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When you think of day trading breakouts the first time frame that comes to mind is likely the morning. This is a natural first reaction as the morning presents the greatest odds of volatility with overnight news, morning earning reports, and early morning economic data. There is however the possibility to make money trading breakouts in the latter part of the day. In the morning, trading breakouts are pretty straight forward, high volume is accompanied by strong movements in price. The afternoon is a bit trickier. The volume is likely much lighter and the stock may appear to move up or down with very little rhyme or reason. You will often find that a light volume buy order can send a stock up effortlessly which can have you on the wrong side of the trade. The key thing is to find short-term levels that can give you the juice you need to capture a strong move.

Late Day Breakout Rules

High/Low from previous day has not been violated
High/Low for both the current day and previous day are exceeded after 2pm

Psychology Behind the Trade

Most active traders will place limit orders above and below the highs of the day. The longer these levels hold true the more orders are added to these levels on the short-term. So, on the opening of the second day as the market moves hard in the direction of the previous high/low only to be turned away prior to hitting the level, more orders are added to the previous day's high as this as seen as a significant level. The afternoon trading from 11-2 now becomes a battle ground for supply and demand as traders try to test the waters on the primary direction of the trend. Once the market begins to break in the afternoon it now has a number of things going in its favor. (1) All of the cause (accumulation/distribution) built up from the lunch time trading, (2) limit orders above/below the current and previous days levels, and (3) the fact no trader wants to hold a stock breaking in one direction hard over night. All of these items converge late in the day to push the stock through key levels and then the stops are tripped. Now don't get too greedy as these short bursts are just that - short. You are capitalizing on short swings based on the tight coiling of price action over a two day period.

Now that we have covered both the rules and psychology behind the trade, let's dig into some real world examples.

Example #1 - DELL 2/8/13

On February 7, 2013 Dell made a high of 13.55 early in the day. Dell then went flat and on the morning of 2/8 made another run at the 13.55 high. You will notice from the chart this move was made on an increase in volume. At this point traders that believe the stock has run out of gas will place their cover orders slightly above 13.55. Conversely, traders looking to get long will place buy limit orders above 13.55, because if the stock is able to climb above this level its further confirmation the bulls are in control. From the 13.55 high set on 2/8 Dell floats sideways for close to 6 hours. In the world of day trading, 6 hours is an eternity. Then late in the day you will see that the stock begins to make a move up on volume. There are three white soldiers taking the stock higher on volume as it slices through 13.55. So, at 3:3o if you are short, you do not want to hold onto this position going into the end of the day, so you cover. All of the shorts who had their stops right above 13.55 also cover. Lastly, the bulls will add to the buying pressure. While the percentage move in this example is not huge, relative to the price action of the previous two days, this level of volatility is appears to be random. However, from studying the chart and the tape you can clearly see why the break of 13.55 produced such a move.

Transcript of Late Day Trading Breakout Video

Hello everyone this is Al Hill, co-founder of Tradingsim.com. To simulate the lesson that we are going to cover in this video visit tradingsim.com or give us a call at 888.610.2734. Hey day traders, this is Al Hill form tradingsim.com. So, in the article we touched upon the late day breakout strategy. We gave you a pretty vanilla example, something that’s realistic you can look at it and say to yourself, you know what, this is in fact possible. Well, in this example we are going to have a little bit of fun; trading doesn’t have to always be so uptight. So, we are going to look at Dell again from early January. January 11th we had a high of 11.02, this was set first thing in the morning. On the 14th you could see we opened up at 10.89 and we went down for a little bit and then traded sideways pretty much during the middle of the day, which is really what you want to see right. Between 11 o’clock and noon you want to kind of even out, bulls and bears are in a dead lock and supply and demand kind of you know could go either way. So, then you want to start to look at your highs and lows from the previous days. So your low from the previous day was 10.76 and your high was 11.02. You can see in here we got around 10.97, 10.96 and kind of just floated. Now again, as we said in the article you want your breakout to come in the latter part of the day. Reason being you are going to break the highs of your current day, so that will give you a little bit of juice when your current day highs are broken as well as your previous day’s high. So now you have also any sort of shorts that have their stops up here as well as the longs, that you know, want to see the confirmation the move has gone in their direction they are going to have buy limit orders out there. So in this example, Dell, everything looks normal right, let’s fast forward a little bit. Everything looks normal and then all of a sudden, I mean the action just explodes. Now you know, again the odds of you catching a move like this are one in a million but it’s always cool to see these things play out. Again this is the late day breakout strategy. Now something like this which you will see shortly is always tied to some sort of news event, be it economic or specific to the stock itself. Now look at this right, let me shut up for a second, this thing I mean literally just explodes, now up 10%, so it is possible but again you have to be on the right side of the market and you have to be aware of these types of patterns. Now, it can be much easier to catch these types of moves if you have a scanner or some sort of proprietary system where you are out there looking through hundreds of charts or hundreds of symbols trying to find these diamonds in the rough. Alright, so again the late day breakout strategy at its best. Take Care and good luck trading.

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Video Example of a Day Trading Cup Breakout

The below video breaks down another working example of the Day Trading Cup Breakout.

This article is a review of the day trading cup breakouts strategy presented by Ken Calhoun in Stocks and Commodities Magazine. Let's lay down the ground rules for the pattern.

1. The pattern is to be used for day trading activities
2. Use 1-minute chart time frame
3. 35-day moving average
4. Two-day time frame
5. Need a cup pattern on light volume
6. The breakout needs to occur on high volume
7. The breakout must exceed the high or low of the previous day by .35% during the first hour of trading

A working example of the setup can be found looking at First Solar (FSLR) from 2/11/2013. Let me first start by saying that while FSLR is not a penny stock it has pretty high volatility. I selected FSLR for this example as a means to show how a trending stock would respond to this sort of pattern.

First we will want to identify the cup pattern. The cup pattern will need to have taken place the previous trading day. The larger the cup, with light volume the better. In the FSLR example you will see that the chart set the high of 30.80 (H1) at 9:40. From this high the stock floated down to a low point of $30.04 (L1) at 11:10 am and then drifted higher into the close. You will notice that the entire day had light volume. The stock also floated above and below the 35 simple moving average which is another indication FSLR was in a sideways pattern.

As we move on to the next trading day, 2/11/13, FSLR opens up in a choppy pattern for the first 10 minutes then begins to move higher with volume. In three minutes 9:40 - 9:42 the stock had a sharp 2.2% move higher. This breakout would have marked your entry point for the cup breakout strategy. Remember we need a breakout with volume that is .35% above the previous day's high. This would have resulted in an entry point of $30.90. After a sharp move to the first swing high of $31.18 (H2) FSLR has a sharp pullback to the breakout range from the morning. The pull back did not hit the 35-day period moving average and the stock had another run to $31.67 (H3). From H3 FSLR begin to drift and the volume dropped off significantly. At this point based on the rules laid out by Mr. Calhoun the exit point would have occurred at 10:35am at the price point of $31.39.

Advanced Technique - Analyze Market Internals

One of the advanced techniques for trading the cup breakout system is to include market internals in your analysis. It is not required to enter the trade, but if the larger market is also breaking out to new two-day highs in the first hour this can add additional support to your position and reduces the odds that your stock will having a morning reversal.

Review of the Day Trading Cup Breakouts Strategy

Pros

The day trading cup breakout system keeps it simple with straight forward rules and only one indicator to follow (moving average). The system relies on volume and price action which are the oldest technical indicators you will find. Using the 1-minute chart is a great way to limit the risk of trading during the first hour of trading which is the most volatile time of the day. Lastly, the system uses a moving average as the exit which makes sense because high volume breakouts likely lead to trending markets.

Cons

The day trading cup breakout system does not provide a clear stop when the trade goes against you other than a cross of the moving average. If going into the breakout the price action is far above the price, you may end up exiting will below your entry point if the stock goes against you. While the first hour of trading provides the greatest chance for profits, it also presents the potential for risks. The other part of the system which I would find challenging during execution is the skill to know when the breakout has enough legs that using such a lagging time period of 35 periods will net consistent gains. I personally like to sell into strength with predetermined targets.

Cup and Handle Pattern Target

Simply draw a rounding line starting from the bottom of the cup and ending at the level of the right top of the cup.

The depth of this cup is the price target for your trade.

Next you want to take the depth of the cup and add this from the point of the breakout.

cup and handle price target

Above you see the 1-minute chart of Loews from Aug 31, 2016. The image illustrates a cup and handle pattern (blue lines). We also have the volume indicator at the bottom of the chart.

The first pink line on the chart measures the size of the cup and handle pattern. The second pink line applies this distance starting from the moment of the breakout. As you see, trading volume picks up during the breakout.

Loews was able to reach its price target 10 minutes after breaking out.

This brings up a great point, in that when you are right and I mean right, the market will go in your favor quickly. Try to resist the urge to sell when a stock moves quickly in your favor, this is likely a sign that you have a real winner on your hands.

Shifting gears back to the price target of the formation, the size of the cup is actually the minimum price target.

So, how long should you hold onto the trade?

Well in the next section of this article, we will cover how to use price action to stay in your trade to maximize profits.

Trading Cup and Handle Pattern with Price Action

Price action trading is simply using time and tested rules around supply and demand to determine how you manage your trade.

To put it simply, you keep a close eye on candlesticks, volume and trend lines.

cup and handle - price and action trading

Above is a 1-minute chart of Microsoft from July 28, 2016. The picture illustrates a bullish trend with a cup and handle pattern embedded within the up channel.

The pattern is marked with the blue lines on the chart. The small blue bearish channel at the end of the cup is the handle. Our buy signal comes when the price action breaks the channel of the handle in a bullish direction.

Notice that in the moment of the breakout, the trading volumes begin to spike. This validates the signal and gives a confirmation of the cup and handle pattern.

The red horizontal line on the image depicts where we placed our stop loss order. As you can see, we positioned this order directly below the low of the handle in the formation.

See that the price continues the bullish trend afterwards. About 20 minutes after we buy MSFT, the price action has already reached the minimum target of the pattern. But the bullish trend is strong, right? The tops and the bottoms of the price action are increasing as well.

So, should we exit this long trade? Let’s use some price action rules to see if we can’t squeeze a little more out of the trade!

In order to better define the uptrend, we draw the green bullish channel on the chart.

It symbolizes the increasing tops and bottoms of Microsoft within the primary uptrend.

As long as the price stays within the boundaries of this green channel, we have no reason to sell the position.

Conversely, if Microsoft were to break through the bottom of the channel, this would represent a clear sell signal for us to exit the trade.

In the red circle on the image, we see the moment Microsoft breaks the channel to the downside.

By using price action to manager our exit, we were able to secure a larger profit versus simply exiting the position when the minimum price target of the cup and handle pattern were reached.

Inverted Cup and Handle Pattern

As you see, the cup and handle pattern has a continuation potential.

Well, the Inverted cup and handle starts with a bearish price run which grows into a consolidation with an inverted “U” shape.

Essentially the inverted is the bearish brethren of the cup and handle pattern.

inverted cup and handle pattern

This is the 2-minute chat of Macys from August 19^th, 2016. On the image above you see an inverted cup and handle pattern, which is marked with the blue line. The cup is the rounded line and the handle is that small channel trending upwards.

In this trading example, the stock enters a bearish trend, which lasts until the price action breaks the down trend later in the trading session.

inverted cup and handle trading example

Above is the same example we just discussed.

This time, we apply some trading rules on the inverted cup and handle pattern. The small blue bullish channel on the image is the handle of the pattern. This means that we need to sell the stock when the price of Macys breaks the handle downwards.

We have also highlighted where we place our stop loss order (red line) for this trade. Remember, never enter a trade without knowing where you are going to exit the position.

Now that we are in a short trade based on the bearish cup and handle, we need to measure the size of the pattern.

The depth of the pattern is represented with the pink arrow from the breakout point.

The end of the arrow is the minimum potential of the pattern.

Six periods later, the stock price completes the minimum target of the pattern; however, this is not the end of the bearish run.

The price action still demonstrates bearish activity on the chart. Therefore, we decide to hold the bearish trade for additional profits. We draw a bearish trend line (green) on the chart in order to better define the slope of the downtrend.

On the way down, the price action creates four interactions with the bearish trend. The fourth interaction actually breaks through the downtrend line.

At the same time, the trading volume increases with the disruption to the bearish trend.

This provides a validation signal that a reversal is likely occurring on the chart. Therefore, we close our short trade based on the assumption that the down run is over.

Is this making sense? It is literally the same trading methodology, but just on the short side.

Cup and Handle Stocks - 2016

Let’s now cover a few stocks that are hot in the market right now. If you are reading this article, years after it was first published, please keep reading. The markets only repeat themselves, so what we cover for 2016 will be just as applicable in 2050.

Amazon - cup and handle pattern

Above is the daily chart for Amazon.

The image illustrates the general bullish trend of the stock and as you can see, there are a couple of cup and handle patterns.

The first cup and handle is pretty large and develops between June and mid-July, 2016. The second pattern is smaller and develops between June and the beginning of August.

Although the price started a bullish move after the creation of the first pattern, its target is not reached.

The second pattern looks like it is confirmed, but the price does not have that breakout moment.

You will want to keep a close eye on the low of the most recent handle. If this low holds, all indicators point to higher prices in the future.

The next cup and handle example is with the stock Intel.

Intel - cup and handle pattern

The chart illustrates a bullish trend followed by a consolidation. The consolidation on the chart resembles a cup and handle chart pattern.

The scenario on the chart is a classic cup and handle bullish pattern. Notice that the volume during the creation of the pattern is light.

Then as Intel comes out of the cup, you can see the volume increasing almost on a daily basis.

Time will tell if this breakout will hold and if so, Intel shareholders should be in for a good ride.

The last stock for 2016 we will review is Mastercard.

Mastercard- cup and handle pattern

The image illustrates a bullish trend, followed by a consolidation with a cup and handle. We have the standard “U” shape formation, followed by the small bearish channel – the handle. Then the price broke upwards with an increase in volume.

However, the price action has only completed less than half of the profit target.

For this reason, we will need to keep a close eye on Mastercard to see if the stock is able to make a run through the end of the year.

Conclusion

The cup and handle is a continuation chart pattern.
The pattern itself represents a consolidation between two trends in the same direction.
The body of the pattern resembles a “U” shape and the handle looks like a channel in the direction opposite to the trend.
Day trading cup and handle pattern rules are:
1. The 1-minute chart is a good time frame for trading the cup and handle.
2. The 35-period SMA is a great tool for monitoring trend health.
3. Use a 2-day time frame.
4. A valid pattern will most likely be formed during low or decreasing volumes.
5. The breakout usually occurs with an increase in volume.
6. The price push needs to go above the high/low of the previous day.
The cup and handle pattern target equals the size of the pattern itself.
Use price action to extend your profit potential:
1. Open your trades when the price breaks the handle of the pattern.
2. Place a stop below the lowest point of the handle.
3. Stay in the trade for the size of the pattern at least. You can always extend your target by using price action rules.
The opposite equivalent to the cup and handle is the inverted cup and handle:
1. It is a bearish pattern.
2. The body of the pattern looks like an upside down “U”.
3. The handle looks like a small bullish channel.

