now time to walk through a real-life trading example.

bump and run trading example

Above you see the daily chart of AT&T from July 2015 through April 2016. The image illustrates a bullish bump and run pattern, where we will apply our trading rules.

The first thing we do is identify a bearish trend on the chart.

We draw the green trend line and measure the angle of the decline. The trend is declining at 40 degrees and then comes the bump.

The price drops rapidly under 60 degrees with high trading volumes. This confirms a bearish bump on the chart.

The price action reverses afterwards, then we measure the size of the bearish bump.

The orange arrows compare the bump with the previous trend impulse. We realize that the bump is almost three times bigger. This creates a very strong implication that a valid bump and run pattern is about to be confirmed.

However, we need to see a breakout through the green bearish trend in order to identify a valid BARR pattern and to enter a trade.

We buy AT&T when we see a breakout in the trend. At the same time, we place a stop loss at the midpoint of the distance between the tip of the bump and our entry point. This is shown with the red horizontal line on the chart.

The price quickly begins to increase after entering the trade.

See that the first correction is a bit steep, but leaves our stop untouched. The price jump then increases its intensity, which is shown with the pink lines on the chart. As you see, the upward movement is exponential.

Suddenly, the price action creates a head and shoulders reversal chart pattern. You can see the figure in the red rectangle on the chart. The black line in the rectangle represents the neck line of the pattern. The price action then breaks the neck line downwards, confirming the authenticity of the reversal figure. This creates a strong sell signal on the chart. Therefore, it is better to close the trade in this case on an assumption that the price action might start a decrease.

Conclusion

1. The bump and run Reversal (BARR) pattern is a trend related formation.
2. The pattern starts under a regular trend. Then the price action creates a big trend impulse. Suddenly, the price action reverses rapidly and breaks the leading trend line.
3. There are two types of BARR patterns based on the potential they create:

• Bearish Bump and Run – It starts with a bullish trend, and it is supposed to reverse the price action.
• Bullish Bump and Run – It starts with a bearish trend, and it is supposed to reverse the price action.

4. 5 Tips to Confirm a Bump and Run Chart Pattern:

• Find a trend line with an inclination between 30 and 45 degrees.
• Discover a sharp trend impulse which is inclined between 45 and 60 degrees. This would be a potential bump.
• Confirm relatively high trading volumes in the time of the impulse. This is now a confirmed bump.
• Confirm that the size of the bump is at least twice bigger that the previous trend impulse.
• Validate the authentic pattern when the price reverses and breaks the leading trend line.

5. The trading rules of the bump and run reversal pattern are:

• Open a trade the moment when the price action breaks the trend line and confirms the pattern.
• Place a stop loss on the midpoint of the distance between the tip of the bump and the moment of the trend breakout.
• Use price action rules to determine when to exit from your trade.

The post 5 Tips for Confirming and Trading the Bump and Run appeared first on - Tradingsim.

The moving average indicator is one of the most important and commonly used tools in stock trading.

Today we will go through 6 tips for how to use a 50-day moving average.

Why Use a Moving Average?

The moving average is a trading indicator used to smooth the price action on the chart.

The moving average indicator takes into account a number of periods when calculating its value.

These periods could be adjusted, which also modifies the appearance of the line on the chart. The more periods it takes into consideration, the smoother the line.

Let’s say we wanted to calculate the 5-period moving average for the following values:

3.00
4.00
8.00
10.00
12.00

The 5-period simple moving average would equal:

(3+4+8+10+12)/5 = 7.4

Each time a new period appears on the chart, the formula is recalculated.

The moving average is a lagging indicator. The reason for this is that the moving average needs a given number of data points based on the periods in order to print a value.

5-Day SMA

The purple curved line on the chart is a 5-period simple moving average. This line is not smooth at all. This is because 5 periods is such a small time frame and thus will result in a number of trade signals.

More signals then I care to track.

Now that we have provided a visual of a moving average, let’s dig into the 50-day in order to see the difference on a longer time frame.

What is a 50 Day Moving Average?

The 50 day moving average is one of the most commonly used SMAs in stock trading.

This makes trade signals around this line pretty reliable based on the number of eyes monitoring the trading activity at this level.

Below you will see a real 50-day moving average on the chart.

50 Day Moving Average

As you can see, the 50-day SMA is much smoother than the 5-period moving average.  This will naturally result in less trading signals and an increase significance on breaches of the average.

6 Tips for How to Use the 50-Day Moving Average

Now that we have discussed the structure of the 50-day moving average, I will now introduce you to six essential tips for how to use the indicator.

• Stock price above 50-day moving average is considered bullish.
• Stock price below 50-day moving average is considered bearish.
• If the price meets the 50 day SMA as a support and bounces upwards, you should think long.
• If the price meets the 50 day SMA as a resistance and bounces downwards, you should think short.
• If the price breaks the 50 day SMA downwards, you should switch your opinion to bearish.
• If the price breaks the 50 day SMA upward, you should switch your opinion to bullish.

These six rules are crucial for understanding the characteristic of the 50-day simple moving average indicator.

50 Day Moving Average Trading Strategy

In this trading strategy, we will lay out the entry, exit and stop loss when trading.

Let’s dig into this a little further.

50 Day Moving Average Trade Entry

To enter a 50-day moving average trade, you should wait for a breakout. Whenever the price breaks the 50 day SMA, you should open a trade in the direction of the breakout. In most cases, the price action will continue in the direction of the breakout.

50 Day Moving Average Stop Loss

Every 50 day moving average trade should be protected with a stop loss order. Nothing is sure in stock trading. The 50 day moving average strategy is no different. In the long term, we expect the price action to continue in the direction of the breakout. However, there will be cases when the price action will surprise us.

The price action could sometimes rapidly shoot in the opposite direction with a big candle. This could happen due to the release of some unexpected report.

The ideal place for our stop loss is beyond a price edge created prior to the signal we use to enter the trade.

If the price breaks the 50 SMA upwards, we need to go long, placing a stop below a bottom prior to the breakout. The opposite is true for bearish trades.

If the price breaks the 50 SMA downwards, we need to short the stock placing a stop below the bottom prior to the breakout.

50 Day Moving Average Take Profit

The rule to close 50 day moving average trades is very simple. Hold your trades until the price action breaks your 50 day moving average in the direction opposite to your trade.

If you are long, you close the trade when the price breaks the 50 day SMA downwards. If you are short, you close the trade when the price breaks the 50 day SMA upwards.

Trading Example with the 50 Day Moving Average

Now let’s approach a real 50 day moving average trading example:

50 Day Moving Average Trading Example

Above you see the 50 day moving average chart of Bank of America. The image covers the period between December 2015 and June 2016. The blue curved line on the graph is the 50-day SMA.

The action on the chart comes in the moment when the price breaks the 50-period SMA downwards. The breakout is shown in the red circle on the image. See that the price first attempts a couple of times to break the SMA downwards.

However, we need to wait until the price action breaks the level in order to get a valid bearish signal. Therefore, we short the stock when we see a sharp decrease through the last two price bottoms below the 50 day SMA.