Transcript of Day Trading Breakout Video

Hello everyone this is Al Hill, co-founder of Tradingsim.com. To simulate the lesson that we are going to cover in this video visit tradingsim.com or give us a call at 888.610.2734.
Hello everyone this is Al Hill from Tradingsim.com. Today we will be discussing the day trading breakout cup strategy ass presented by Ken Calhoun. Before we get started you will need to configure your chart in order to size up the trade. First you will want to adjust your chart to a 1-minute time frame. Secondly you wil want to select a simple moving average of 35 periods. Third on your list you will want to add volume to your chart. At this point you are now ready to trade the market with this pattern. So, in this example here let’s pause it for a second. On February 11th if you look at this chart FSLR in the afternoon had a pretty flat day. The stock began to drift sideways here. Now when you see a number of cup patterns repeating themselves that is a clear indication you are in a sideways market. You will see the stock begins to just go up and above the 35-period average without a care. So here you will see the volume is somewhat higher here on this bar which is the start of the cup and the high of this bar is $32.58. The stock then goes into a lull and makes a low here and then comes out of it here. You will see the volume start to pick up in here. At this point the stock makes a handle which is this tight formation here. The handle is another way of saying a flag if you will. So at this point you have the actual formation, the cup formation from the previous day . You have a high of $32.58. So based on Ken Calhoun’s method you will want to buy the breakout of the previous day’s high which is $32.58 within the first hour of trading and it has to come with higher volume and it has to be .35% higher. You can see the volume is coming in here with First Solar. We will want to buy a break of $32.69. Alright so let’s skip forward to see how that would have played out. As we skip to midday you will see the stock broke out with volume. You will see it here. $32.69 was exceeded within 2 minutes of the open. FSLR then just kind of went up made another high came back down tested the 35-SMA and here it actually closed below it. So, here is where we would have exited the position at $33.07. In this example of First Solar it went higher, but this is the market it could have just as quickly gone lower. This is the day trading cup breakout strategy. Please visit Tradingsim.com to simulate this lesson. Thank You.

The post Top Tips for How to Day Trade the Cup and Handle Pattern appeared first on - Tradingsim.

The bottom tail formation is a trend reversal pattern that comes at the end of a down move. Below is the setup for the bottom tail pattern:

There is a downtrend in progress
Select two popular time frames that are close together (i.e. 1-min & 5-min or 5-min &15-min)
Identify a bottom tail candle on both time frames
You will want to enter the trade on the break of the high of the bottom tail candle
Enter your stop below the low of the bottom tail candle

What is a Bottom Tail?

A bottom tail is a candlestick that has a long wick and small body. If you were to dissect the body of the candle there was increased selling pressure which resulted in the long wick, followed by a strong rally that left the stock closing very close to where it opened. The bottom tail will reveal itself after an established downtrend and is one of the first examples that the bears are losing control and the trend is shifting to a more neutral state. Below is an image of a bottom tail.

For those of you reading this article that do not have a lot of experience with trading candlestick formations, these formations are another version of a technical indicator. Some in the industry will lead you to believe that simply identifying the key patterns will lead to instant wealth. Instead of looking to candlesticks as the magic bullet, these formations are great when combined with other confirming signs. This rule of looking for confirmation in other indicators is always a great idea to validate your beliefs.

Specifically for the bottom tail formation we are going to use the price action on multiple time frames to confirm a reversal in trend. The power of using multiple time frames is on an intra-day basis when traders on different time frames see the same thing, this confluence can result in great trend reversal opportunities. Think about it. If both traders on a 5-minute and 15-minute bar both see a buy signal, you now have more participants taking action at the same price level. This will increase the amount of activity which is required to generate a reversal of trend.

For the analysis covered in this article we will use the 5-minute and 15-minute charts. When comparing multiple time frames you will want to focus on (1) the most popular time frames and (2) of these time frames the ones that are closest to each other. For example you would want to pair the 15-minute with the 30-minute, or the 1-minute with the 5-minute. The expectations for gains should be in direct proportion to the time frame you have selected. It's not good form to expect the same level of price swings on a 1-minute chart as you would on a 60-minute.

Bottom Tail Example - Goldman Sachs

In this first example we will be looking at a bottom tail formation for Goldman Sachs from 8/10/2012. Can you identify the bottom tail pattern in both the 5-minute and 15-minute charts below?

Did you pick the right tails? So for the 15-minute bar the bottom tail showed up on the print of the 2:15 candle. For the 5-minute bar the bottom tail revealed itself on the print of the 2:20 candle.

Notice how both candles have longer wicks and smaller bodies. Also, do you see the display of downward pressure from the number of red candles preceding these lows?

Now comes the fun part. Where do you think you should enter the trade?

For the more aggressive trader you will enter a break of the bottom tail's high on the 5-minute bar. The reason being the high from the 15-minute bar is likely to be greater than that of the 5-minute bar because it is on a longer time frame. For those of you that want additional confirmation the trend has a greater chance of reversing you will want to enter on a break of the bottom tail's high on the 15-minute bar.

Stops

In terms of stops you will want to place your market order below the low of the bottom tail bar. Another option is to place your buy order on the 15-minute scale and your stop market order on the low of the 5-minute bottom tail. This way you can be slow a.k.a conservative to enter the trade, but quick to kill the position if it goes against you.

Profit Targets

For profit targets you will want to either sell into the strength or use a moving average to exit your trade. For example, if there is a gap above that the stock is now going back to fill and you see climatic volume coming in you will want to exit at that point. Another option would be to apply a moving average (i.e. 10, 20, etc.) to the chart and then close out your position once the stock closes beneath the average.

Pros of the Bottom Tail Day Trading Strategy

The bottom tail buy strategy combines both candlestick patterns with the concept of time - traders on two different time frames. The entry points and exit points are straight forward. You can apply this strategy to any security and you can use it on multiple time frames

Cons of the Bottom Tail Day Trading strategy

It is tough to find a bottom tail on both the 5-minute and 15-minute bars unless you have a real-time stock screener. Since the stock is trading in real-time and you only have minutes to identify the trade, you have to quickly scan the market for bottom tails on both time frames simultaneously. This would be a simple task if you were looking at daily/weekly charts, but is far more challenging an an intra-day basis.

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The three bar patterns is one of the more common trading setups. The reason its so common makes it an easy target for newbie traders when they do their scans. The problem with the three bar reversal pattern when it comes to day trading is the setup can be found all over the place. So, in order to reduce the potential number of trades on an intra-day basis, we are going to apply a few requirements to this setup to filter out the noise.

The stock must be trending hard in one direction
The low or high of the three bar formation must occur on the middle candlestick
The third bar must close above the high of both the first and middle candlestick (the requirement of the formation is only that it closes above the high of the middle bar, but we are tightening this rule a bit to increase the odds in our favor)

As you see the picture below you will notice the painfully obvious the trend has reversed based on the closing of the third bar. That's the entire point, we want to have a clear sign that the trend has reversed in order to reduce the number of false signals.

Example of when a Three Bar Reversal Pattern works

Let's first establish a baseline of when the three bar reversal pattern works. For this example since we are day trading we will use the 5-minute time frame to identify the setup. The below chart is of First Solar (FSLR) from 2/20/2013. The stock made a low and then reversed sharply. The third bar in the formation closed above the high of both the middle bar and the first bar. Again, the three bar reversal pattern only requires a close above the high of the middle candlestick, but we are looking for a close above the first and second candlestick for insurance. In this particular setup, you would have purchased FSLR on the close at $36.03 which was 1 penny above the high of the first candlestick at $36.02. While the three bar reversal pattern does not have a specific exit trigger you can use a simple moving average or a price target to book your profits. A guiding principle is you want to maintain a 3 to 1 risk to reward ratio for all of your trades.

Let's have a little fun and stretch the boundaries for the setup. What if instead of simply identifying the setup on one day, what if we look for setups that occur over a two-day period. This way we can honor the rules as defined for the three bar reversal, but wait for the third bar to occur on the next day. This way you can take advantage of the increase in volume and volatility that occurs on the open.

In our next example we will review a three bar reversal pattern for Royal Gold (RGLD) that developed over 2/20/2013 and 2/21/2013. You will see from the image RGLD had a gap down in the morning, traded flat for most of the day and then closed near the low. Then the stock had a gap up in the morning to close above the highs for both the first and second candlestick. This then triggered a rally of over 2% by 10am once RGLD exceeded the high set on 2/20/2013.

False Buy Signals using the Three Bar Reversal Pattern

Day trading is really a test of wills as of late with the number of active participants trying to fake each other out on a daily basis. The three bar reversal is not immune to these games. In the next few examples we will cover false signals of the three bar reversal pattern and how you can quickly cut your losses.

One reason the three bar reversal pattern will have a number of failures is due to the lack of volatility. When the market is really choppy the formation is nothing more than a pause in the action that does not result in any major upswing. For example, if we look at RGLD from 2/7/2013 you will quickly notice the stock was range bound from 10:30am until the close. At 1pm RGLD presented a three bar reversal pattern after a minor pullback. The third candlestick then closed above the high of both the first and middle candlestick. This gave the impression that a rally was brewing. Well two small dojis later and the stock rolled over. At this point you as a day trader have to acknowledge you are on the wrong side of the market. You will want to place your stop below the low of the middle candlestick.

Pros

The three bar reversal pattern can be easily found on the chart and can generate quick returns. As a day trader you will have no trouble finding these patterns in any type of market. Also, unlike other trading setups which are more prevalent in the morning or afternoon, you will find the three bar reversal pattern throughout the day.

Cons

The three bar reversal pattern used by itself can generate a number of false signals. Adding in additional confirmation items such as volume and volatility will increase the odds the market will go in your favor.

The post Day Trading the Three Bar Reversal Pattern appeared first on - Tradingsim.

Price and volume are the oldest indicators you will find in the market. As day traders we are always looking for an edge, hence the endless supply of indicators and trading methodologies. When you really boil it down to its root, trading is nothing more than capitalizing on the imbalance of supply and demand. So, if your screen is cluttered with a bunch of indicators all saying different things and you feel completely lost, then you have landed in the right place. In this article we will cover the day trading strategy of how to effectively use divergences with price and volume to beat the market.

What to look for with Price and Volume

As price moves in the direction of the primary trend, volume should accompany the security with each successive new peak (bull market) or trough (bear market).
Each counter move to the primary trend should do so with lighter volume
Once the volume for a counter move matches or exceeds the last swing high or swing low of the primary trend, this is a clear sign a potential reversal is in play
Just to confuse you a little, there is one exception to the above rules. For example, if you are in a bear market with a clear down trend line that contains each rally it is ok for each successive touch of the trend line to have heavy volume, as long as this is a sign of selling pressure. Meaning as the stock hits the down trend line and then moves lower, volume should pick up as sellers short the stock and weak longs use it as an opportunity to unload their shares.

Confirming Primary Trend

An oldie but goodie for traders to identify the primary trend is to overlay one of the many moving averages over the price chart. What if you could use an off chart indicator to do the same thing, but with more confidence. The problem with moving averages is you will get out of the trade when the stock has closed below the moving average. What if you could know going into a rally that it's time to sell on any weakness. Instead of using a lagging indicator such as simple moving averages, you can use volume as a leading indicator.

In the above example of Bank of America (BAC) from 1/28/2013 and 1/29/2013 you can clearly see the stock has an established down trend on the 15-minute chart. In point A above the high was made with 11M shares traded. Then as you can see points B and C both were made with lighter volume. Finally point D had an almost 200% increase in volume. So, how would you trade this setup? Point A and B are purely points that you observe since these establish the downward sloping trend line. Point C would have been your first opportunity to short BAC. You would want to see how the volume comes in on the candlestick and where it closes before you open a position. After point C the stock began to slowly rollover and the volume began to pickup as the stock went lower. At point C At point D, there are a couple of triggers that would have prompted you to exit the trade if you hadn't already. (1) BAC closed above the down trend line and (2) the volume was significantly higher on the breakout candlestick.

The above Wynn Resorts (WYNN) trade from early October 2012 illustrates how price and volume can tell a story as the stock fluctuates between highs and lows. You will notice on the left side of the above chart WYNN was experiencing heavy volume as the stock (1) tested the down trend line or (2) dipped into a swing low. The low and volume which has a green circle around the action is the first time in this down move where the volume began to dry up. This would have been your trigger if you were long to either book profits or tighten your stops. The stock then went flat for and ultimately jumped the trend line on heavy volume. Assuming you exited the short trade when the stock started to drop on lower volume, now would be the time to load up once the stock pulled back to the trend line. This was safe entry since the stock pulled back on light volume. You would have received confirmation on the trade once you saw it break the most recent high with high volume. This shot the stock up from the $113s all the way up to $118.98 by 11:15 am.

In our last example we will be looking at FSLR from August 2012. The stock was in a clearly defined up channel. As the stock made higher highs within the channel, this price action was also accompanied with high volume. This pattern held true on the 15-minute chart for over a week. You could have bought the pullbacks and quietly rode the stock higher. As you can see from the chart above FSLR finally broke down through the support line and then followed this break with a sharp gap down. Well was that gap down really a surprise? Of course not, the smart money's intentions were clear in the tape. As you can see when the stock broke through the bottom trend line it did so with increased volume. After the break the stock drifted sideways or as we call it in the trading world developed a bear flag. If you were day trading FSLR you would have had about 5 hours after the break of the trend line to exit the trade.

Pros

If you use price and volume it reduces the noise of the market. Instead of reacting to every down day as if it's the end of the world, this will allow you to put things into perspective. You will know that while your stock may have pulled back, if it did so on 80% less volume, the primary uptrend is likely to continue. You will also be able to anticipate when a strong market has weakened. So, in the future you will be able to spot the weakness exhibited by FSLR in our previous example prior to the gap down.

Cons

Analyzing price and volume while day trading requires you to make quick decisions. Problem with this method is unlike other indicators that may hit a certain overbought or oversold level on an indicator, you have to review and assess price and volume action quickly and accurately. Again, price and volume is very subjective, so it's not an trading methodology for the newbie trader.

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A breakout of a range presents an opportunity to get long or short. But how do you know when the range has enough "juice" to generate a trending move. As day traders you will have a slew of data to analyze in a short amount of time. So, why not take the simple approach and instead of looking at ranges that go back 5 or 10 days, simply focus in on the most recent high and low trading range from the previous day.

When you think about it, every stock has its own trading fingerprint. This is because there are different market operators trading in stocks throughout the day. But if you peel back the onion, you will notice that the bulls and bears begin to establish clear boundaries of how far they are willing to let a stock go in either direction. Your job is to simply monitor these ranges and then buy or sell short when the range is exploited.

Requirements for the Two-Day Range Breakout Strategy

Identify the price range of the previous day (High - Low)
Look back 2 days to see if the range for the previous day deviates greatly from the range set 2 days ago. You want to avoid a situation where the ranges are completely erratic and a break of the range means little.
Buy or sell short the stock once the current day's range breakout exceeds the previous day's range by 10%.
Use a simple moving average to stop yourself out of the trade. Logic here is you are buying or shorting the start of a new impulse trend, so you want to go along for the ride. Another strategy would be to sell the stock out as you approach a predetermined price target.