We place a stop loss order above the last big top on the chart. The right location of your stop loss order is shown with the red horizontal line on the chart.

See that the price creates a very sharp decrease afterwards and enters a bearish trend. We need to stay in the trade as long as the price is located below the 50-period SMA.

The blue channel on the chart displays when the price breaks the 50 day SMA and we close the trade.

However, this is also a long signal and we tackle the market with a new trade, which is bullish. We place a stop loss order below the last bigger bottom on the chart as shown on the image.

The price then returns and tests the SMA as a support. A bullish bounce appears afterwards, which resumes our bullish hopes. The price experiences a few bumps along the way, but the 50 SMA sustains the price action.

The price then creates a top, which is lower than the previous on the chart (pink line). Then we see a breakout through the 50 day moving average. Therefore, we close the trade on the assumption that the price action will reverse and this is exactly what happens.

This case is an example of two 50 day moving average trades, which differ in terms of their profitability.

The first trade is short and it brings a solid profit of 15.60% for three-and-a-half months. However, the second trade brings only 0.22% for about three months.

Your trading results will vary.  This is a cost of doing business and is simply unavoidable in the market.

The key is knowing that your system will win in the long run and sticking to your convictions.

50 Day Moving Average vs. 200 Day Moving Average

Another important moving average is the 200 day moving average. I specially mention this tool, because it creates a very strong signal when used in conjunction with the 50 day moving average.

This signal is called the golden cross.

The golden cross is a signal created by the 50-day moving average crossing through 200 day moving average to the upside.

A good Golden Cross trading strategy is to open trades in the direction of the golden cross and to hold them until a break in the opposite direction.

Golden Cross - Trading Example

Above is the daily chart of Google from June 2015 to July 2016. The blue line on the chart is a 50-day moving average. The red line on the chart is the 200-day moving average.

In the green circles we have highlighted golden crosses.

The first golden cross is bullish and we use it to buy Google.

We place a stop loss order below the bottom prior to the cross. The trade needs to be held until the two moving averages create a bearish sell signal.

This long trade with Google generates a profit of 22.28% for one year.

Remember, the golden cross can be used very effectively when trading the stock market.

Conclusion

• The moving average is an indicator which smoothes the price action on the chart by averaging previous periods.
• The 50-day moving average is one of the most commonly used indicators in stock trading.
  1. It averages 50 periods of a stock.
  2. Many investors and traders look at the 50 day moving average.
  3. Therefore, the 50 day SMA is a psychological level, which acts as a support and resistance.
• The 6 tips to use a 50-day moving average are:
  1. Stock price above 50-day moving average is considered bullish.
  2. Stock price below 50-day moving average is considered bearish.
  3. If the price meets the 50 day SMA as a support and bounces upwards, you should think long.
  4. If the price meets the 50 day SMA as a resistance and bounces downwards, you should think short.
  5. If the price breaks the 50 day SMA downwards, you should switch your attitude to bearish.
  6. If the price breaks the 50 day SMA upward, you should switch your attitude to bullish.
• To trade with the 50 day SMA you should remember these rules:
  1. When the price breaks the 50-period SMA, you should trade in the direction of the breakout.
  2. You should place a stop loss order beyond a bigger top/bottom prior the breakout.
  3. You should stay in the trade until the price action breaks the 50 day moving average in the opposite direction.
• The 50 day SMA combines well with the 200 day SMA:
  1. The crossover of the 50 day moving average vs 200 day moving average is called a golden cross.
  2. When you see a golden cross, you should look to get long.
  3. You should place a stop loss beyond a bigger top/bottom prior to the cross.
  4. You should hold the trade until the 50-period SMA is breached to the downside.

The post 6 Tips for How to Use the 50-Day Moving Average appeared first on - Tradingsim.

What is the Kicker Candlestick Pattern?

The kicker formation is a reversal pattern that starts with a candle in the direction of the primary trend, followed by a gap contrary to the trend.

Talk about being caught on the wrong side of the trade if your judgement is off.

The pattern symbolizes a strong change in the investor’s attitude about the stock. This usually happens due to the release of crucial information about the company.

Kicker Candlestick Signals

There are two types of kicker candlestick patterns - bullish and bearish.

Bullish Kicker Candlestick Pattern

The bullish kicker candlestick pattern develops during bearish price move. I know that is counter intuitive, but remember, the stock gaps in the opposite direction of the primary trend – hence bullish.

bulish kicker pattern

See that the two candles of the gap are bearish and bullish respectively. The key point to call out is that the candles never overlap.  This is essential when validating the pattern.

Bearish Kicker Candlestick Pattern

The bearish kicker candlestick pattern appears during bullish price moves.

The pattern is the mirror of the bullish candlestick pattern and is a great indicator that the party is over.

bearish kicker pattern

As you have probably guessed, the pattern is absolutely the same as the bullish kicker, but upside down. This time the two candles of the gap are bullish and bearish respectively.

Again, notice how there is no overlap between the two candlesticks.

Kicker Pattern Candlestick Charting

When you spot a bullish kicker pattern on the chart, you should look to get long.

Conversely, if you identify a bearish kicker pattern, you should look to get short.

Bullish Kicker Charting Example

Let’s now do a deep-dive of a real bullish kicker charting example:

bullish kicker trade example

This is a 5-minute chart of Facebook, which shows the market opening on August 26, 2016.

After a decrease, FB finishes the trading day with a bearish candle.

The next trading day starts with a bullish gap and a big bullish candle. The last candle of the previous trading day and the first candle after the opening do not overlap.

This confirms the authenticity of a bullish kicker signal on the chart. For this reason, we open a long trade after the gap up candle.

We place a stop loss order right below the last candle of the previous trading day. This stop loss order protects us from any sudden price moves against our trade.

One point to note is that we opened our position after a large candlestick.  There isn’t necessarily anything wrong with this approach, but with such large price expansion, odds are the stock will go lower before heading higher.

This is essentially what happened in the above example.

You as a trader need to be able to discern when a stock is having a normal retracement.  Keeping a close eye on volume is a great way to locate healthy retracements, versus a trade you need to close immediately.

Shifting gears back to Facebook – the stock developed a wedge pattern after the huge gap up candle.

As you probably know, the rising wedge pattern has strong bearish sentiment.

We close the long trade with Facebook the moment the price action closes a candle below the support line of the rising wedge pattern. This is shown in the red circle on the chart above.

Bearish Kicker Charting Example

Now that we’ve covered the bullish pattern, let’s dig into the bearish version of the pattern.

bearish kicker trade example

Above is a 1-minute chart of Pandora Media from Aug 30, 2016. The image illustrates a bearish kicker candlestick pattern, which developed after an impulsive uptrend.

The last candle of the upward move is bullish. A bearish gap followed by a bearish candle appears afterwards. This confirms the validity of the bearish kicker on the chart. Therefore, we sell Pandora stock and we place a stop loss above the pattern top as shown in the image.

The key differential of this example from the previous bullish example is the small size of the gap candlestick.

I personally like this setup, because it allows me to keep a tight stop in the event things go against me on the trade.

Also, if things do go in your favor, you are able to reap more of the profits on the way down.

As you see the price enters a bearish trend after the kicker pattern presents itself.

We are able to draw a straight trend line through the tops of the patterns.

We hold the trade until the price action closes above the blue line.

Kicking Pattern Candlestick vs. Exhaustion Gap

So, how does the kicker pattern measure up to the more commonly found exhaustion gap?

The exhaustion gap consists of a gap in the direction of the trend, formed during low trading volumes. The trend might continue in the direction of the gap for a brief period, before the volume picks up and the price action reverses.

exhaustion gap

Above is the 5-minute chart of Berkshire Hathaway from Aug 31, 2016.

Notice that during a downtrend, the stock gaps down with relatively low volume.

The gap and the following decrease represents the last efforts of the bearish believers.

Suddenly, the attitude shifts abruptly and the bulls take control.

Volumes then pick up quickly and the stock changes its direction and begins a new bullish trend.

See that the increase is steady and retraces the entire down move.

If you want to trade this case, you should play it the following way:

exhaustion gap - long example

The blue horizontal line on the chart is the top of the exhaustion gap. You could buy BRK when the price action breaks this level with high volume.

You should also use a stop loss order for your trade. It should be placed below the bottom created at the moment of the reversal – red line.

Now that you have a basic understanding of both the kicker and exhaustion gap patterns, let’s have a head-to-head competition between the two patterns.

Exhaustion Gap

                Positives:

• The exhaustion gap is found more frequently in the market when compared to the kicker pattern.
• Bigger price moves are created after the exhaustion pattern.
• The exhaustion gap utilizes trading volume to confirm the validity of the pattern.

                Negatives:

• The trades involved with the exhaustion gap usually take more time.
• The exhaustion has a lower success rate than the kicker pattern. Many of your exhaustion gap trades will continue in the direction of the primary trend for some period of time. This can often lead to you being stopped out before the trend reverses.
• The stop loss is often pretty far from your entry price. By definition, this increases the risk you are taking on the trade.

Kicker Pattern:

Now let’s review the positives and the negatives of the Kicker pattern.

                Positives:

• The kicker pattern has a higher success rate.
• The kicker pattern has a specific structure, which reduces the likelihood of you mistakenly identifying the pattern.
• The stop loss of the kicker pattern is tighter than with the exhaustion pattern. The reason for this is that the gap jumps in the direction of the reversal. In this manner, your stop loss will only contain the size of the gap and the last candle of the previous day. In comparison, the exhaustion stop should contain the size of the gap, including the extension, which comes after the gap.
• The actual kicker trade usually takes a shorter period of time to complete.

                Negatives:

• The kicker is a very rare chart pattern. In this manner, you will have a tough time identifying the pattern.
• The price moves after the Kicker are a bit smaller than the ones created by the exhaustion gap. The reason for this is that the exhaustion creates a new trend.

So, what’s the verdict?

Depends on what you hope to get out of the trade.

I won’t do that to you, not yet another blog post where the author speaks out of both sides of their mouth.

Drum roll….the Kicker pattern is definitely the better trading alternative relative to the exhaustion gap.

The main reason for this is the high success rate of the pattern. For me, I don’t deal well with losing (at least I’m honest).

Conclusion

• There are a few requirements for the confirmation of the kicker candlestick pattern:
  1. The last candle of the trend needs to be in the direction of the trend.
  2. A gap opposite to the trend should appear next.
  3. The candle after the gap should be bearish.
  4. The two candles prior and after the gap should not overlap.
• The kicker pattern is a result of rapid switch of forces, which is often caused by a major event.
• There are two types of kicker patterns based on their potential:
  1. Bullish Kicker Pattern: It starts with a bullish trend with a bullish candle at the end, followed by a bearish gap and a bearish candle.

The post Kicker Pattern vs. Exhaustion Gap: Positives and Negatives appeared first on - Tradingsim.

The morning reversal gap fill is another great trading setup for the first hour of trading, preferably within the first 20 to 30 minutes of trading. This strategy is a play on a shift in market momentum and is directly tied to market manipulation by the market maker on the open. As we discussed in our introduction to morning gaps, the market maker can legally manipulate the opening price of a stock and a reversal can occur under the right circumstances.

Risk Management

You now know the gap trading rules and the money management system of this chart pattern. We will now discuss the basic risk management rules of the pattern.

The basic stop loss rule when day trading gaps is to put the order below the reversal bar. However, this practice does not provide a clearly stated stop loss range. The reason for this is that there are different reversal candle patterns, with different sizes.

Imagine the price fulfills 70% of a bullish gap and then a hammer reversal candle is formed. Hammer candles have a very long lower candle wick. This would trigger a stop that is pretty far from our entry price.

Now, imagine the reversal candle is not a hammer, but an inverted hammer. Inverted hammers have very small lower candlewicks. This means that when we put the stop below that wick, it will be relatively close to our entry price. This setup would allow us to maintain a relatively low risk-to-return ratio

Doji reversal candles also allow tight stop loss positioning. There are doji candles, which have small candle wicks. However, there are also doji candles with bigger candle wicks like the dragonfly doji reversal candle.

I have worked out a simple risk management rule for day trading gaps, by conforming to the size of the reversal candle. However, never risk more than 1% of your bankroll in a morning gap reversal trade. If you have a hammer reversal candle, place your stop as low as possible, but do not go below 1%.

Intraday Gap Trading Strategies for Morning Reversal Fill

Trading a Gap Fill with a slow mover

The case below will show you how to trade a morning reversal gap fill when the equity is slowly trending in a steady manner.

Morning Reversal Gap Fill

Above you see the 5-minute chart of Bank of America from Aug 25, 2015. The image displays a short trade on a morning reversal gap fill.

The new trading day starts with a sizeable 5.61% bullish gap. This gap size fits in our 3% - 7% gap size requirement. Notice that the first 5-minute candle after the gap is a hanging man reversal candlestick. This gives us a short signal to trade the eventual gap fill scenario. However, we wait to see if BAC will develop a range.

This does not happen.

The next candle is bearish and relatively big. For this reason, it was highly unlikely for BAC to create a range. Therefore, we short BAC at $16.07 per share.

We put our stop loss right above the head of the hanging man candle pattern as shown on the image above. This means that we are risking 0.87% of our capital in this trade. The risk percentage fits our requirement of less than 1%, giving us a great setup for our short position.

BAC decreases to the psychological level of $15.90 per share. This is when BAC actually begins to trade in a range. The range plays out for two hours.

However, we are patient and stay with our trade. The price continues declining, breaking its previous low. The drop reaches the level at 15.75.

This is when the price enters a second trading range. This trading range plays out for 1 hour and 20 minutes.

After this consolidation phase, BAC begins another leg down.

This price drop takes BAC to our target area of $15.30, minutes before market close.