In this first example we will review First Solar (FSLR). The previous day's range on 11/5 was .92 cents. In order to make sure we are not going to get head faked, we went back one additional trading day to 11/2 and noticed the trading range was $1.33. With the stock trading currently in the $20 dollar range the delta between the ranges does not give reason for concern. Now turning our attention back to the current trading action of 11/6, the stock set a low of $23.25 on the first 5-minute bar and then quickly began to rally. So, we now would need to set our target entry point for the stock. Since the previous day's range was .92 cents we will want to buy or sell short a breakout above a range box of $1.01 (.92 cents x 1.10%). Based on the low set at $23.25 we would look to enter the trade on a break of $24.26 ($23.25 + $1.01).
As you can see from the above chart once FSLR broke through $24.26 the stock took a quick breather and then resumed her uptrend until reaching a high of $25.28 or nearly a dollar of profit.

Can you recognize what in this trade would have given you confirmation that the breakout was real? Well if you don't see it, take a look at the volume indicator near the bottom of the chart. Notice how the stock began to have an increase in volume as the price moved higher. This was a clear sign that the buyers were pushing FSLR higher and the stock had legs.

In the next example we will analyze Royal Gold (RGLD). The stock set a trading range of $1.18 on 12/11. Just as a sanity check we went back an extra day to 12/10 to validate the range is not exponentially larger. While the 12/10 range was greater, it is not a matter of concern with the stock trading in the 80s. So now that we know our previous day's range was $1.18 we apply our 10% lift for a target of $1.30. This basically means that if the stock's price moves above or below an intra day range of $1.30 we want to open a position.

RGLD starts out the 12/12 trading day with a gap up only to see the stock reverse lower. Now at this point you do not know if you are going to go long or short the stock. RGLD then stops dead in her tracks around 11am, which is a common reversal time and begins to move higher. Now that we have an established low from the morning of $81.79 you will want to place your buy limit order above $83.09. This is also a great entry price because it places your order behind the whole number of $83. As RGLD approached and sliced through the $83.09 level you will notice that the volume picked up on the chart. Remember this was our extra piece of confirmation from our previous example with FSLR. Another promising point with the volume is the increase came during the middle of the day which is normally a pretty dead time in the market. This implies that the stock had real potential and would likely move higher throughout the remainder of the day.

RGLD began to flag after the breakout above our entry point and then had another late day surge up to $84. Depending on your strategy you could have exited at the next dollar level of $84 or stayed long through the remainder of the day until your moving average of choice was violated.

Pros of Day Trading a Two-Day Range Breakout Strategy

The strategy takes into account volatility which I think so many day traders simply ignore. If a stock has a trading range of $2, why would you enter a trade with an expectation of a $10 dollar move?
The entry levels are somewhat hidden. Unlike other strategies where you buy the break of the previous day's high, this strategy is based on the box ranges and less about obvious high or low price points. It also helps that it requires you to wait for a move slightly beyond the previous day's range to give you confirmation.

Cons of Day Trading a Two-Day Range Breakout Strategy

With day trading, every cent counts towards your bottom line. Waiting for the confirmation may prove a conservative approach against potential head fakes, but if you are consistently right on your picks, over a few hundred trades these forfeited insurance points could add up to big money.

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Day trading requires you to have quite a bit of cash on hand for your trading activities. Margin aside, I have said you need 50 to 1 cash to monthly expenses ratio. There is a little bit of room here if you have other means for income to offset your expenses, such as rental income. No matter what you d,o you will still require cold hard cash to be a success. When you really think about it, making money is the most important thing to focus on as you start out in your trading career. It's not about picking the right stocks or placing one hundred trades per day, it's just about making more money then your expenses. In this article I am going to cover 5 ways you can go about getting the seed money required to start day trading for a living.

Save the Money Yourself

Good luck with this approach. On paper it makes a lot of sense. You are using your own money, so you won't have to answer to anyone. You are exercising an enormous amount of discipline by consistently placing the money aside each month. More importantly, you are showing you have the patience required to succeed, because most day traders when presented with cash will tell you they can make the money in the market quicker than they could save it on their own. The one major flaw in this approach is unless you are an executive in corporate America, to save the amount of cash required and still handle all financial hurdles life throws at you is a pretty daunting task. To make this example real, if a person's monthly expenses are 4,000 a month they would need to have $200,000 in cash. If you think $200,000 is too much money, that's fine, we just will have to agree to disagree. Now, back to our example, if this person makes 100k a year that means after tax they will likely take home about 75k depending on their tax bracket. If we subtract their expenses ($48,000 per year) from their take home pay ($75,000 per year) this leaves them with $27,000. This of course would not account for any of life's curve balls (loss of employment, medical bills, new additions to the family, etc.) At this pace it would take the aspiring trader ~ 7.5 years to save up the required seed money. Mind you, this trader has not saved one cent towards retirement. How many people do you think will honestly be able to make it this route?

2. Use Credit Cards

If you read the book market wizards or some of the rags to riches stories from the street, you will undoubtedly hear of a trader that took 5k on credit cards to 1 million in a few years. To be honest with you, these stories get me going. Like most traders its in our nature to cheer the underdog that comes out of nowhere and makes it. While hearing these stories may get the blood flowing, the odds of them being grounded in truth are pretty slim. Day trading alone is a hard enough business to succeed in; couple that with the fact you are now using money that you don't have, the odds just go that much further against you.

Let's assume you go for broke and take out $100,000 dollars in credit cards. Your current monthly expenses are $2,000 dollars so you feel comfortable with the idea you are within my prescribed 50-to-1 cash to debt ratio. The one problem here is off the top if you are using credit cards there will be a minimum monthly payment requirement. On $100,000 that minimum will run you a cool $2,000 dollars (2% of outstanding debt). So, the monthly expenses have now just gone up 100% to $4,000 dollars. At this point you will need to make 4% return per month just to survive. Oh wait, you will have to pay some taxes of course, so that percentage has just jumped up to 6% per month. The last whammy I will throw your way in this scenario is if you lose any money. Unlike when you use cash, you still have to not only pay the interest on the money, but also have to repay what you have loss. This has a compounding effect on your trading capital. I think you get my point, do not use credit cards to fund your trading activity!

3, Take the Money out of your Home

This was the obvious go-to during the bull market in real estate. The sudden found wealth in people's homes provided the means to kick start a number of trading careers from 2003 - 2007. Using equity from your home will provide a much better interest rate than a credit card, but the one problem with this approach is your home is used as collateral. In a worst case scenario if you lose your stake not only are you out of the game, but you also may lose your home. Again, much like credit card debt, the use of a home credit line will increase your monthly expenses and further compound your losses if things don't go as planned.

4. Borrow from Family

Trading is a journey best taken alone. If you accept money from your parents and they are unable to completely stay hands off with the management of the money this will prove to be a headache you can't escape from. You now have introduced for lack of a better term a partner into your trading venture. Yet, this partner has not taken the time to research the markets or attempted to understand the mechanics of your system. They are just there to point out when things aren't going well and a constant reminder of their discomfort and the veiled threat of pulling the funds if you don't make money everyday.

5. Trade Your Way to the Top

This is more of an old school way of getting the start-up money required to start your career. Simply put, if you want to trade in the markets, what better way to get the initial capital required other than trading the markets. Other than your time and sweat equity the market in theory should be an endless A.T.M. at your disposal. This is honestly my favorite means to get started. First off you are not committing any additional money from savings until you have proven you can make money trading. Secondly the money is all yours. You have not borrowed it from anyone and you do not have all of the pressures that come with not controlling your own destiny. Last but not least you are building the self confidence that you can actually pull off the wild idea of making a living trading. The major downside to this approach is it will take years before you are able to trade full-time. But like any profession worth mastering you must be prepared to commit to 10,000 hours of study before you can truly call yourself an expert.

What of the 5 options above would best suit your risk profile? As my Dad has told me over the years, most of the time in life the option which is the most painful is often the one built on a solid foundation.

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When you get up every morning to go to work you know what hours your employer expects you to work. What about your favorite store. For me it's a toss up between Best Buy and Wegmans (I know a grocery store). Even though these two establishments would gladly take my money, they will only do it during business hours. The point I'm getting at is every business has a way they conduct their business. These range from hours of operations to product pricing. In this article we will cover a strategy where you only place 3 trades a day with a set profit target for each, so you can achieve the same level of structure Fortune 100 companies follow.

Trading is not an activity that requires an enormous amount of effort. If you like to constantly fight people in life, you will likely put on a lot of trades and make very little money. You on the other hand may be the constant dreamer, looking to hit it big (we also like to call this a classic gambler in certain circles). What if you turn down all of the noise in the market. When I say noise I mean the tips, indicators, complicated trading programs and even your own thoughts. Whether you are a breakout trader or automated system trader, it doesn't matter. The 3 trades a day strategy can work for any system.

Why 3 Trades a Day?

It's an odd number, so you can quickly see whether you were able to pick more winners than losers on a given day. It allows you to put on enough trades over a one-month period to make some serious cash (see below). It provides you a clear point to which you need to halt all trading activity for the day. How many of you have experienced a flash of over trading? How much damage did you do to your account?

As a child I was an avid bowler. There was nothing better than waking up every Saturday morning and going down to the bowling alley. The best part of it all is I knew I only had 3 balls per turn (duckpin bowling) and the maximum score I could bowl in any one game was 300. Every week my average was updated based on my 3-game set. So, I knew how well I had improved from the beginning of the bowling season at years end. Why in trading do you not measure yourself as closely as I measured my bowling when I was 9?

Lastly only placing 3 trades forces you to focus on your strategy. You will know before you place a trade that you only have 2 more you can open for the entire day. This will force you to be more critical of entering a new position. Remember, it should always be really hard for you to open a new position, but you should always quickly pull the trigger when profits present themselves.

Do you know how much you will make this month?

In business, over time you begin to develop trends. As a retailer you will know your peak seasons as well as the average amount of sales you can expect to generate in a year. There may be some variations, but for the most part your actual results will be within a certain percentage of your baseline estimate. Traders on the other hand hate the idea of earnings targets. You want to feel that the market is limitless and there are no boundaries. This may trigger a lot of excitement, but let me share a different approach. Let's assume you have $100,000 dollars to trade. If you are a fan of this blog you will know that you can use $40,000 per trade. Now, assuming there are 20 trading days per month on average, if you place 3 trades per day, that gives a total of 60 possible trades. At this point it's just basic math. In order to use the 3 trades a day strategy, you must have a set profit target and a clear stop loss level. If you are a trader who lives by touch and let's their profit runs and losses balloon, then this is not the strategy for you. Reason being, like bowling you need to know how many turns you have per month and what is your definition of a perfect score in order to rate yourself. Let's assume your system has a profit target of 1.5%. This would give you a potential profit of $600. If you place every trade successfully this gives a high end profit target of $36,000 for the month. Please do not just skim over this example because it appears simple. Ask yourself, do you have a earnings profit target for the month? Please don't consider the I want to make "x" amount as a real answer. Do you have a realistic blueprint for how much money you want to earn?

Tracking your Results

Since you are now ready to treat day trading like a business, let's map out a mock trading month earnings target.

Earlier in the article we stated the target high range for the month was $36,000. If making 36% return in one month is not enough for you, then please stop reading this article and book a one-way ticket to Las Vegas. Now that we have made that disclaimer, for the low end you will want to take a third of your high-end target. This leaves you with a total earnings potential range of $12,000 - $36,000. At the end of the month take your actual earnings and compare those against your target. So, let's say you earn $20,000 for the month. $20,000 would represent 55% of your target. Unlike school where a 55$ is failing, this would be a passing grade for the 3 trades a day strategy. The bare bones of what you should shoot for is 50% of your high-end target each month. Since you are placing the same amount of trades every month, like my bowling average as a kid, you need to start tracking your percentage every month. If you are able to stay above 50%, welcome to the club, if you are able to stay on average above 75% over a 12-month period you are a master trader.

In summary the 3 trades a day system forces you to box in your trading activity. This provides you a clear measurement of how to track your performance so you don't fall victim to the greed and plethora of opportunities the market presents on a daily basis. If you don't believe over trading is a problem, perform this simple analysis. Look at your trades over the last year. I guarantee you will see some sort of trend. For some of you your profits may come in the morning. Others your profits may pickup after 2pm. Making money in the market is not about sheer effort, but more about seizing the right opportunities and knowing when to quit when you are ahead.

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When should I sell my stock? If you have been trading for less than an hour you have probably already asked yourself this question. If we figure out the old adage of buy low and sell high, we could all live the good life. Trading however is a bit more challenging. There are indicators, systems, tips and a plethora of other options that present a rationale for selling your position. Which one do you use? In this article we will cover a simple means to know when to exit your position.

As traders we have price targets in mind before we enter a trade. While we will never admit it, on some level we expect the stock to make a b-line move directly towards our target. For new traders the level of excitement when entering a trade is about as close as you will get to reliving your 5th birthday. Unfortunately, the majority of the time the stock does not behave appropriately. At this point your emotions will start to pick up. You start to say things like to yourself like: "Do I sell, do I wait? I have made some money, why am I being greedy? My favorite stock guru told me it would go higher, so I just need to wait." Once you start thinking in an unsure manner, please pack it in and stop trading. The market does not require you to always be right, but it does require you to have strict rules and confidence in what you are doing.

Time - the Missing Link

Make sure you are reading this closely. It's so simple you may miss it if you are day dreaming. The key to knowing when to sell is to factor in the element of time and volatility. We are not going to cover volatility in this article, to read up on this topic please visit one of our most popular posts How to Trade Volatility; Back to time. When people trade they just don't think in terms of time. It's funny in a way. We really only think of money but not the amount of time required to make the big bucks in the market. In any other profession, you have the concept of a timeline. You will say to yourself that you need to start at the bottom, make manager in 7 years, director in 15 years and senior vice president in 25. You understand that things don't happen overnight and this helps you weather some of the rough times. You don't just say to yourself, I'm out of here. Well maybe you quit one or two jobs if the promotions aren't flowing, but at some point you realize you can't keep bouncing around, because who is going to want to hire you. Trading is the same way and I'm going to show you why.

When Should Pete Sell His Stock?

Pete is a fictitious character, so please don't try to Google him. Pete is a day trader. He has a system that requires him to make 1% on each and every trade. Pete read up on Tradingsim's article about volatility so he knows how to scan the market to find trades that fit his trading profile. While Pete is able to find the right top of stocks he always sells out before his profit target is hit and he doesn't know why.

In order to bring in the time element to trading let's take a deep dive into the stock Facebook (FB). First we will need to build a time profile for Facebook. Since Pete is day trading, let's look at the 5-minute chart and we want to determine how long 1% moves have taken to materialize over the last three swing trades. The reason we are assessing the last three swings is to capture how the stock has been recently performing as an indicator of how things are likely to develop in the near future.