Let’s summarize the trade action:

• BAC opened with a 5.61% bullish gap.
• The first candle for the day on the 5-minute chart is a hanging man reversal candle pattern.
• We wait for a range to develop.
• We short BAC at $16.07 per share.
• We place a stop loss right above the head of the hanging nan reversal candle.
• The risk we take with our stop loss equals 0.87%, which fits our 1.00% maximum rule.
• The price hits our target at $15.29 per share.
• We profit 4.83% on the size of our trade while risking 0.87%.
• This is a 1:5.5 risk-to-return ratio.

This is an example of a successful morning reversal gap fill trade. Notice that the consolidation we anticipated came later than expected. We were already in the trade and we had to sit patiently through the entire consolidation period which lasted two hours.

Extending the Target of the Morning Gap Fill

The case below will show you how the price of the equity fills the gap relatively fast. A quick fill presents the opportunity to extend our usual target since the market momentum is in our favor.

Have a look at the image below:

Extended Target - Morning Reversal Gap Fill

Above you see the 5-minute chart of Yahoo Inc. from Jan 28, 2016.

Yahoo starts out with a 3.03% bullish gap, followed by a hanging man reversal candle. This gives us a signal that the bullish gap could turn into a counter trade opportunity.

Notice that the trading volumes in the time of the gap are relatively high. This implies that a range is not likely to develop. Therefore, we short the stock based on the signal attained from the hanging man reversal candlestick. We place a stop loss order right above the head of the hanging man candle, which represents a trade risk of .49%.

The next two candles are bearish and are relatively large in size. The second candlestick completes our morning reversal gap fill target (green horizontal line). According to our tight strategy rule, we have to close our trade here. If we do so, we would collect a profit equal of 2.5%.

However, we observe the expanse in price action in the bearish direction, therefore we hold to our guns.

The next candle in the row is bullish and small. We can use the area above that candle to adjust our stop.

The point is to try catching a further bearish move, while locking in some guaranteed profit. Fortunately, the decrease continues with another bigger bearish candle. On the way down we see a hammer reversal candle, which alarms that the downtrend might be ending soon.

We adjust the stop again. This time, we put the stop right above the body of this candle. Notice that I say above the body and not the upper candlewick. The reason for this is that if the next candle breaks the body of the previous candle, we will confirm the reversal pattern.

However, the price continues with the decrease without even getting close to our stop. Four more bearish candles appear on the chart, dropping Yahoo to $28.95 per share. Notice that since the market opened there were 10 candles on the chart. Nine of them are bearish and only one is bullish.

This is why we have the confidence to stay in the trade!

After reaching 28.95, YHOO enters a trading range. Therefore, we move our stop above this resistance area as shown in the image above. Five candles after the price enters the ranging move our stop loss is triggered.

Our trade is closed at $29.16 per share. During this bearish position we manage to net a profit of $1.34 per share.

Let’s now summarize all the data.

• YHOO opened with a 3.03% bullish gap.
• The first candle of the day on the 5-minute chart was a hanging man reversal candle pattern.
• Volumes are relatively high and bearish, which implies that a range is not likely to develop.
• We short the YHOO stock at $30.49 per share.
• We put a stop loss right above the head of the hanging man reversal candle.
• The risk we take with our stop loss is 0.49%, which fits our 1.00% maximum rule.
• After 10 minutes the price hits our target at $29.69 per share.
• We decide to hold the trade because of the higher volumes and rapid price development.
• We use regular price action rules for adjusting our stop loss on the way down.
• Our assumptions turn out to be correct, since the stock experienced 9 bearish candles out of 10.
• The next price hesitation crosses a crucial resistance area and we close at $29.16 per share.
• We generate 4.40% profit with an initial risk of 0.49%.
• This results in a risk-to-return ratio of 1:9

Conclusion

• Morning Reversal Gap Fill represents a shift in the market momentum, which results in a direction change.
• When you trade Reversal Gap Fill, try spotting gaps between 3% and 7%.
• Do not attempt to trade bigger gaps, since the price in these cases end up ranging.
• This setup works best when the gap is opposite to the general price trend.
• Enter the market on a reversal candle after the gap.
• Always put a stop loss above the reversal candle on a bullish gap and below the reversal candle on a bearish gap.
• Make sure your stop loss covers a maximum loss of 1% no matter of the candle size.

When you trade shorter time frames on high trading volumes you can always adjust your stop loss in order to lock in guaranteed profit.

The post Morning Reversal Gap Fill appeared first on - Tradingsim.

Every day trading system conforms to intraday breakouts. The reason for this is that in many cases a breakout could predetermine the future price behavior. Thus, traders use breakouts to set entry points and exit targets for their trades.

In this article, we will cover four strategies for how to trade early morning range breakouts (EMRB).

What is the Early Morning Range Breakout?

The Early Morning Range Breakout allows traders to take advantage of the violent whipsaw action that can result from the flurry of buy and sell orders that come into the market on the open. As traders, we sit on our hands and watch for ranges to develop on some of the more popular stocks of the day. As we watch on the sidelines, we allow the other traders to fight against each other until one side wins.

Typically, you want to give the range 30-minutes or 60-minutes to develop before you trade in the direction of the breakout. I prefer the 30-minute range, as there is a bit more volatility in this timeframe as compared to the 60-minute range. As with most setups, the EMRB tends to work best with large cap stocks, which do not have wild swings. I do not like trading this strategy with stocks which have gapped up or down by more than 10%.

Ideally, the stock should trade within a range, which is smaller than the average daily range of the stock. The upper and lower boundaries of the range can be identified by the high and low of the first 30 or 60 minutes.

Early Morning Range Breakouts

The idea is to go long on a break above resistance, or short on a break below support. Is it that easy? Not quite. You need to understand how to read the order flow, discern which day trading time zone you are trading within, and understand the volume relationships that are being formed.

Let’s start with the order flow; the time and sales window will be an invaluable tool for day traders to use in order to understand if the breakout is real or not. As we have discussed in detail in our lesson on tape reading, it is essential that there is conviction behind a move above or below the range. We need heavy volume but also the right type of volume; meaning, if we have a stock breaking out to the upside we want to see heavy bids coming into the market rather than heavy offers at these levels. Secondly, different times during the day bring in different types of traders and could result in a perfectly good technical setup, which fights against the prevailing market dynamics at that time.

Finally, price and volume must be in harmony. If you plan to short a stock, which has gapped down, you want to see the stock gap down on heavy volume and then retrace on lighter volume (indicating a lack of buying). This confirms that the sellers are in control.

The early morning range breakout is a great trade from a risk perspective because you will want to exit the position quickly if there is no continuation after the breakout. Traders should not wait around and hope that the breakout is legitimate even though it has fallen back into the range. It is paramount that we protect our capital at all times. Learning when to stay in and when to get out is partly following your rules but also being able to process what you are seeing on the tape very quickly. Practice, practice, practice. You will start to feel the market after you get used to trading this type of setup. Be aware that some stocks will have very large bid ask spreads, which could alter your money management and open you up to higher levels of risk than you are willing to assume.