Starting on March 13th, Facebook had a greater than 1% swing range of $27.65 down to $26.92.

This move required 8 candlesticks to play out. This move also began after a gap down on the open, so Pete should have made a mental note that the move was likely exaggerated.

Next trade, still on March 13th, Facebook then bounced off of the midday low from the morning gap down to form another 1% move ($27.19 up to $27.45).

Facebook then went on another 1% swing from $27.45 down to $27.07. This move down required 10 candlesticks.

We have now been able to establish 3 clear examples of 1% swings with Facebook. The three swings required 8, 14 and 10 candlesticks respectively. The average of these three swings are ~11 candlesticks. So, looking at this clear picture, if Pete wanted 1% or greater from FB, why would he expect this to happen in 3 or 4 candlesticks? Have you ever found yourself in this position where you are expecting a stock to move in a certain fashion? Without understanding how long recent moves have taken to develop, do you see how you are walking in the dark a bit?

Before I lose you let's take this up a level. You landed on this page seeking an answer on when you should sell your stock. Since the question is posed in a way that you are long, let me now show you what Pete should do in his next long trade.

Remember there are three things you should know before entering a position. First you must have a profit target in place, secondly you must know how long it will take to get there and three you must have a stop loss in place when things do not go according to plan. In Pete's case he knows that it will take Facebook a minimum of ~11 candlesticks for him to achieve his 1% profit target. While we have displayed this example on the 5-minute chart, you will find similar patterns, albeit larger ones on higher time frames, but the principle remains the same.

When to Sell if things do not go as Planned

This is the hard part of trading. When to know to cut your losses or when to cash in when you are no where near your profit target. Well, let's go back to our good old friend Pete. Remember how Pete tracked 3 swings in Facebook from the 13th of March. The very next day Pete decides to buy a test of the mornings low. He enters the position believing wholeheartedly that the trade will go his way and he will hit his 1% target.

Pete's entry point was great. He waited for the market to test the morning lows on light volume and he had a tight stop below the recent low. However, the market did not move in the fashion Pete would have expected. Without having some sort of time expectation, Pete would have no reason to exit the trade prematurely. The stock reacted positively after he made the purchase and then it began to drift sideways. The newbie trader waits for the stock to continue higher and ignores the warning signs that something is off. In this example you could see that Facebook did not make a run higher, but instead rolled over into the close. Now, I know all of you traders who make decisions by "touch" will say that in other cases the stock could have gone higher. To be honest, you are probably right. But in this game of trading where the only measure in my book is how consistently you book profits, Pete should be a-okay with gains slightly below his profit target of 1%.

When to Sell when things go terribly Wrong

Once you are in a trade and things immediately go against you in the worst way, do not hesitate. Just as Pete has clear targets of how much money he plans to make, you also need to know when to fall on the sword. Below is an example where Pete was clearly wrong from the start.

Notice how in the above chart the minute Pete put on the Apple trade the stock rolled over and went lower. As a trader you must have your stops ready to go if you find yourself in this situation. No matter how long you have been trading or how good you think you are, you must be prepared to cut a loser in a nanosecond.

Do you know when to Sell your Stock?

After reading this article I hope you know when to sell your stock. If not let me give you a quick recap:

Before you enter the trade make sure you have a clear stop loss order if things go terribly wrong.
Make sure you have a profit target to exit the trade.
Remember to factor in time if the stock initially acts appropriately but then things become a bit gray. This will tell you when you need to get off the bus.

If you follow those three rules, you should not find yourself in a position where you are questioning when to sell your stock.

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I have written a few articles on trend reversal patterns, but I would like to dive into the topic of buying and selling climaxes when day trading. The obvious question you probably have is if someone is buying a lot of shares and I am long, this is a good thing right? Well, it is when the buying is healthy in nature. However, if the buying and selling are extreme, this is a sign the retail or uninformed trader has entered the market and there is no one left to sustain the current move.

So, why should you care about buying or selling climaxes? The short answer is you can make money trading this basic formation and you can save money by not ending up on the wrong side of the market. If timed just right, going in the opposite direction of a climactic move can yield sharp returns. In this article we will cover real-life examples of buying and selling climaxes.

Psychology behind Buying and Selling Climaxes

Big Money Players

In the market you have the small percentage of traders who make the vast sum of profits. Then there is the retail or uninformed investors who fund the top 1% of traders' lifestyles. The buying and selling climax setup is the greatest example of this redistribution of wealth you will find in the market. Normally the big market players will accumulate and/or distribute their shares overtime in a healthy manner. This is because the large players understand if they were to try and offload and/or accumulate large positions in one transaction; it would disturb the natural law of supply and demand.

Retail Investor

Climaxes are nothing more than traps for the average trader. Buying and selling climaxes are one of the toughest patterns to experience as a uniformed trader. Reason being they generally occur around the time of a major news event. For example, a company will announce record earnings and everything from the quarterly reports looks great. Naturally you place an order to buy the stock and for a short time things are working in your favor. Then just when you begin to get comfortable in your position, the stock will have a sharp reversal and drop like a rock. This is a demoralizing experience because not only were you wrong in your trading approach, you were dead wrong!

How to Trade Buying and Selling Climaxes

Below are the rules for how to trade buying and selling climaxes:

Identify volume increases >300% of the last 5 trading days. This first rule assumes you are day trading (intra-day charts).
Look for a test or break of the demand/supply line (top or bottom of the trend channel).
Place your buy order .25% above or below the candlestick (depending on if you are going long or short).
Place your stop below or above the high of the opening candlestick (depending on if you are going long or short).
The stock can never break the low of the first candlestick if going long and cannot exceed the high of the first candlestick if going short.
Close your position at the supply line or a back test of the trend channel

Selling Climax Example

Our first example comes from Facebook (FB) on the morning of January 31st, 2013. As you can see from the below 15-minute chart Facebook had a clear uptrend that began in the middle of December and ran through January.

On January 31st Facebook gapped down 7% through the channel and the volume was significantly higher. You will also notice how the long-tail candlestick developed on the 5-minute chart. At this point in the trade requirements 1 and 2 have been met for trading the selling climax.

The first candlestick has a high of $29.36 and a low of $28.74. To satisfy rules 3 and 4 we would place our buy order at $29.43 and our sell order at $28.73. The price target would be the previous demand line (bottom line) of the trend channel at ~$31.50. Based on our stop order and profit target the trade provides us a 3-to-1 risk reward ratio.

After entering the trade you will see how Facebook rallied to close the gap in a b-line fashion.

Without these rules in place of how to view a morning gap on high volume you would have done one or more of the following:

Sold Facebook short after it gapped down
Closed your long position prior to back testing the demand line
Failed to book profits after Facebook clearly back tested it’s demand line twice
Not placed an initial stop order when you first opened the position

Are you starting to see how the smart money makes money now?

Buying Climax Example

Looking at Facebook, if we go back to October 24^th, 2013 there is a clear example of a buying climax. Facebook had been in a flat trading range for three months, beginning in mid-July.

Notice the spike in volume that shot Facebook right up to its supply line. Facebook quickly stalled after the first candlestick. The high of the candlestick was $24.25 with a low of $23.68. This means our stop would be at $24.26 with a short entry at $23.62. The potential profit target for this position is $19 which is the bottom of the trading rage. This represents a risk of .62 cents with a profit target of $4.62. I don’t know about you but I would take a 7.45 risk-to-reward ratio any day of the week.

Let’s fast forward to see how this trade would have played out.

Facebook in fact pulled back to the demand line (support), at which you would have exited the trade with a handsome profit.

From this article I hope you have picked up on the following:

Even though you may be day trading, you should still have some context of the bigger trends to determine if your stock is hitting larger supply or demand lines
Some day traders avoid opening positions after the first candlestick (myself included) but given the right circumstances it can be profitable
Learning how climax events work, you should avoid the scenario where you enter a trade only to have it fade – immediately resulting in a losing position
Clear profit targets of when to exit your position. Far too often newbie traders will hold onto a position and miss out on booking profits.

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Why Moving Averages are Good for Day Trading

Keeping things Simple

Day trading is a fast game. You can be up handily in one second and then give back all of your profits shortly thereafter. As a trader, you need a clean way to understand when a stock is trending and when things have taken a turn for the worse. When analyzing the market, what better way to gauge the trend than a moving average? First off, the indicator is literally on the chart, so you do not have to scan anywhere else on your screen and secondly it is simple to understand. If the price is moving in a particular direction over 'x' periods then the moving average will follow that direction. Unlike other indicators, which require you to perform additional analysis, the moving average is clean and to the point. In day trading, having the ability to make quick decisions without performing a number of manual calculations can make the difference between leaving the day a winner or losing money.

Should You Go Long or Short?

Moving averages also provide you a simple yet effective way for knowing what side of the market you should be trading. If the stock is currently trading below a moving average then you clearly should only take on a short position; conversely, if the stock is trending higher then you should enter long. When a stock is below its 10-period moving average under no circumstances will I take a long position. I know, I know, all of these concepts are basic and that is the beauty of it all, day trading should be easy. I have yet to meet a trader who can effectively make money using a million indicators.

Best Moving Average for Day Trading

There are literally an infinite number of moving averages. There are weighted, simple and exponential and to make matters more complicated you can select the period of your choice. With so many options, how do you know which one is best? Since you are clearly reading this article for an answer, I will share my little secret. For day trading breakouts in the morning, the best moving average is the 10-period simple moving average. This is where as you are reading this article you ask the question why? Well, it is simple; first, if you are day trading breakouts in the morning you will want to use a shorter period for your average. Reason being, you need to track price action closely, as breakouts will likely fail. Please do yourself a favor and never place a 50-period or 200-period moving average on a 5-minute chart. Once you find yourself using larger periods this is a clear sign you are uncomfortable with the idea of active trading. Now, back to why the 10-period moving average is the best; it is one of the most popular moving average periods. The other one that comes in a close second is the 20-period. Again, the problem with the 20-period moving average is it is too large for trading breakouts. The 10-period moving average gives you enough room to allow your stock to trend, but it also does not make you so comfortable that you give away profits. In the next section, we will cover how I use the 10-period simple moving average to enter a trade.

How to Use Moving Averages to Enter a Trade

So, let me say this up front, I do not use the 10-period simple moving average to enter any trades. I know, that is completely contradictory to the title of this section, but I think it is important to cover this topic. If you buy the break of a moving average it may feel finite and complete, but stocks constantly back test their moving averages.

Now that the curve ball is out of the way, let us dig into how I actually enter a trade. Below are my rules for trading breakouts in the morning:

Stock must be greater than 10 dollars
Greater than 40,000 shares traded every 5 minutes
Less than 2% from its moving average
Volatility has to be solid enough to hit my 1.62% profit target
Cannot have a number of bars that are 2% in range (high to low)
I must open the trade between 9:50 am and 10:10 am
I need to exit the trade no later than 12:00 noon
Close the trade out if the stock closes above or below its 10-period moving average after 11 am

If you are like me these rules sound great, but you need a visual.

The above is a day trading breakout example of First Solar from March 6, 2013. The stock had a nice breakout with volume. As you can see, the stock had well over 40,000 shares per 5-minute bar, jumped the morning high before 10:10 am and was within 2% of the 10-period moving average.

Here is one more example, but this time it is on the short side of the trade.

This is a chart of Facebook from March 13, 2013. Notice how the stock broke the morning low on the 9:50 bar and then shot straight down. Volume also began to accelerate as the stock moved in the desired direction until reaching the profit target.

This is literally the only setup I trade. I believe in keeping things simple and doing what makes money. As stated earlier in this article, notice how the simple moving average keeps you on the right side of the market and how it gives you a road map for exiting the trade.

How to use Moving Averages to Stop out of a Trade

In theory when buying a breakout you will enter the trade above the 10-period moving average. This will give you the wiggle room you need in case the stock does not break hard in your desired direction. The above chart is the classic breakout example, but let me give you a few that are not so clean.

The above chart is of First Solar (FSLR) from April 10, 2013. The stock had a false breakdown in the morning then snapped back to the 10-period moving average. This is your first sign that you have an issue, because the stock did not move in your desired direction. If your stock fails, the 10-period moving average will provide a fail safe for you to gauge your stock. Continuing on, FSLR stopped in its tracks at the 10-period moving average and reversed down again only to trade sideways. At this point, you know that something is wrong; however, you wait until the stock closes above the moving average because you never know how things will go.

How to use Moving Averages to Determine if a Trade is Working

You have to know when to hold them and when to fold them. If we could all apply this logic to business and life, we would all be much further ahead. In the market, I think we naturally look for the perfect example of our trade setup. In reality, the majority of trades will neither work nor fail, they will just under perform. Since I am trading breakouts, the moving average must always trend in one direction. For me I know it's time to raise the caution flag once the 10-period moving average goes flat or the stock violates the moving average prior to 11 am.

Why I Do not Ride the Average

Before I get 100 emails blasting me for this one, let me qualify the title of this section. Yes, you can make money allowing your stock to trade higher as long as it does not close below the moving average. For me, I was never able to make consistent sizable profits with this approach day trading. There was a time before automated trading systems were stocks moved in a linear fashion. However, now with the complex trading algorithms and large hedge funds in the marketplace, stocks move in erratic patterns. Couple that with the fact you are day trading breakouts, it only compounds the increased volatility you will face.

So, to avoid all of the back and forth present in the market, I would have a 2% profit target. On average the stock would have a sharp pullback and I would give back the majority of my gains. To counter this scenario, once my stock hit a certain profit target I would start using a 5-period moving average to try to lock in more profits. So, it was either give the stock room and give back the majority of my gains or tighten the stop only to be closed out practically immediately.

It was a vicious cycle and I advise you to avoid this type of behavior. I did not begin to make money in the market until I started selling into strength and covering into weakness. I discovered that when I would scan the market looking for examples of my trade setups I would naturally gravitate towards trades that were perfect in every sense: clean breakouts, high volume and b-line moves of 4% to 7%. So, on some level I was training myself on a subconscious level to expect these types of gains on every trade. This sort of thinking led to a lot of frustration and countless hours of analysis. Where I ultimately landed and you can see from the trading rules I laid out in this article, was to look at all of my historical trades and see how much profit I had at the peak of my positions. I noticed on average I had two percent profit at some point during the trade. I took that a step further and reduced it down to the golden ratio of 1.618 or 1.62% to increase my odds.

Why you Need to Use the Default Moving Average

Technical analysis is clearly my method of choice when it comes to trading the markets. I am a firm believer in the Richard Wyckoff method for technical analysis and he preached about not asking for tips or looking at the news. Everything you need to know about your trade is in the chart. One thing I tried to do early on in my trading career was to outsmart the market. What I mean by this is I would take for example the 10-period simple moving average and say to myself a simple moving average is not sophisticated enough. This would lead me down the path of using something more colorful like a double exponential moving average and I would take it a step further and displace it by "x" periods. If you are reading this and have no idea, what I am talking about then great for you. What I was doing in my own mind with the double exponential moving average and a few other peculiar technical indicators was to create a tool set of custom indicators to trade the market. I believed that if I were looking at the market from a different perspective it would provide me the edge I needed to be successful. Well, this could not have been the furthest thing from the truth. The market is nothing more than the manifestation of people's hopes and dreams. To that point, if the majority of people are using the simple moving average then you need to do the same so you can see the market through the eyes of your opponent. The art of war says it best in Chapter 3, "So it is said that if you know your enemies and know yourself, you can win a hundred battles without a single loss. If you only know yourself, but not your opponent, you may win or may lose. If you know neither yourself nor your enemy, you will always endanger yourself."

Common Mistakes when using Moving Averages

Using Moving Average Crossovers to Enter a Trade

Many moving average traders will use the crossing of the averages as a decision point for a trade and not the price and volume action on the chart. For example, how many times have you heard someone say the 5-period just crossed above the 10-period moving average so we should buy? This action by itself means very little. Think about it, what significance does this hold for the stock? Don't you think a moving average crossover of the 5-period and 10-period will mean very different things for different symbols? I remember at one point I wrote easy language code for moving average crossovers in TradeStation. I ran back tests on a few stocks and the results where stellar. I was just sure I had a winning system; then the reality of the market set in. The stocks began to trade in different patterns and the two moving averages I was using began to provide false signals. Therefore, needless to say, I abandoned that system and moved more towards the price and volume parameters detailed earlier in this article.

Not Using Popular Moving Averages

Not using popular moving averages is a sure way to fail. What is the point of looking at something if you are the only one watching? I am not going to beat this one to death since we covered it earlier in this article.

Using more than One Moving Average

As a day trader, when working with breakouts you really want to limit the amount of indicators you have on your monitor. I have seen traders with up to 5 averages on their screen at once. In my opinion it is better to be a master of one moving average than an apprentice of them all. If you don't believe me there was a study published in August 2010 by Ben Marshall, Rochester Cahan, and Jared Cahan that provided a detail analysis of trading profits when using indicators. The study stated: "While we cannot rule out the possibility that these trading rules compliment other market timing techniques or that trading rules we do not test are profitable, we do show that over 5,000 trading rules do not add value beyond what may be expected by chance when used in isolation during the time period we consider." I am not ready to throw out all of the technical indicators in my toolbox based on this study, but don't try to turn your indicators into the genie in a bottle.

Constantly changing the Moving Averages You Use

There was one point where I tried the 10-period moving average for a few weeks, then I switched over to the 20-period, then I started to displace the moving averages. This trial and error period went on for months. At the end of it, how do you think my results turned out? Do yourself a favor, pick one moving average and stick with it. Over time, you will begin to develop a keen eye for how to interpret the market. Remember, the end game is not about being right, but more about knowing how to read the market.

Using Moving Averages to Gauge the Risk of Your Trade

The 10-period moving average is a great tool for knowing when a stock fits my risk profile. The most I am willing to lose on any trade is 2% and as you read earlier in this article I will use the 10-period moving average as a means for stopping out of my trade. One thing I like to do is to see how far my stock is currently trading from its 10-period simple moving average. If my stock is 4% above the moving average, I will not take the long trade. I cannot go into the position knowing that I am already exposing myself to 4% worth of risk, which is double my maximum pain point.

The below chart example is from NFLX on April 23, 2013. Some of you may look at this chart and think wow, the stock is up 22% and on high volume. For me when I look at Netflix all I see is a stock trading a full six percent away from its simple moving average when it was time for me to pull the trigger. Since I use the moving average as my guidepost for stopping out of a trade this is too much risk for me to enter a new position. The next time you look at chart, try thinking of the simple moving average as a risk meter and not just a lagging indicator.

Putting it all together

Let's talk through an entire trade so we can see how to effectively day trade using a 10-period simple moving average.

The first thing you need to determine is the level of volatility you trade in order to establish your profit targets. Remember your appetite for volatility has to be in direct proportion of your profit target. For a deeper dive on volatility please read the article - how to trade volatility. For me I trade breakouts on a 5-minute period with high volatility.

The above chart of United Health Group from 4/2/2013 has all the right ingredients for my system. There is heavy volume on the breakout. The stock gives very little back on the first retracement and breaks the high between the time of 9:50 am and 10:10 am. Lastly, the moving average is within 2% of the stock price, so I am able to give the stock some wiggle room. Based on this setup should I pull the trigger?

The answer is yes, but I am purposely showing you a trade that has failed. There are enough blogs out there pumping systems and strategies that work flawlessly. Breakouts will fail the majority of the time. You are simply trying to limit your risk and capitalize on your gains. In this example, the stock broke out to new highs and then reversed and turned flat. Once you saw the candlesticks start to float sideways and the 10-period moving average roll over, it was time to start planning your exit strategy. True to my breakout methodology, I would have waited until 11 am and since the stock was slightly under the 10-period moving average, I would have exited the position with approximately a one percent loss.

In Summary

Moving averages are not the holy grail of trading, but if used properly can help you gauge when to exit a trade and also help limit your risk. The rest my friend is up to you and how well you are able to analyze the market. If you get nothing else out of this article, remember that less is more and to focus on becoming a master of one moving average.

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Assuming you have either started day trading or are looking to get into the game, I am going to shock you in this article. What I will cover here would have saved me 20 months of headache if I just had someone give it to me straight. Recent studies have shown that the majority of trading activity occurs in the first and last hour of trading. Let me make this even easier for you, only focus on the first hour and watch how simple it all becomes.

Why First Hour Trading

Simply put, trading during the first hour provides the liquidity you need to get in an and out of the market. On average the market only trends all day less than 20% of the time. Most new day traders think that the market is just this endless machine that moves up and down all day. In reality the market is pretty boring. The one time of day which consistently delivers on sharp moves with volume is the morning. Assuming you are doing this for a living you will need some serious cash. Day trading isn't something you should undertake with your lunch money. If you were trading with a $100,000 per trade how much volume do you think your stock needs? If you are really reading this article the first response from you should have been what's the price of the stock. Assuming you were already thinking that, you need tens of thousands of shares trading hands every 5 minutes. Reason being, you need enough volume to enter the trade, but also enough that you can potentially turn around in a matter of minutes and close out the same trade you just put on.

Let's get more granular when we say the first hour

The first 5 minutes

Now that the market has opened. the first noticeable increment of time is the first five minutes. I have no study to back this one up, but from my own experience and talking with other day traders the 5-minute chart is by far the most popular time frame. Within the first 5-minutes you will see a number of spikes in both price and volume as stocks gap up or down from the previous days close. This will often be driven by some sort of earnings announcement or pre-market news. This first five minutes is arguably the most volatile time of day. There is no high or low range for the day and odds are the previous days range has been eclipsed by the gap. With no clear boundaries for where to go, to short or buy after the first 5 minutes in my opinion is nothing more than a gambler's paradise. If you are serious about your trading career stay away from placing any trades during the first 5 minutes.

Below is a chart of NII Holdings (NIHD) which is one of the more volatile stocks on the Nasdaq. Notice how NIHD gapped up on the open to a high of 9.05 only to come back down to earth and close at 8.73. How do you think NIHD trended over the next hour?

First 5 minute bar

Let me not keep you waiting too long. All of you advanced day traders will say that the stock continued lower because the stock had such an ugly candlestick on the first 5 minutes. Well guess what, in this particular instance you would be correct.

5 minute reversal bar

Remember I am a day trader so I already know what you are thinking. You are probably saying to yourself, well Al I can place a buy order above the first 5 minute candlestick and a sell short order below the low of the candlestick. You may even take it one step further and place your stop order neatly behind the high/low of the first candlestick to box in your risk. Sounds simple enough right? Wrong! This is nothing more than saying to yourself that you are going to gamble your money within a defined framework. While I do believe keeping trading as simple as possible is the best means for creating wealth, this approach is just too simple and unpredictable.

9:30 - 9:50

The 9:30 - 9:50 time segment will look odd to you because it is. Most traders will wait for the first half an hour to complete and wait for a clearly defined range to setup. I have noticed over the years that if a stock is going to head fake you, it will often do it at the 10 am hour. Another reason I like 9:50 as the completion of my high low range is it allows you to enter the market before the 15-minute traders second candlestick prints and before the 30-minute traders have their first candlestick print.

After the completion of the 9:30 - 9:50 range you will want to identify the high and low values for the morning. The importance of identifying the high and low range of the morning provides you clear price points that if a stock exceeds these boundaries you can use this as an opportunity to go in the direction of the primary trend which would be trading the breakout. Or you can go against the primary trend when these boundaries are reached with an expectation of a sharp reversal.

Below is another example of the stock NIHD after it sets the high and low range for the first 20-mintues.

High Low Range

At this point you have one of two options. Your first option is to buy the break of the 9:50 candlestick and go in the direction of the primary trend. I am of the opinion that when you see stocks b-line like this for the first 20 or 30 minutes, the odds of the stocks continuing in that fashion are slim to none. I personally like to see a stock bounce around a bit and build up cause before going after the high or low range.

Your second option is to short the stock with the expectation NIHD will reverse in or around the 10 am time block. I am not a fan of this approach either because you are just hoping that the stock will reverse, but there is no real justification.

So, looking at NIHD what would you do at this point? The correct answer is you should stay in cash.

Range Holds

As you can see in the above chart, NIHD floated sideways for the remainder of the first hour. Do you see how sizing up the trade properly would have allowed you to miss all of this nonsense.

9:50 to 10:10

The 9:50 to 10:10 time slot is where you will want to enter your trade based on a break or test of the high and lows from the first 20 minutes. Now that we have already had our head fake example earlier in the article, let's focus on one that follows the happy path.

Break Down

This is a clean example from Newmont Mining on 5/7/2013. Notice how the stock was able to shoot down and build steam as the stock moved lower. In theory waiting for a break of the range after an inside bar or a tight trading range will often lead to consistent profits. The key thing to remember with the 9:50 to 10:10 time frame is this is the only window of opportunity to enter new trades. If you place a trade at let's say 10:15 and you are trading the first hour, it only provides you 15 minutes to close your position. Unless you are trading ticks, which I think is a sure way to make your broker rich, you simply don't have enough time for the market to move in your desired direction.

10:10 - 10:30

The last twenty minutes is where you let the stock move in your favor. This doesn't sound like a lot of time, but if you step back for a second this represents a potential of 40 minutes from the time you first entered the trade at 9:50. Now there is no law against you holding a stock beyond 10:30, for me personally I allow my positions to go until 11:00 am before I look to unwind. The key thing I want to get across here is that you get out of the mindset of letting your profits run. I honestly get visibly frustrated when I hear people giving this advice to new traders. In today's world there are way too many automated systems and retail investors all clamoring over pennies, stocks no longer move in a linear fashion where you can sit back and place your trades on cruise control. The amount of head fakes and erratic behavior is just over the top. For me personally, setting a clear profit target is the best way to ensure you take money out of the market on a consistent basis. If you want to read more on this topic you can check out any of the following articles: Day Trading Targets and Trading Plan - Key to a Successful Trading Business. Each of these articles will clearly breakdown the importance of getting in a rhythm of taking profits.

So, the last 20 minutes of the first hour is not the time to just hang out and see how things go. This is the time where you need to be on the lookout for closing your position and you must have some idea of where you want to close the position. I personally like to have a set percentage target that I'm shooting for while others may adjust this value based on the volatility of the stock. It really doesn't matter over the long run because you will adapt your trading strategy to your performance. The key thing is making sure you are coming from a place of wanting to pull profits out of the market.

Why 11:00 am is a bad time

Most of you reading this article will say to yourselves, this makes sense. I should trade during the first hour when I have the greatest opportunity to make a profit since there are the greatest number of participants trading. Since I am a trader I know there are still a hardcore group of you reading this thinking, I can make money all day. This is actually a true statement. You can make money all day. The only problem is the vast majority of people do not. You will see that around 11:00 am the volume just dries up in the market. This is because the institutional investors and hedge funds realize that there is far more work and risk to be had during the middle of the day than potential profits. The resulting price action when the true stock operators are away from their desk is basically a lot of sideways action. Stocks will breakout only to quickly rollover. Stocks will begin to move in one direction with nominal volume for no apparent reason. Lastly, while there may be price movements, they are so small that after commissions and time spent fighting the market it's just not worth the headache. Oh how I wish I had come across an article like this back in the summer of 2007, I may actually still have a few strands of hair on my head.

Just Settle Down

Think about it, in any line of work you want to follow the methods and strategies of the people who are the most successful. Don't try to fight the market just for the sake of being able to tell your family members and friends you were trading all day. You are in the business of making money, not working long hours. If you think my experience isn't enough reason to caution you, Thomson Reuters did a study and have concluded that 58% of all volume on the NYSE occurs during the first and last hour of trading. Of course the bulk of that trading is in the first hour. So, while one hour may only make up ~15% of the trading day, it is probably accounting for 35 to 40 percent of all the trades on average. Again I will ask you, why would you want to trade during any other time of day than the first hour. If I can not sway you from your desire to be involved in the action of the market, then maybe at least take a break between the hours of 11 am and 2 pm. While the afternoon does not have as much volume as the first hour trading, you can still catch some good price swings. Funny as I right this it makes me think of trading in terms of surfing. All we are trying to do on any given day is catch some really good waves.

Hopefully you have found this article useful and it has provided some additional insight into first hour trading and some basic approaches you can take in your day trading strategies to capitalize on the increased volume in the morning session. Please now take a minute and visit our site Tradingsim and check out how you can use our trading simulator to help you become a better trader. Can't take my word for how difficult intra-day trading can be, well try placing a few trades in our application and end all of the speculation once and for all.

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Turtle Trading System vs. Al's Trading System

The turtle trading system fascinates me on many levels. First you have two guys (Richard Dennis and William Eckhardt) debating over whether they can mold untrained every day people into master traders. Apparently, Richard who was claiming you could was right in his belief that winning traders can be taught and are not born with some innate trading ability. I am not covering the details of the Turtle's journey from ashy to classy in this article, but if you would like to read more on the turtle traders you can visit any of the following links:

http://www.turtletrader.com/

http://en.wikipedia.org/wiki/Richard_Dennis

Turtle Trader Book

The aim of this article is to compare the trading rules of my personal day trading system to those of the turtle trading system as published by Curtis Faith one of the original Turtles. To see the details of the turtle trading rules I am comparing my system to please visit: http://bigpicture.typepad.com/comments/files/turtlerules.pdf.

My going in assumption is the two systems will not be a spot on match because they were developed independently, but I want to see how much overlap if any exists.

#1 Define the Markets to Trade

The turtles were very prescriptive in terms of which markets they traded. Since the entire Turtle trading system centered on using large sums of monies, the Turtle trading system worked best in the futures markets. The Turtles did not concern themselves with trading equities, options or the other dozen trading vehicles present in the market during the 1980s.

For my own day trading system I do not trade options, forex, or the futures markets. I exclusively trade US equities and only those listed on the NYSE, AMEX, and NASDAQ. I do not trade any stocks listed on the OTCBB.

So, in terms of defining which markets are permissible to trade, I am going to say there is a 1-to-1 match between the Turtle trading system and my day trading methodology, because we both are selective about the arenas we operate within.