Trading Early Morning Range Breakouts

First, traders should be aware of the support and resistance levels on a larger timeframe. By using Fibonacci retracement levels and pivot points, you can get a good idea of where your trade will find friction. If this level is too close to your entry, it may be a trade not worth taking or at least one that requires very tight stop loss parameters.

Secondly, this pattern is far more successful when the stock is hovering near a price level, which is closer to the direction of the anticipated breakout. When there is no directional bias within a range, traders need to exercise caution, as a breakout in either direction may not have strength behind it.

Let’s now go through some of the tools, which assist us during EMRB trading:

#1 - Volume

Volume is crucial for every type of breakout as it confirms each breakout prior to entry.

If the equity breaks the morning support/resistance level with low volume, there is a high likelihood the breakout will fail.

• Valid Breakout

The image below shows how high volume during a breakout is likely to push price through key resistance:

Early Range Morning Breakout - Volume

This is the 5-minute chart of AT&T from Nov 17, 2015. In the image, you see that after a break in an early morning resistance with high volume, the price starts increasing.

• Fake Breakouts

When trading volumes are low, there isn’t enough pressure to push the market to new highs or lows.

Early Morning Range Breakout - False Breakout

This is the 5-minute chart of Yahoo from Sep 25, 2015. The blue line indicates a resistance level. In the red circle, you see a breakout, which later fails. This breakout occurs with low trading volume, which implies that the breakout is not reliable. As you can see from the chart, within 3 candlesticks, Yahoo created a bull trap and began to roll over.

#2 - Early Morning Range Breakout + Trend Line

Trend lines are one of the basic components in price action trading. Since the EMRB is all about price action and chart patterns, it is crucial to discuss trend lines for EMRB trading. Every time you encounter an EMRB, the price is likely to start moving according to a trend line. Your first task is to identify the trend line and to place it on your chart.

You should hold your trade until the price breaks your trend line in the opposite direction. How simple is that? Let’s see how a trend line applies to the same AT&T chart we used in one of the examples above:

Early Morning Range Breakout - Trend Lines

In the beginning of the chart, you will see two big bullish candles. Then you will see a resistance area formed by the next 6 candles (blue line). This is what we consider as the early morning resistance and a signal line for a long trade. We open a long position when AT&T price breaks this resistance in a bullish direction. This happens in the green circle on the chart. As you see, the breakout appears with relatively high market volume, which means the breakout is reliable. The next three candles allow us to build a bullish trend line, which is the green bullish line on the chart. Then we follow the trend line with our long position. As you see, during its increase, the price tests the trend line a few more times. This confirms the credibility of the trend. We close our position when AT&T’s price breaks in a bearish direction through the green bullish trend.

This is a clear example of the trend line breakout trading strategy after an early morning range breakout. Our long position brought us a profit equal to $0.25 (25 cents) per share.

#3 - Early Morning Range Breakout + Mass Index

Another opening range breakout trading strategy is EMRBs combined with a 25-period Mass Index indicator. We use the MI in order to set a proper exit point during an EMRB trade. In a bullish market, we will go long when the price breaks the early morning resistance level if volumes are high. Then we will hold our position until the MI goes above 27 and then it breaks this level in a bearish direction. Let me now demonstrate to you how this breakout trading system works.

Early Morning Range Breakout - Mass Index

This is the 5-minute chart of Twitter from Nov 17-18, 2015. As you see, with the market opening we already have an established resistance level, marked in blue. This is our early morning resistance level. After the market opens, Twitter breaks through this resistance. At the same time, volumes are high, which is a sign that the break is reliable and we go long. The price starts moving in our favor.

As you see, the MI starts increasing as well. The price increase is relatively strong, which is reflected in the mass index indicator. Four candles later, the MI gets above the 27 level.  Now we wait for the MI to break this level in a bearish direction. Six candles after the mass index gets above 27 we get our bearish break and exit our trade.

For less than an hour, we made a profit of $0.52 (52 cents) per share.

#4 - Early Morning Range Breakout + Simple Moving Average + Volume Weighted Moving Average

This is a stock breakout trading strategy strongly based on volumes. I am going to use the same period SMA and VWMA for this breakout trading strategy. I will enter the market when I spot an early morning range breakout with high trading volume.

Then I will hold the equity as long as the two MAs are far from each other. Since the two MAs are far apart, this means volume is still pouring into the market. If the equity is trending with high volume, we should hold the stock. We will exit the trade when the volume begins to decrease, hence driving the two MAs closer together.

Early Morning Range Breakout - SMA - VWMA

This is the 5-minute chart of Boeing from Aug 7, 2015. The red line on the chart is a 30-period SMA. The blue line is a 30-period VWMA. On the opening of Aug 7, 2015, Boeing has a strong gap down which quickly found support. Later, the price breaks this support in a bearish direction, with relatively high volume, so we short Boeing.

At the same time, the two MAs begin to separate from each other due to higher trading volumes.

We stay with this trade for 59 periods on the 5-minute chart and exit the stock when the two MAs cross, which implies volume has dried up. Notice that when we closed our trade, the volume actually begins to increase.  However, the volume increase is not in the direction of our bearish trend, but for the start of a new bullish counter move

Which EMRB Strategy?

Each of these intraday breakout trading strategies can be profitable if done properly.

Volumes are crucial when trading breakouts. Thus, volumes should always be displayed on our chart for any breakout day trading strategy. It is up to you which volume tool you are going to use – VWMAs, VI, Net Volume, Volume Oscillator, etc. In my opinion, the cleanest way to display trading volumes is by using the plain vanilla volume indicator.

The EMRB + Trend Lines opening range breakout strategy is very easy to understand and perform. Yet, it is basic and sometimes the signals it provides might not be enough.

The EMRB + Mass Index is a good strategy if you like scalping. The Mass Index is likely to take you out of the trade earlier.

The EMRB strategy I like combines a VWMA and the SMA. This strategy will keep us in trades long enough to catch the bulk of the trend and since the VWMA is a volume based MA, it gives us a better picture about the current volume of the equity.

In Conclusion

• EMRBs are breaks in support or resistance levels right after the market opening hours.
• Volumes are crucial when trading early morning range breakouts because volume can help filter false signals.
• A breakout should be considered reliable, only if it happens during relatively high volumes.
• Breakouts during low volumes might give you a false signal.
• Always include a volume indicator when trading EMRBs.
• Some of the successful EMRB trading strategies are:
• EMRB + Trend Line
• EMRB + Mass Index
• EMRB + VWMA + SMA
• Each of these three strategies also includes a volume indicator.
• Each of these three strategies is profitable if executed properly.
• I recommend a trading combination of EMRB + VWMA + SMA.

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Day trading with the symmetrical triangle formation is a great way to take advantage of late day breakouts.  Some traders will look for symmetrical triangles on a very short timeframe (ie. 30 minutes); however, I like to see this pattern develop over a few hours after a strong morning advance.  Symmetrical triangles are considered to be direction neutral, however, I have found them to be very reliable when traded with a strict set of rules.

Here is an ideal setup of the symmetrical triangle as I trade it.