Does your day trading system allow you to trade across all types of securities and markets?

#2 Position Sizing

The Turtles have a system by which they factor in volatility to determine the number of contracts that can be purchased per trade. Their end game is to never lose more than 2% on any trade. The Turtles use a look back period of 20 days for the average true range of a commodity to determine its volatility, at which point they will then size their position accordingly to minimize their risk.

In my day trading system I do account for volatility by comparing the average true range relative to the stock price. To read about my approach please visit How to Trade Volatility.

While I do factor volatility into my trading, I do not have a look back period defined for the average true range and I do not have a systematic way of position sizing. If I see the ATR is high relative to the closing price of the stock I will take on a smaller position. I do however have zones of the ATR which if exceeded I will not trade. If the ATR is within my green zone I will place 10% of my available margin in the trade.

It is probably a good idea for me to take my system to the next level by having a defined approach for position sizing, since it only takes being wrong once when you are over leveraged to have a serious problem. For me, instead of modifying my position size and taking all valid setups as trade opportunities, I have learned over the years which ATR ranges are not appropriate for me and have avoided these trades all together.

The other item I have in common with the Turtles related to position sizing is the concept of a maximum drawdown of 2% of my account value on a trade. Just like the Turtles, I will liquidate my position the second this is breached.

For position sizing, while there are a number of similarities, I have to say I don't have a match with the turtles on this one.

Have you factored in position sizing into your trading system?

#3 Entry Criteria

The turtle trading system opened new positions on a break of the 20-day or 55-day high/low. For the short-term the 20-day period was used and for the larger trend the 55-day period. This breakout approach was used for both long and short trades.

Just like the Turtles, my day trading system only calls for an entry when price breaks above or below the high/low of the morning range after a strong move.

I trade on the 5-minute time frame, but I have not called out the exact range breakout range (i.e. 20 bars, 55 bars). However, my day trading system accounts for the concept of buying or selling the breakout since I only trade volatile stocks in the morning that are moving on high volume. On average these stocks are clearing not only the last two days trading range, but likely the range for the last week which is far more than 20 or 55 bars.

There is a slight difference on how I approach entries. The Turtles will buy/sell the commodity on the break of the range. This means if the commodity gaps up through a level, the Turtles are buying on the open. If the commodity breaks through the range during the middle of the day the Turtles are purchasing as well.

For my day trading system I have two rules which I follow no matter what:

I do not blindly buy the breakout at 9:30 if a stock sails above a trading range. I must see the stock pullback from the morning high, build more cause and then surge through that high. For me this is validation the stock will continue in the direction of the primary trend, at which point I will open a position.
Unlike the Turtle traders who can open a position at anytime during the trading day, I only open new positions between 9:50 and 10:10 am. Since day trading is on a much shorter time frame than the system used by the Turtles, I don't have enough time to make my money back if things go against me. Also, I have to give stocks enough time to run before the dead zone starts at 11. If you haven't heard me rant already about lunch time trading please check out this article - 9 Reasons Why I Do Not Trade During Lunch.

Other than the concept of buying breakouts, our systems are not in alignment. The disparity between long-term trend following and day trading got the best of us on when it comes to entry criteria.

#4 Adding Units

The Turtles would add to winning positions as these positions went in their favor. Sizing up was permissible all the way to the maximum number of contracts a Turtle could carry based on their account value. In principle sizing up makes sense, since you should add to winning positions.

My day trading system does not call for increasing the size of winning positions as the trade progresses. In day trading the window of opportunity are much too short and stocks will turn on a dime after a false breakout. My day trading system calls for me to close my position after 1.62% profit; however, some of my positions never quite make it to my profit target.

Sizing up if the trade goes in my favor somewhat but not all the way would go against my day trading money management principles. If I start to add to a winning position let's say every quarter point it goes in my favor and the stock reverses after 1% of profit, I have now increased my risk profile to an unsustainable level.

Increasing the trade size is something best left for longer term trading. For good reason, my day trading system and the Turtles have zero in common when it comes to adding units to a winning trade.

Have you tried increasing your trading sizes when day trading if things go your way? What types of results have you achieved?

#5 Stops

The Turtles had a maximum stop loss of 2% of their account value for any trade. If a Turtle was adding units to their trade size, the Turtle would move their stop up in order to maintain the same level of risk as when the Turtle first opened the position.

As stated earlier in the article I too only risk a maximum of 2% of my account value on any trade.

I'm not going to drain stops too much, it's pretty straight forward. The Turtles and I have a 100% match between our systems. If you do not use stops in your trading approach, you are asking for it. Show me a trader that has been in business for more than 5 years that doesn't use stops; good luck with that one, they don't exist.

#6 Exits

The exit is the most important component of a trading system. Early in my trading career I would never take money out of the market. When I was 25 I made over $100,000 dollars trading options in a little over 7 weeks. To this day I remember my wife sitting with me as we looked at my trading account. She turned to me and said "Sweetie this is awesome, when are you going to sell." To this I replied, "This is step one in my trading plan. My goal is to make a million dollars in 6 months."

Don't you wish you could go back in time and slap yourself? Needless to say I no longer trade options and I consistently take money out of the market after every winning trade.

I digress; the Turtles would close winning positions when the security set a new 10-day high/low for short-term trading and a new 2o-day high/low for longer term trading. This required the Turtles to give back significant profits of 20% to 100% in order to allow the security enough room to breathe.

Over the long haul the turtles are basically swinging for the fences in order to make up for all of the trades that resulted in minor to midsize losses. Remember with the Turtles their system was less about being right all the time and more about winning big when the commodity heavily went in their favor.

Let me be crystal clear, my day trading system does not allow me to let my trading profits run. I am day trading people, things move pretty fast. I have a set profit target of 1.62% and my end game is to hit this percentage as many times per month to turn a profit.

If the trade goes against me before I hit my profit target I look to get out of the trade with a profit sometime between 11 am and 12 pm. I literally say to myself, I have entered the dead zone (11 am - 2 pm), so if I am up on the position I still consider the trade a win.

For exits, we can safely say the Turtles and I are in complete disagreement. I largely think we are not in alignment because while we both systems are centered around trading breakouts, day trading requires me to book profits quickly and on a consistent basis. Due to high frequency trading linear moves are very rare to come by intraday.

In Conclusion

Needless to say there are more than just a few differences between the Turtle trading system and my day trading system. I was only able to find clear overlaps in two places: defining the markets to trade and stops.

As a trader it's always good to see how your trading methodology measures up against other top traders in the industry. It is comforting to know that while our systems differ these disparities are largely based on the fact we are trading different time frames.

Over time I can only dream of making as much as the other successful Turtle traders.

I hope you found me going on and on comparing myself to the Turtles not too presumptuous. If you would like to discover how you can define your own trading system, check out our trading simulator where you can practice in a risk-free environment.

Good Luck Trading.

- Al

Photo Sources

Turtle - tarotastic

Stop Sign - DonkeyHotey

The post Can the Turtle Trading System work with Day Trading? appeared first on - Tradingsim.

Day trading is all about getting in a rhythm. Over time you will begin to identify day trading setups that consistently work for your trading style.

Whether you have a high win ratio or the average winning profit runs much greater than your losers, you just need to come out ahead.

Your trading style is what makes your market experience unique from everyone else's. This is where your background, fears, and beliefs all converge in how you view the market. No matter how good the system or the day trading setups placed right before your eyes, if the system is counter to how you view the world, you will not make money.

One of the most popular trading systems of all-times is the Turtle Trading system. The Turtles, as they have been affectionately called, were able to make 100s of millions of dollars trading commodities. That's right folks, 100s of millions of dollars, but did you know that some of the trainees in the program were let go. Even though these folks received the same training as the other Turtles, some could not grasp the concept of allowing their profits to run. It's never about the system; it's about you the trader.

In this article we will cover 6 classic day trading setups you can use to trade the markets. When I say classic, it means these setups would have worked in the 1980s and will continue to work well into the 2030s.

As you study each day trading setup, it's important to remember you must find the one that matches your trading style the most, in order to have success.

#1 Day Trading Breakout

No matter if the market is trending or aimlessly floating sideways, there will always be breakouts in the morning. A breakout is defined when a stock gaps up or down on high volume first thing on the open. These types of moves are almost always related to a news event.

Day Trading Breakout Rules

Stock gaps up or down on high volume.
Wait for a trading range to develop between 9:30 and 9:50.
Buy or sell short the breakout of the morning range high/low sometime between 9:50 am and 10:10 am.
Have a predetermined profit target for your position. Your profit target should be in alignment with the volatility of the stock.
You must have a stop loss order. My personal stop is a maximum of 2% and I look to exit trades if they are not profitable once the 11 am time strikes.

You may be thinking what's up with the time references? Day trading is fast, so you only have a set amount of time to capitalize on each trade. At 11 am the number of participants in the market drops off dramatically and you will find it very difficult to trade breakouts. So, get in and out in a hurry; time is not on your side.

Trader Profile - Day Trading Breakout

Expects quick returns
Perceives volatility as their friend
Able to make trading decisions in a matter of seconds
Less concerned with riding the trend and more attracted to making quick profits before the trend reverses course

#2 Fade the Breakout

Your ability to accurately pre-screen a breakout will determine how often the stock will continue in the direction of the primary trend. I have been able to successfully introduce the concept of volatility into my trading system which has greatly increased my overall win rate.

If you are just buying and selling any and every breakout, then your success rate will likely land around 50%. So, the takeaway from this statistic is there are just as many failing breakouts as ones that will continue trending.

I'm a firm believer you should profit off of the failed breakout attempts as well.

Fade the breakout rules

Stock gaps up or down on high volume.
Wait for a trading range to develop between 9:30 and 9:45.
If the stock gaps up, the first 15-minute range high cannot be breached. Conversely, if the stock gaps down, the first 15-minute range low cannot be breached.
Buy or sell the break of the trading range between 9:45 and 10:10 in the opposite direction of the gap.
The profit target is the closure of the gap.
Stop loss is below the high or low of the morning range, depending on the direction of the gap.

Trader Profile - Fade the breakout

Expects quick returns
Perceives Volatility as their friend
Able to make trading decisions in a matter of seconds
Enjoys the idea of going counter to the trend
Loves to punish other traders that jump in a trade too soon

#3 Trading Ranges

Believe it or not, there are trading ranges that can develop intraday. It's hard for people to think of day trading in terms of ranges, because most people assume day trading is some wild man's game with flashing lights bouncing off the screen.

I personally could not make money trading ranges. It's not that ranges don't work; they just didn't work for me. The slowness of the moves and the fact I had to trade with larger sums of money to achieve the same profits made me uneasy. I would close trades well before they had time to develop. You may not have these issues, so review the trading range rules and see if you have found a match for your trading style.

Trading Ranges Rules

Stocks volume should be light compared to the morning's trading volume.
Identify a discernible high low range between 9:30 am and 11:00 am. This may not always correlate to the high low of the day; just make sure you have identified the primary range.
Range should be a minimum of 1% from high to low. This will give you enough profit to cover commissions and the inherit risk that comes with any trade.
Open new positions between 11:00 am and 2:00 pm.
Buy the low of the range and sell the high of the range.
Profit target is again the high and low of the range.
Stop Loss is relative to the size of the range. A rule of thumb is you do not want to see the range exceeded by .20% of its value. So, if a range is 2%, you do not want to see the stock move out of the range by more than .4%.

Trader Profile - Ranges

Slow to react
Likes to perform thorough analysis over the course of a few minutes to a few hours
Views volatility as unwanted risk
Seeks to limit risk by placing tight stops
Gravitates towards a clear trading channel versus sloping lines and other geometric shapes
Is okay with placing multiple trades for the same stock

#4 Late Day Breakout

At the end of the day around 2 pm the volatility picks up again in the market. This is where traders return from lunch and are looking to enter or close positions in preparation for the next trading day. This is a great trading opportunity for active traders as the high low ranges set earlier in the day are breached.

Again, I only trade the mornings, largely because I will over trade if given the opportunity, but if you are a volatility trader after 2 pm is when you can get back into the game.

Late Day Breakout Rules

The stock exceeds the morning range with an increase in volume after 2 pm.
The stock is able to clear the range by .2%.
Profit target is the size of the move that preceded the trading range.
Stop loss is the middle of the range. This would imply the stock failed on the breakout attempt and is now falling back inside of the range from the morning.

Trader Profile - Late Day Breakout

Slow to react
Likes to perform thorough analysis over the course of a few minutes to a few hours
Likes volatility
Enjoys riding the trend into the close

#5 Trading the Flag

A flag is a classic technical analysis pattern that predates anyone reading this article. If you are unfamiliar with the pattern it's a sloping rectangular formation that occurs after a strong move. The primary characteristics of the formation are an increase in volume with a sharp price move. The stock then begins to consolidate in a range pattern that goes counter to the trend and volume completely dries up.

While I do not trade flags, I do like the fact the formation is soundly based on price and volume principles.

Flag Rules

Stock needs to breakout with high volume
A sloping rectangular range will develop with a minimum of 4 candlesticks
Open new positions on a breakout above or below the range
The profit target is the same length of the move that preceded the flag formation
Stops should be placed below the low of the range if going long and above the high of the range if going short

Trader Profile - Flags

Less concerned with a particular time of day and more focused on trading the setup
Likes to see a number of inside bars and consolidation patterns before a continuation move
Enjoys riding the primary trend to profits, regardless if this takes a few minutes or a few hours
Only looking to trade a stock once, in order to reap the rewards of the next major move

# 6 Triangles

I trade the Wyckoff method which calls for parallel trend channels and stays away from the head and shoulders patterns, diamond formations, and other complicated chart formations. However, I would be re-missed if I did not touch on the concept of ascending and descending triangles. Like the flag formation an ascending or descending triangle will develop after a strong move in a stock. The part of the triangle formation I like the most is that the reactions are smaller and smaller each failed attempt at the breakout level.

Funny enough when a trade goes against me, the ascending or descending triangle is the one formation that you can literally feel pulling away at your life. If you are short, the stock fails at the high of the day, so you immediately feel relieved as the stock backs away. This flash of hope is replaced by fear as the stock quickly turns back up again and does not break the previous low of the day. This process goes on and on, for what feels like ages, and by the time the stock finally breaks out, you already knew you were toast two hours into the formation.

Triangle Rules

Stock needs to have a strong move with price and volume
Once a high or low is set, each reaction from that swing point should become more shallow
Buy or sell short the break of the daily range
Place your stop below the last swing reaction if long and above the last swing if short
Profit target is the length of the move that preceded the triangle formation

Trading Profile - Triangles

Less concerned with a particular time of day and more focused on trading the setup
Likes to see a number of inside bars and consolidation patterns on a chart
Enjoys riding the primary trend to profits, regardless if this takes a few minutes or a few hours
Only looking to trade a stock once, in order to reap the rewards of the next major move

Summary of Day Trading Setups

In this article we covered 6 classic day trading setups. I could have easily highlighted another dozen or so; but that would only expose one of the main problems confronting active traders.