Let's review a few rules that I use to successfully trade the symmetrical triangle.  I want to mention that I only trade this pattern if it is a continuation in the primary direction.

I will discuss these rules in terms of the bullish version of this pattern.  The rules for the bearish version can be reversed.

1)  The Advance: There should be a strong advance before the formation of a symmetrical triangle.  Notice the advance in our diagram above.

2)  Retracement: For my day trading style, this rule is very important.  The retracement created from the top of the early morning advance should be no more than 50% of the advance, but ideally only 38% to 40%.  The smaller the retracement, the better the odds of continuation.

3)  The Setup: The symmetrical triangle should be viewed as a 4 point formation, with lower highs and higher lows until it breaks out.  The top of the early morning advance is considered to be point 1 while the reaction off of that level is considered point 2.  A rally to point 3 will lead to a reversal below Point 1 and a decline into point 4 will lead to a bottom at a higher level than point 2.

4)  Volume: This is key.  Once the early morning advance is complete, volume should die down and stay relatively low during within the formation of the triangle.  However, as you can see, a strong expansion should occur on the breakout bars.  This is one rule which can be different for the bullish and bearish triangle.  Markets don't need heavy volume to fall but should have heavier volume when they rise.  When looking for a bearish continuation breakout, volume is not all that important.

5)  Breakout: Many novice traders will look for stock to break out right at the apex of the triangle.  This is not what we want.  You want to see the breakout occur about 75% of the way into the triangle.

5)  Price Projections: The price projection can be calculated by taking the highest point on the upper trendline and subtracting the lowest point of the lower trendline and adding that difference to the breakout point from the triangle.  For example, if the triangle started at 50 and retraced down to point 2 at 40, the upside target would be 10 points higher than where the stock broke out.

6)  Money Management: There is the possibility of a false breakout and therefore, stops should be placed beneath the lower uptrend line after breakout.  Additionally, once the position moves in my favor by 1%, I set the stop to break even.

Stay true to these rules and you will stay on the right side of this pattern most of the time.  Remember, it does not come up all that frequently so have patience and only take the setups that fall within the rules.

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Our next strategy, the gap pullback buy, is one of my favorite setups.  It allows us to let the morning action play out and enter into a trade with a strong setup and relatively low amounts of risk.

Trading Characteristics of a Gap Pullback Buy

Volume is key to this strategy and it is important to note that we want to see the stock open on huge volume followed by a further advance of 1 to 3 bars on lighter volume. It is in this light volume advance where we will see the lack of leadership and the precursor to a move lower. At this point we do nothing, except for observe the volume behavior. We are not attempting to pick a top and go short.

The presence of heavy volume and a strong reversal suggest that the big money is supporting this stock. This is exactly what we want to see as traders who are looking to follow the money.

Money Management

The rules for taking this trade and stopping it out are fairly simple. A long position should only be taken when price penetrates above the high of the reversal bar. A stop loss order should immediately be placed below the low of that bar and if the range of the bar is too large, move your position size down so that you are able to trade the setup the way it was intended to be traded. One of my personal rules is to set my stop to breakeven the second I am up 1% on the position. It is absolutely unacceptable as a day trader to be up on a trade by a significant amount and end up taking a loss on it.

As far as upside is concerned, the first bigger target is the high of the day where I will sell at least half, if not all of the position. However, always stay abreast of the market condition and the other support and resistance areas on the chart. If there are significant levels of resistance on the path to the HOD, I will not think twice about selling some of my position. Remember, this game is a marathon, not a sprint. Your goal should be to take small, consistent profits from the market rather than lottery money. This is not a dreamer’s game. The worst mistake a trader can make is to get attached to targets without tying in the context of the overall market; be nimble and be ready to change at any time.

The gap pullback sell is the opposite of this pattern.  It occurs after a gap down on the open followed by a retracement into that gap and a subsequent failure. You can basically turn our chart from above, upside down, to get an idea of how this day trading setup would look.

Trading Pullbacks Intraday

Since you are now familiar with the basic concepts, let’s dive into real-life examples of the gap pullback strategy.

Gap Pullback Strategy

This is the 2-minute chart of Apple from Feb 10, 2016.

Apple opens with a bullish gap, with high volume that quickly reverses to the downside and retraces approximately 2/3 of the gap. After this three bar selloff, Apple prints an inverted hammer reversal signal and on the close of this candle we go long.

We use the low of the prior candle as our stop. Our profit target is located near the morning’s high – the green horizontal line on the image.

As you can see, Apple found its footing and reversed to the high of the day.  The key points to call out in this trade is that we had clear entry, stops and profit targets for the trade.

Closing Portions of a Trade

After the target is reached, we close half of the trade. Apple begins to consolidate after the initial target is reached. We hold the trade during the consolidation and we wait for the continuation of the breakout move.

Suddenly, volume begins to increase rapidly and APPL closes above the previous morning high. We immediately adjust our stop loss order above the previous high as shown on the image above. This way we lock in guaranteed profit above our first exit price.

The next candle on the chart is bearish and hits our stop. With the other half of the trade we managed to catch a further increase of $0.16 (16 cents) per share.

We made a profit of .65% on the first half and .74% on the second half of the position.

Let’s cover another trading example.

Gap Pullback Strategy - 2

This is a 2-minute chart of JP Morgan Chase & Co. from Oct 15, 2015. The image illustrates a gap pullback very similar to the previous example of Apple.

As you continue to gain trading experience, you will notice that these patterns often repeat themselves time and time again.

First, JPM stock starts the trading day with a bullish gap on high volume. The price tops out at $60.61 and starts selling off on the very next candle. The decrease continues for three periods in a row. Then the price sets a bottom at $60.10 per share, retracing approximately 80% of the gap.

The next candle after the decrease is an inverted hammer reversal candlestick, which confirms that JPM is likely to reverse the downtrend and we enter a long position on the close of the candlestick.

The stop loss should be located below the low of the day, which is the wick of the previous candlestick.

After we enter the trade, the price begins increasing and our minimum target of the days’ high is reached.  At this point, you as a trader have a choice to make.  You can either: (1) close the entire trade and book your profits or (2) close a portion of the trade and hold for a higher price to sell.

Let’s assume you only sold half of the position.

Gap Pullback Strategy - VWMA

This is the same chart image, which includes the further price action of the JP Morgan and Chase stock until noon. Instead of using a tight stop in our previous Apple example after reaching our first target, we enlist the help of the 20-period volume weighted moving average (VWMA).

JPM begins a rally that takes the stock to a new high of $61.05.  After JPM begins to rollover, we exit our long position once the stock closes beneath the 20-period VWMA.

On the first half of the trade we were able to capture a .75% profit and 1.26% on the second half.

Adjusting the Stop on Long Gap Pullback Trades

Another way to determine an exit signal on your long pullback trade is to manually adjust your stop loss. Every time the price has a corrective move, you should place your stop below the most recent bottom. Your stop will remain in place until a higher bottom prints on the chart, at which point you should adjust your stop accordingly.

Let’s again review the JP Morgan Chase & Co. trade using this stop approach.

Gap Pullback Strategy - Manual Stops

We have removed the 20-period volume weighted moving average and have listed the 6 times you would have updated your stops based on the price action of JPM.

Notice that we do not move our first stop before the price reaches the first target and sets a higher low. Once a new high is reached, we then adjust our stops accordingly based on the swing lows printed on the chart.

In this case, we close approximately at the same price as the VWMA indicator at stop #7. However, in most cases, manually adjusting stops will get you out a bit earlier.

This has positive and negative implications.

The image below will show you the difference between the two.

Gap Pullback Strategy - Manual Stops versus VWMA

Above you see the 3-minute chart of Citigroup from Oct 15, 2015. On the chart we have the 20-period VWMA and stop loss levels based on each swing low.

The trading day starts with a bullish gap with high volume. During the next few periods, the volumes are still big, but they are decreasing. Two periods after the market opens, Citigroup decreases sharply, filling approximately 70% of the morning gap.

Citigroup then creates a bottom with two hammer reversal candles and we get long. The minimum target of the trade should be located at the high of the gap as shown on the image above. Your initial stop loss order should be located below the low of the day.

Once the first target is reached, let’s now follow the manual stop loss orders and the 20-period VWMA to identify the exit signals generated by each approach.

After the price reaches the minimum target, we see a decrease which breaks the 20-period VWMA. However, we disregard this signal because the price has not switched above the minimum target and we rely on our initial stop loss order. Citigroup price increases afterwards and breaks the minimum target.

When this happens, we adjust our stop loss below the previous bottom at position (2) and activate our 20-period VWMA stop as well.

As Citigroup climbs the proverbial wall of worry, we update our manual stops below each swing low and below the 20-period VWMA.

After we place the stop loss order at #4, the price increases initially; however, the correction breaches the 20-period VWMA near manual stop #5.

If we rely on the volume weighted moving average for closing our gap pullback buy trades, we would exit the trade as this point.

On the flip side, if you were using swing lows as your stops, stop #4 was not breached and you would have stayed in the trade. To take it a step further, based on the manual stop loss strategy, we would have closed the trade out at 52.93 when the price hits the adjusted stop loss #8.

Summary of the VWMA versus Manual Stops Approach

Based on the 20-period VWMA, the profit from the second part of the trade equaled 1.92%.

Conversely, on the manual stop loss order strategy, the profit from the second part of the trade was 2.96%.

Please do not interpret this to mean a manual stop always outperforms an indicator.  You have to know when to use the right approach, or keep things simple and stick with one.

A good rule of thumb is that if the price moves dramatically higher, using a swing low may require you to give back a lot of your profits if the stock rolls over.  On the other hand, if a stock is slowly stair stepping higher, a moving average will likely stop you out based on a low volume test of support levels.

Conclusion

• The gap pullback occurs when novice traders are misled by a gap in the morning.
• The gap pullback is a great morning strategy as it reduces your risk as you are not buying at the highs of the day.
• At the end of the pullback, we need a reversal candle in order to enter a trade.
• Properly interpreting volume is a crucial ingredient when trading gap pullbacks.
• Your initial stop loss should be located below the lowest wick of the pullback’s bottom (low of the day).
• When the minimum target is reached, you can close the whole trade or part of it.

You can use either manual stops or a moving average to manage the winning position.

 

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Day Trading Money Management

Day trading as a business can be very profitable. It is probably the safest form of investing, as you are focusing on a small number of positions, you are not holding any positions overnight and you are able to enter and exit trades with pinpoint accuracy. However, many day traders find themselves losing due to poor day trading money management.

How Much Should You Risk

The size of your trading position, is in direct proportion to the value of your portfolio. The key to day trading success is to avoid big losers. I can not tell you how many times early in my trading career, that I would be up huge over a 5-day period, only to have a big loser wipe out 50% of my gains. So, to avoid this bad habit, you should only risk a total of 1% of your portfolio on any one trade. Most traders take this rule of thumb, and just put a 1% stop loss out there and when that is hit, they just take the loss. If you have put on around 1,000 day trades or more, you know all too well that a 1% loss can happen. So, in order to avoid taking constant hits, you should allow yourself to take a 2% hit on your position, where the dollar loss from this trade will only represent 1% of your overall account value. Now that I have confused both of us, let me try to say that a little easier. You simply want the total dollar amount invested per position, to equate to 12.5% of your total marginable equity. So, if your account value is $100,000 you will have $400,000 dollars in margin buying power, and should use $50,000 for each trade. Remember, this $50,000 you use only represents 12.5% of your marginable equity. This way if you take a 2% hit, it will only be 1% of your total account value.

Stops are not meant to be hit

It really upsets me when I hear so called professionals advise new traders to set stop loss amounts. Doesn't that seem like a general rule? Trading is a game of precision, and does not operate in the realm of gray. Yes, you need a stop loss order for every trade, but it is a fail safe. In this article we have discussed the power of a 2% stop rule and overall day trading money management. But do you think you should let every losing trade hit your stop? Of course not. Now I am not suggesting that we all become rogue traders and trade without stops.  The minute you see that the trade is wrong, get out with small hit. Because in the end, the goal here is to see a small number of .25% or .5% losses, while your winners are in the range of 1%-3%. This is how you will win the game. Again, the 2% stop loss is for the unexpected sharp counter move, and it is not your goal to have this stop hit. You should know well before your stop is hit if you are in a bad trade.

Operate in Cash

Day trading is a cash business. The only loan you should be using is with your day trading margin buying power. Do not start or continue to day trade, if you have to take out loans, credit, or use part of your retirement to get in the game. Traders that operate with a positive cash flow and utilize day trading money management rules, have a much higher success rate than traders that start out in the red.

Money Management Trading Examples

Since we have covered basic money management principles, let us now explore a few real world examples.

First, let us dive a little further into the money management rule of limiting losses on each trade to 1% of your overall bankroll.

Money Management Trading Example

This is the 5-minute chart of Facebook from Dec 1, 2015.

Facebook opens with a bullish gap. The price eventually tops out around $105.63 and then begins a correction.

For this reason, we use $105.63 as a trigger for a long position, as a breach of this level could lead to another run up in the stock.

The price breaks $105.63 and we were able to enter the market long at $105.95. Assuming our cash account has $100,000, since we are day trading, we can leverage 4 times this amount.

This means that with $100,000, we have buying power of $400,000. We invest $50,000 in the trade and place our stop loss order 2% from our entry price to limit the total impact to our cash portfolio to 1%.

Let’s calculate:

50,000 x 0.02 = 1,000

This means we are risking a maximum of $1,000 on the trade, which is 1% of our total cash balance.

Now, let’s shift gears back to the trade.

The red area on the image represents where we would be down on the position and at the bottom of this area is our stop, which is $2.12 from our entry price.

After we go long, Facebook begins moving upwards as forecasted. On its way up, Facebook has a few corrections.

However, we stay in the trade because none of these corrections breaks one of the previous bottoms. We exit our long position before the market closes to avoid holding an overnight position.