There are just too many opportunities present in the market on any given day.

Your job is not to trade everything, but only trade a limited few. Remember, it only takes mastery of one day trading setup to make consistent profits in the market.

Do you have an idea of what type of day trading setup you should be trading? If not, or if you are looking to refine your current trading methodology, try out our trading simulator built by and for active traders. Learn to trade in a risk free environment before placing your hard earned money in the market.

Good luck trading,

The post Day Trading Setups – 6 Classic Formations appeared first on - Tradingsim.

So this post will be one of the worst shameless plugs you will find on the web. Simply put, I believe without a doubt Tradingsim is the best online stock trading site and I'm going to tell you why.

Affordability

In today's economy we all feel a bit squeezed. As I look around the web I see a number of trading sites and platforms that offer really cool features and free offers; however, the one thing they all have in common is overpriced monthly platform fees and data fees. On average the data fees alone will run anywhere from $35 - $49 dollars per month. In addition you will have to pay some sort of hefty platform fee which will range from $80 to well north of a $100 per month. When you add it all up you will end up spending close to $1000 per year just to practice trading. If you don't believe me check out ninjatrader.

We at Tradingsim provide you access to real historical tick data for over 11,000+ symbols and access to our platform for less than $21 dollars per month. Why would we do this? Simply put, we know how hard it is to make money in the market and we want to provide the most affordable means for you to master your craft. Odds are, before you end up at a site like ours, you have spent hundreds if not thousands on a trading books, seminars and workshops. Why should you spend another $1,000?

Only 10% Make It

Let me splash a bit of cold water in your face. For every 10 of you reading this article only 1 of you will be profitable. This does not mean exceptional, I just mean profitable. The market is one of the hardest beast to tame. It only allows a select few into the club. So, now that I have managed to offend you, please hear me out before you click away.

Tradingsim allows you to practice for free 24/7, 365 days a year before you risk a dime in the market. Your risk is fixed at our annual subscription rate. These other so-called best online trading sites will dazzle you with free access, but in reality their only mission is to have you fund an account to begin trading. Knowing that only 10% of traders are profitable, why would they do such a thing?

Well it comes down to self-interest; the brokerage firms want you to trade so they can make money on your trading commissions. We at Tradingsim have elected to build or business on the foundation of helping traders discover their strengths before placing money in the market. So, trade or not, we still want your business.

New Features

We at Tradingsim pride ourselves on constantly adding new features. Unlike other online stock trading sites, instead of adding feature upon feature to the site, we assess the usage of each feature. Instead of just hoarding every feature which creates a very complicated user experience, we only look to keep the most valuable components in our charting application. This means that over time as we collect feedback from our users, the trading application you see when using Tradingsim has organically been engineered by our users. That's why when you use Tradingsim, it's hard to explain in words why the application feels just right.

Did I also mention all of the features of Tradingsim are offered to you in your subscription. If you look at other sites there are some features reserved for the VIP clients who pay a little extra each month. Our clients login to Tradingsim and see new features and enhancements on a regular basis. We do this not to just create more bells and whistles, but to continuously improve on our site in such a way that it will make you a better trader and that my friend should not cost you more money.

Made by Traders for Traders

I have nothing against people personally that build trading sites without ever trading, but there will always be a little something missing from the equation. Tradingsim has been built from the ground up by traders for traders. We know what it feels like to use other simulators or free tools offering by brokerage firms. We know how frustrating it can be when they only give you a look back period of a few weeks or months. We know what it feels like when your brokerage firm is charging you $100 dollars per month when you may only need to use your simulator a a few hours a month just to stay in the zone. I remember signing up for a free thinkorswim account, only to have them calling me and pressuring me to fund a live account or they were going to terminate my free one. We are not a brokerage firm. We are like you; traders simply looking to find and keep an edge in order to make money in the markets.

How Long Have The Other Sites Been Around?

You will see simulators and trading sites pop-up all the time around the web. They will have a bunch of flashing lights on their website and will try to entice you to signup for some new hot feature that is going to make you millions in the market. Give it a few years and come back to see if these companies are still in business. We at Tradingsim have been in business since 2009 and have just crossed our 4-year anniversary - GO TEAM! How have we been able to stay in business so long on the fast moving pace of the web? We simply deliver on what we promise to our customers.

Is the Site Online?

This one maybe throwing you for a loop. There are sites which advertise themselves as being online, when in fact their data feed is technically over the internet; however, you will need to download a GUI application to your local machine. This is the case with TDAmeritrade's Trade Architect and NinjaTrader. We at Tradingsim provide a lightweight online stock trading application that streams directly across your internet browser. There are no downloads or executables you need to worry about. All you have to do is login and the application will appear before your eyes. You maybe asking, why is this important? Let's say you download your favorite trading site's application to your home computer. You go to your folks house for the holidays, and now would like to practice trading. You will need to go ask permission to from your Dad to download this software onto his machine. You will likely get the, "Will this create spam on machine or slow down my computer" questions. Once you are of age, the last thing you want to do is relive your childhood. It's a much better feeling to go to your parents study and just login to Tradingsim like any other website and not have to worry about the residuals of some application you just downloaded to your Dad's machine.

Support

Other sites talk about support; however, their support begins and ends with their trading platforms. We are a small business and we value each and every client. If you email us at admin@tradingsim.com with a random trading question, know that you will get a response. Our level of support is on a much deeper level than just answering your basic questions about the platform, it truly matters to us that you are successful.

Blog

Right now you are reading a blog from one trader to another (you). On these large trading sites, their corporate blogs will cover the next great IPO or merger, but they won't talk trading in plain speak. You will find articles from people with a large number of acronyms after their names, but are you really able to connect with their overly complicated financial wizardry?

Feel free to read our host of articles over at tradingsim.com/blog. You will find all sorts of articles covering everything from trading psychology to money management.

Do they make you money?

Check out this review site http://online-stock-trading-review.toptenreviews.com/. This article has a pretty exhaustive list of features, pricing and key data points. The one thing I cannot find in this article is how much money will you make using one broker over the other. If you honestly ask yourself this question you can only arrive at the logical conclusion of you don't know. The obvious answer is the lowest cost provider. Or you may believe that the platform with the lowest latency will mean you get better fills and over the long run will make more money. You and I both know these are all things to make you feel comfortable with the idea that more tools, or faster connections will lead to you becoming a more profitable trader. You will make money in the market when you are ready. It has very little to do with the platform or system. However, the one thing that is true, the more your practice your craft and learn to trade in the zone the more money you will make. Since Tradingsim provides the largest database of historical tick data (9 months as of the writing of this article) I think it's safe to say you can literally lose yourself in our application.

Account Minimums

The vast majority of online trading sites will require you to have a minimum account balance. These minimums will range from $500 to $2,000. Not to keep rubbing it in, but those free simulators and other applications they offer are clearly not free. Let me ask you a simple question, if you have $2,000 sitting in an account, how long before you place a trade? Will you be able to simulate trading for 3 months, 6 months or a full year without placing a live trade? Are you seeing the light yet?

With Tradingsim you simply come and practice trading until you can see positive growth in your trading account. Under no circumstances should you ever place your own money in the market until you can prove to yourself you can make money on a consistent basis.

Referrals

Do me a favor. Go and visit the top 10 results in Google for best online trading sites. Do you see anything in common? They all provide a brief platform comparison and some helpful write-ups on each brokerage firm. If you haven't figured it out yet let me spoil it for you. Each icon for the brokerage firm has a nice button conveniently placed near the company's image. What do you think happens once you click the button? Bingo, the site receives a nice fat referral fee if you create an account. So, can you really trust any of these review sites? When you start to look at things through this prism, makes my shameless plug of Tradingsim look quite ethical.

So Why is Tradingsim the best online stock trading site?

If you are still asking this question, you clearly have skimmed this article. When I first started day trading at home I desperately was looking for a risk-free place I could trade without the risk of switching from my simulator to live account (which I did quite frequently). TradeStation which was my platform of choice offered a simulator, but I could only use it during market hours and that's when I needed to make money. I then went on to download the free version of Ninjatrader, but they required me to record my own data during the day. Needless to say between that painful process and the overly complicated front-end I quickly abandoned Ninjatrader as well. I bounced around to a few more downloadable GUIs, but they all wanted money for the data fees and platform fees and I couldn't explain spending more money to myself after I was already paying Tradingsim $100 a month.

So, I set out with my business partner Kunal to build a site that provides you the risk-free environment where you can mature as a trader, free of all the bait and switch games of the brokerage firms who are only out to separate you from your money. They like casinos are not concerned with whether you win or not, simply that you play, so they can make money on your trading commissions.

We at Tradingsim believe anyone can get in the 10% club if only they have enough time to become a master of their craft. Come join us today to start your journey towards trading success.

The post What is the Best Online Stock Trading Site? appeared first on - Tradingsim.

Stock Simulator

If you do a search on the web for stock market simulators, you will get a laundry list of sites. Some are free and others can cost quite a penny. I will lay out in this article a couple of key things you should consider when trying to find the best stock simulator money can buy.

How Much Data?

For me, simulating the current day is critical, but the true value of a stock simulator is the ability to go back weeks, months or even years. Think about it, your system may work well in a bull market, but may have horrible returns when the market gets a little nasty. Remember, it's not just your individual stock out there, one of the major drivers for how your baby will perform is the trend of the overall market. If the stock simulator only offers a week or a few months of data, the accuracy of your back testing will only be as good as the type of market trading at that given snapshot. Your is simulator should provide fresh data regularly, preferably daily and should have a a minimum of 6 months of data. This will allow you the benefit of doing some extensive research prior to placing your money in the market.

Is the Data Real?

The key thing with any simulation is practicing in an environment that simulates the real trading world as much as possible. There are times when you are trading a stock and the tape will speed up dramatically or the entire market will catch a bid and bounce suddenly. It's key that your stock simulator provide you with that level of authenticity. The only way you will be able to achieve this same feeling is if the simulator has real-tick data. To take this a step further, the tick data should pipe through the application in milliseconds. This is the standard for most large brokerage firms. When you are talking milliseconds, this is quicker than what the human eye can actually process. It may not sound like a lot, but believe me when I tell you the speed of the market can be shocking at times if you are not ready. Some simulators will only update their data every 5 or 10 seconds, which doesn't sound that bad, but there are a lot of trades that can execute within that time frame. So, while it maybe "free" to use BATS data, there will be a cost down the line when you are faced with trading at true market speed.

Is the Data Included in the Price

Data is the key item for any trading simulator. Without data you pretty much are looking at a blank screen. As you assess the stock simulators available in the market, remember to pay close attention to their data fees. It's unfortunate, but most will require you to purchase a data subscription with a third party data provider as the simulator sites often do not provide data directly. These costs which are monthly, add up to a pretty penny by the end of the year. Make sure you keep a close eye on these hidden fees.

What Type of Simulation is Provided?

Simulation can mean a lot of things to a lot of people. There are some very basic stock simulators out there that only show the last value of the stock and an option to buy or sell the security. There maybe little information provided in the form of technical analysis or a charting engine. For me personally, I use technical analysis as my "edge" when analyzing the market. For most day traders and swing traders, technicals are their source for how to analyze the market. So, when assessing a simulator ensure the application provides you with whatever tools you need to gain your "edge".

Don't Over Analyze

I have been reading a number of books related to trading psychology over the last few months. The one thing they all have in common is that successful traders do not fall in the endless cycle of analyzing the market to find their edge. If you really decompose trading down to its most basic elements, it is truly a profession of odds. The problem most traders face is when the market sends them a losing trade or two, instead of just accepting the loss and moving onto the next trade, the trader begins the cycle of analyzing the market. The level of analysis is often directly linked to the negative trend in the trader's equity curve.

Most traders begin changing their system as they receive feedback from the market in terms of profits or losses. This constant changing of the system never allows the trader to establish a solid baseline of their trading methodology. To counter the need to constantly refine your system, try logging into your stock simulator to see if your last few losing trades are just the market odds playing out, or if you really need to reassess your overall approach.

When are you able to Simulate?

This is a key factor that most people don't think about when assessing stock simulators. The vast majority of simulators only allow you to practice during market hours. This is good if you are generally free during the hours of 9:30 and 4:00 pm; however, most people are trading or working their day jobs during this time. The more you are able to practice the greater chance you will have of finding your zone and staying in it. So, make sure your simulator provides 24/7 practice trading.

Does the Stock Simulator provide Penny Stocks?

Most stock simulators are used as a means for companies to up sell a much larger ticket item. Therefore, some companies will skim on the amount of data the store and/or collect. An example of this is penny stocks. Now, I'm not just talking about stocks that trade below $5 per share, I am referencing those that trade OTCBB. What most newbies don't realize is that a lot of penny stocks do not trade on the NYSE or Nasdaq. Due to their volatility and low share price, these securities trade over the OTCBB or also known as Pink Sheets.
It's critical that your stock simulator have this data as many newbies are attracted to the thrill of making quick money in penny stocks. I personally do not advocate trading these types of securities, because the moves are often so violent that most traders are unable to sit through the gyrations. Which is again more reason to have them in your simulator of choice, so you can determine if you have an edge with penny stocks.

Fantasy Trading is for Games not Trading

The primary driver for fantasy trading is to measure yourself up to other would-be traders. While this is great for entertainment purposes, this is horrible for trading. Trading is about you; this is a one person game. Focusing on other traders is a sure way to lose yourself in the game of trading. This is not fantasy football or family feud. You have to figure out what makes you money; worrying about the fact you are 22nd out of 1,000 traders adds no value to your trading skills. If you want to compete with others, try picking up a copy of Call of Duty.

Is the Charting Application Easy to Navigate?

There are a number of trading simulators that have simply added feature after feature over the years. It's funny because when you open these applications up for the first time your initial reaction is to run for the hills. There are flashing lights everywhere and it's almost as if the screen is going to attack you. The more features and indicators does not equal profits. Some of the most successful traders have made fortunes using one or two indicators. When you are assessing your trading simulator, make sure the user interface is clean and straight forward. I know what you are thinking, more is better. Actually this is the furthest from the truth. As you progress through your trading career you will experience a few bumps in the road. The key thing during these times is to not over analyze your system as stated earlier in this article. When you have a platform that offers you endless combinations of how to analyze the market, you will likely fall victim to this cyclical behavior.

Is the Stock Simulator Web Based?

The last thing you want to do is have to download your stock simulator to every computer you own. This will become especially challenging as you try to explain to your manager at your job why you have just tried to download the latest trading application to your computer. A much easier solution is for your stock simulator to be a lightweight web application that you can login on any machine from anywhere in the world.

Is the Stock Simulator an Upsell Tactic?

Trading simulators at times are an upsell for other services. Brokerage firms are notorious for this technique. The brokerage firm will lure you in with a heavily discounted simulator in hopes that you will switch from simulation mode to trading live. Their motivation for this is to get as many trading commissions out of you before you go bust. The company that provides you your simulator should be firewalled from you and the live market. Your stock simulation company should have a vested interest in making you a better trader and not simply in getting you to trade in the market. Remember if the simulator appears to be extremely cheap or almost free, make sure you prepared for upsell that is likely around the corner.