We exited the trade $1.17 higher than our entry price, which represents a 1.11% increase on our position.

Let’s now perform some basic arithmetic:

$50,000 x 0.0111 (1.11%) = $555 profit.

So, to quickly recap, our $100,000 bankroll grew to $100,555 ($100,000 + $555). Therefore, our buying power increased to $402,220.

Notice that this trade brought us 1.11% while risking 2%, which does not give us a good risk-to-return ratio.  Therefore, you will want to have a high winning percentage in your trading system, if your gains are relatively small.

Let’s review another example:

Winning Trade

Stop Loss Example

Here we have the 5-minute chart of Twitter from Aug 3, 2015. In this scenario, we will use the same money management techniques, but on a short position.

Twitter begins the trading day with a bearish gap. The gap is followed by a contrary bullish move, which creates a bottom. The price starts decreasing afterwards and we use that bottom as a trigger for a short position.

Once this low is breached, we take a short trade.

Remember, that we increased our capital to $100,555, which gives us buying power of $402,220. Since we invest 12.5% of our buying power in each trade, we use $50,277.50 on the trade.

Our stop loss order is located 2% higher from our entry price, thus we are risking a maximum of $1,005.55 in the trade.

The price starts moving downwards in earnest after we short Twitter. After two and a half hours of consolidating, Twitter finally started to move upwards and we exited our position.

So, what were the results from this trade?

This time, we entered the trade with $50,277.50, because we increased our capital and buying power from the previous trade. We risked 2% of the amount traded, which equals 1% of our capital - $1,005.55.

This time, the trade was more than three times better than our first one. We managed to catch a 3.83% price decrease while shorting Twitter. So, let’s calculate:

$50,277.50 x 0.0383 = $1,925.63 profit from shorting Twitter!

In this manner, our capital will increase to $102,480.62 ($100,555 + $1,925.63) and our buying power will increase to $409,922.51 ($102,480.62 x 4).

Losing Trade

Losing Trade Example

This is the 5-minute chart of Oracle from Jun 11, 2015. In the image above, we take a long position that ends up failing.

Oracle begins the trading day with a bullish gap, and 30 minutes later, Oracle’s price makes a new high and we enter a long position.

This is our third trade and until now, we have increased our capital to $102,480.62, which gives us buying power of $409,922.51. We continue investing 12.5% of our buying power, which breaks down to the following:

409,922.51 x 0.125 = $51,240.31

We go long buying $51,240.31 of Oracle at $44.42 per share. As usual, we put a stop loss order 2% below our entry price at $43.27.

Once in the trade, Oracle never gets going and begins to roll over.

The price breaks $44.16, which marks the open price of the starting gap candle. This gives us a signal that the price action is not going in our favor and we decide to exit the trade.

We end up losing $299.92 from this trade, instead of $1,024.81 had we have waited until the stop loss was hit. When we subtract this loss, we end up with cash account value equal to 102,180.70.

Do you remember when I said earlier in the article that stops are not meant to be hit? This is exactly what I mean.

Why should you stay in a trade, which obviously is not moving in your favor? After all, the 2% stop is just for unpredictable and volatile situations. That does not mean that every losing trade should cost you 1% of your bankroll.

Now, I will show you a situation where your stop loss is the only thing protecting you from the bread line.

When Volatility is not Your Friend

Stop Loss Losing Example

This is the 5-minute chart of Netflix from Jun 24, 2015. Above you see an unsuccessful long position, where our 2% stop loss was triggered.

For twenty-five minutes, Netflix goes in our desired direction and we were actually up 0.8%! However, the sixth candle after our long position takes a sad turn for the worst. Netflix price crashes 3.25% in a matter of seconds! Fortunately, we had our 2% stop loss, which prevented us from taking a steep hit.

So, if we continue on our trading journey in this article, here are the results of the trades highlighted in this article:

We invested $51,090.35 to purchase 73 Netflix shares. The price hits our 2% stop loss order and we lose $1,021.81 from this trade. Therefore, our bankroll decreases to $101,158.89 (102,180.70 – 1,021.81).

Hey! Even after these two terrible trades, we still have more than $100,000! We are still in the game!

This my friends, over thousands of trades is how you slowly but surely get ahead in this the greatest of all games.

Isn’t the 1% Rule Too Expensive?

Absolutely not! These rapid price moves do not happen in every trade. Actually, a 3.25% decrease in a minute as in the example above is a relatively rare event. However, when it happens, we should be prepared.

Remember, you need to use your own system to know when to exit a trade.  If you see the price moving against you and things don’t feel right, simply get out of there. As I previously stated, stops are not meant to be hit if you are keeping your eye on the ball.

Conclusion

• Money Management is considered the most important aspect when day trading.
• If you do not implement a money management technique when trading, you will inevitably lose your money.
• Your 2% stop loss is not meant to be hit! It is there to protect you from huge price moves.
• Attempt to close all your losing trades before the 2% stop loss is triggered if anything feels out of place.

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Automated Day Trading Definition

Automated day trading is when a trading system places orders in the market without any human interaction.  These systems work best for traders who are unable to manage their emotions and or have poor money management techniques.  With a number of direct access brokers providing automated trading, it is no longer just an option for large banking institutions.

Pros of Automated Day Trading

There are very few traders that can handle the emotional runs that come with actively trading in the market.  Day trading requires you to have a constant conversation about risk, entries, exits, etc.  Since the market is actively moving, you have to constantly react as an active trader.  This is where an automated trading system will help.  The system will identify the trading opportunities and execute the orders.  This allows the day trader to step back and simply watch their system at work.

Cons of Automated Day Trading

Each day in the market is completely different.  Some days the market will trend, while other days the market will be completely choppy.  Traders of course will be able to react to the market environment, while the majority of systems are only optimized for specific market situations.   Lastly, unless you develop the trading system yourself, you have no idea how the system works.   So, if you purchase a "holy grail", how do you know when it is broken?  Are you suppose to just sit there and wait for your account to hit zero before you cut off the trading robot?

Popular Automated Day Trading Systems

Automated day trading systems perform best when they are focused on one security.  The popular systems target the e-minis and forex.  System traders are most attracted to the forex market due to the clean price structure and available leverage.  When looking for a system make sure you can monitor it in a trading simulator before putting up any real cash.

Summary

In summary an automated day trading system can take the emotions out of trading and reduces trading to simple rules.  Remember though, that there is no free lunch in the market, so traders will have to determine how well a respective system fits into their trading profile.  Lastly, the trader must test drive the system for an extended period of time before committing any money to the system.

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Video that shows how to use the zoom and slider feature.

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Video that shows the three window panes within the Tradingsim Platform which you can expand and collapse. The three panes are (1) Tools, (2) Level 1, Time & Sales, and (3) Open Positions and Orders.

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Video shows how to add data to a chart in order to view more historical tick data without using the calendar feature. By adding more data to your chart, it allows you to see intraday data on one screen back to the first day in our database. We are one of the few platforms to offer months of tick data to our clients.

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