Combat the Need to Over Trade

Over trading is one of the many challenges you will face as a trader. Over trading can start from trying to dig yourself out of a hole or simply fighting the market. These periods of over trading are normally short but can be disastrous to your equity curve. Instead of channeling your energy into trade after trade, you can use a stock simulator to get the bug out of your system. When you feel the urge coming on to go on a trading binge, log into your stock simulator and trade away until you feel the urge leave your system. This again ties back into my earlier point of why your simulator should be firewalled from your brokerage firm. I can't tell you how many times I would be off my game and would switch from simulation mode to live trading while I was in the middle of a trading slump.

How Best to Use a Stock Simulator

For newbies it's best that you use a trading simulator to get a feel for the market. A stock simulator will allow you to determine your risk profile and win/loss ratio which are critical to determining how to use your edge to consistently make money.

For active traders, you can use a stock simulator to review your trades. Most traders perform their review by looking at static charts. The real power in a stock simulator is reviewing your trades with a replay tool that can display every tick. This will allow you to relive the moment to see the speed of the tape and overall market action.

Lastly, you can use a stock simulator to review how a stock trades before you enter a position. How many times have you looked to day trade a stock, only to find out that the stock has really high spreads between the bid or ask price or the intraday action is erratic. This sort of tick-by-tick action may not reveal itself on minute or daily bars and may come as a surprise when you look at the stock in real-time. This sort of feel for the stock only comes from actively monitoring or trading the stock. Using a simulator with real tick data allows you to gain a level of understanding of how a symbol trades without having to monitor the stock during the trading day or risking any money.

In Summary

An online stock simulator is a must have simply because it allows you to practice. Just as athletes practice in the off-season, you also need to continue to practice your craft outside of market hours. To see why we believe Tradingsim is the best stock market simulator, please visit https://www.tradingsim.com.

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Stop Loss Orders

How do Stop Loss Orders Work?

If I had to define a stop loss order, it’s just that, a protective order which stops you from losing more money than you would like. In a nutshell these are orders that are placed a certain distance from your entry price and if reached your position is closed. This does not mean 50% of your position is closed, but an entire liquidation.

When you think of a stop loss order, you should get a visual of a defeated soldier waving a white flag on the battle field. It is a complete concession that your original plan was wrong.

As we probe deeper into the topic you will receive a compelling argument on both sides. One point of view that stop loss orders are a good idea, the other that if used incorrectly, this capital preservation technique could have the exact opposite effect on your equity curve.

Stop Loss vs Stop Limit Orders

There are a number of stop loss order types, so without confusing you or myself, let’s slowly ease into this one. Stop loss orders can be placed on both sides of the market: long or short. In addition, the orders can be placed as limit or market orders.

Buy Stop Market Order

A buy stop loss market order is an order to buy a specific number of shares at the market or ask price. The buy stop market order is used to close short positions and is placed above your entry price. For example, if you are short Google at $1,000 and place a buy market order at $1,250, then your short position will be liquidated as a market order to buy back all of the shares on a price breach of $1,250.

Buy Stop Limit Order

A buy stop loss limit order is an order to buy a specific number of shares at a limit price. The buy stop limit order is used to close short positions above your entry price. As an example, if you are short Apple at $500 and place a buy stop limit order at $525, then your position will be liquidated at the set price of $525. This may seem in theory that you have more control over where you exit the position versus a market order; however, if your sell price of $525 is jumped by the bulls, you could be stuck holding your position.

Sell Stop Market Order

Do you really want me to explain? It’s the exact opposite of the buy stop loss market order, but used to prevent further losses from a long position.

Sell Stop Limit Order

Again, not trying to put you to sleep, it’s the exact opposite as the buy stop limit order, but is used to prevent further losses from a long position.

If you want more in terms of definitions of various stop loss orders, please visit the following link to an article on Tradersedgeindia.com. They’ve done a pretty good job of explaining the basics.

How to place a stop loss order

You place your stop loss orders like any other order through your trading application. For short positions, you will want to place a buy stop loss order and for long positions you will want to place a sell stop loss order.

It’s a bit confusing because when I first started trading I expected to see an order type called ‘stop loss’. In actuality, stop loss is just the term used to signify you are attempting to close a losing position.

You will want to place your stop loss order some distance from your entry price, which signifies to you that the position has gone against you and it’s time to take the loss.

That sounds easy enough right? Wrong! Knowing where to place your stop loss order is more magic than science. As you read further along in this article you will see why.

How to use stop-loss orders

Most traders will look at key levels of support or resistance as obvious points to place their stop loss orders. This can come in the form of a recent swing in an up or down trend, or the breach of a key top or bottom in a horizontal pattern like a head and shoulders bottom.

This sounds so simple enough, but it’s far too complicated to see on first glance.

It makes logical sense right, close your position when a key level is breached. Clearly, something is wrong and you must protect your capital.

Yes and no. The more you trade, the more you will realize the market is filled with more head fakes than the best bobble head at your local dollar store.

Why stop loss orders can cause you to lose more money than you would otherwise

The first reason stop loss orders can lose you money is you don’t know what you are doing. That sounds harsh, I know. But if you have been trading for a few months you are probably having enough time trying to figure out what’s going on, let alone have any idea of when you are wrong.

Your lack of understanding of the inner workings of the market will cause you to place stop loss orders at what will later be the turning point for the stock. The level of frustration you will face as your position is closed right before the stock takes off will feel like your 8^th grade girlfriend dumping you right before the dance.

I go into detail of how was recently burned below…..

Stop loss orders and how marker makers will gun for you

Market Maker

While the activity of market makers is completely legal, we have all cursed them at one point or another in our trading careers. The market makers will often see a number of orders clustered around a specific price and these orders act as a magnet for how these makers will bid the price of the stock. This is why you will notice that your order when triggered, will often lead to a bounce in the opposite direction.

This is because the market maker can use yours and other stop loss orders from newbie traders to provide the sell orders large enough for a big buy for the smart money.

Think I’m making this up? Notice how stocks will have these quick moves through support only to rally so hard that you don’t have the courage to jump on the trade.

How to use Trailing Stop Loss Orders

One method of stop loss orders we have not covered to this point is trailing stops. This is where you have booked profit in a trade and you trail or move up your stop loss order as the stock continues to move in your favor. The great thing about trailing stop loss orders is that you will lock in profit at as the stock rises, thus lowering your risk profile and increasing your paper profits. It's a great method for new traders who are learning the art of letting their winners run.

Stop loss orders and volatility don’t mix

If you are trading a volatile stock, using stop loss orders is a difficult proposition. Think about it, the really volatile stocks can swing between high and low points wildly. It’s tough enough to time the swings, let alone know exactly where to place your stop loss order.

Trading tightly with a volatile stock is contradictory at best. Take a look at stocks like CHTP, NIHD, and VNDA. Pick any timeframe or day of the week; where do you place your stop? Notice how levels are breached with no regard, only to rally as if there is no resistance at all.

For these highly volatile stocks, you have to truly accept the risk. If you are long, you are long. If you are short, you are short. You need to wait until your profit target is reached and be prepared to lose money if it doesn’t. If you are not prepared for that reality, don’t get involved with the high flyers.

Let me tell you a secret, I don’t use stop loss orders

Secret

Before I go any further, I am not advocating you do the same. Only you can decide what trading strategy works best for you.

Over the years for me I’ve noticed that stop loss orders cause me more pain the help. In the past, I had so much fear of the market. While it’s always good to have a healthy level of respect for how the market can take your money, you should never be afraid.

My fear was causing me to place my stops at ridiculously tight levels from my entry price. This would work if my strategy called for tight stops and I used the same approach every single time. This however was not the case for me.

In my mind placing the trade and then establishing a stop loss order was proof to me that I was accepting the risk of the trade. This couldn’t have been the furthest thing from the truth.

I was just going through the motions of what I thought it meant to trade with a set of rules. Does this sound familiar?

In the end, when I decided to no longer use stop loss orders, I knew I needed another method for protecting myself against runaway losses.

So, if I am long, I will place an alert at a key support level. If that level is breached, I will be alerted of the price action. Instead of just panic selling, I will see the volume and price action at the key support level.

At this point I will make a call of either closing out the position, or moving my mental stop lower. Over time I have noticed that these breaches are just classic head fakes that the experts use to squeeze out the little guy before the big move.

If you look back over your trades and you notice that the ensuing move starts right after you are closed out, placing a mental stop and then evaluating the price action may be what you need to turn a sharp corner in your trading journey.

A real-life example of using Stop Loss Orders

While thus far we have discussed stop loss orders in theory, there is nothing like the real world smacking you in the face. In the next few paragraphs I will cover an actual trade where I was squeezed out right before the big move.

The trade was in a stock that we all know and love named Tesla. Now Tesla had made a quite miraculous move up to a high of $194.50. After which the stock began a nasty correction back down to the $120 - $117 range.

I managed to avoid this blood bath, which looking back on it was a pretty good call. I entered the trade at $123 which was a little early, but I got in on 11/18/2013, where the stock had a $15 dollar range.

After entering the trade, Tesla began to move sideways for a number of days. There was a clean base which formed and as the stock dragged lower, there were three successive moves down which pushed the stock lower. You can see these swing points in the below 30-minute chart.

After the stock took out the previous day’s high, in my mind the move had started, so I placed my stop loss order directly below the last swing low as illustrated.

Everything about this to me even as I write this makes perfect sense. The only problem is the market of course went after that low, because odds are there were hundreds or maybe even thousands of other traders that did the same thing as I did on that day – place a tight stop.

As you can see, TSLA spiked down to hit a new intra-day low of $116.10 only to begin the sharp move up. As of the writing of this article (1/23/2014) TSLA hit a high of $182.38. Even with my awful entry price of $123, this still represents a profit of ~ 50%.

Now you could say, well the trade didn’t work out, but you were trying to protect your capital so it’s still a good trade. In my humble opinion, I say no. First off, at the peak of my paper loss I was only down 6% and on a volatile swing trade like Tesla, that’s less than a scratch.

The bottom line is that I was unwilling to take the risk. From what I remember on the trade, I was more concerned with the possibility of Tesla breaking down below $97, and that was all I could see. Makes perfect sense now why the move to $116 rattled my cage.

Has something like this happened to you in one of your past trades?

Summary

Stop loss orders can be a great mechanism for you to place controls around the anarchy that is the market. This is especially helpful for when you are starting out in your trading career. As you begin to understand how you react to the market (emotions, fears, greed, etc.) you will begin to see that these hard fast rules can hurt as much as help.

If you are struggling with where to place your stops or just looking to improve your trade management, please check out the cutting edge trading simulator at Tradingsim. We are helping traders like yourself make more money without risking their shirt.

Photos

Dice Photo by Incalido

Market Maker Photo by Wikipedia

Secret Photo by Jeremy Atkinson

The post Stop Loss Orders – Why They Don’t Always Work appeared first on - Tradingsim.

How to calculate the number of trading days per year

Trading Days in a Year

Since you have posed the question question of how many trading days in a year, let me first provide you an answer. On average there are ~ 251 days per year. This calculation is broken down into the following inputs:

# of Days in the Year - # of Weekends - # of Half Trading Days - # of Holidays = Total Trading Days per Year

Based on this formula let’s look at the number of trading days for 2014.

Number of Trading Days in 2014

365 (number of days in 2014) – 104 (number of weekend days in 2014) – 9 (public holidays) = 252 days.

What most people forget to factor in are the days where the market closes at 1pm. In 2014 those dates are July 3, 2014 (day before July 4^th), November 28, 2014 (day after Thanksgiving) and December 24^,2014 (day before Christmas). Once you factor in these three half-day sessions, you lose an additional 9 hours of trading which is equivalent to 1.4 trading days.

So, if you take the previous value of 252 trading days – 1.4 trading days you will have a total of 250.6 or ~ 251 trading days.

While we performed this calculation for 2014, the average of 251 days will be pretty consistent across any year (2015, 2016, 2017, 2018, 2019, 2020, and beyond).

251 days is based on the US market; however, you can use the same calculation for determining the number of trading days in a year for your respective Country (India, UK, Germany, etc.).

How Many Days Can you Actually Trade Per Year?

In this article we will cover how the number of days impacts you as a day trader or active trader. Unlike a normal 9-5 job, you don’t get sick days, vacation, or time off for training when you are an independent trader. If the market is open and you are not trading, then you are not making money.

Vacation (251 Trading Days Remaining)

On average people will take 2 weeks of vacation per year. I know for my European brethren, 10 days off is just the tip of the iceberg, for us in the states it’s the norm. If you factor this into the calculation there is a loss of another 10 trading days.

Sick Days (241 Trading Days Remaining)

Trading Sick Day

Now enters the variable of sick days. At work, I know we all may fall ill on the unseasonably warm Friday in late February, but again when you are trading on your own, each day counts. Assuming you take your Vitamin Cs religiously and avoid large public places in the winter, I think it’s safe to say you will take about 3 sick days per year.

Now, if you are like me and you have kids, then you need to up this figure to ~ 10 days. While you can try trading with a sick kid at home, I don’t recommend it as your attention will likely be diverted with doctor’s appointments, medicine schedule and just general worry.

So, we’ll reduce the number of trading days by another 10 (if you don’t have kids you can use the standard 3 days).

Trading Slumps (231 Trading Days Remaining)

Trading Slump

I don’t care how good you think you are, there will be some rough trading days along the way. These dark days will sneak up on you and out of nowhere it will be as if you can’t find a winning trade anywhere.

Some traders will just plow through this rough period and keep trading, but experience has shown me over the years this is a more costly approach.

Another option is to outright stop trading, which makes sense if you don’t let your ego get bruised so much you can get back on the horse.

What I have found to be the sweet spot is to continue trading through my slumps but use far less money and reduce the frequency of my trading. This allows me to regain my focus and reduce the noise of worrying about losing money or the need to be right.

On average you will lose about 1 day a quarter for these rough spots. So, we’ll need to reduce another 4 trading days for this as well.

Life Happens (227 Trading Days Remaining)

We have all been there; you have a plan for how your day is going to go and things go crazy. Your HVAC unit goes out, or your internet connection is awful. Things will just happen. On average expect to lose another 3 days for this as well.

The market has nothing to offer (224 Trading Days Remaining)

A sign of a good trader is that at times there are no trades available in the market. This may sound strange to newbie traders reading this article since there are thousands of stocks and there has to be something you can trade.

While the supply is always abundant, finding quality trades is another animal. I remember days where the market had no volatility. This lack of enthusiasm often occurs around holidays or after really big moves and the market needs a breather.

You can expect to lose another 7 days from the sheer lack of action over the course of a year.

So what’s left? (217 Days Remaining)

So after all of these reductions you are looking at a total of 217 trading days where you will be able to make money. That means you are losing ~ 14 – 15%% of total available trading days to lack of a better phrase, the cost of doing business.

Swing Traders vs Day Traders

Now if you are swing trading or position trading, the loss of over 30 days or 1.5 months does not make that much of a difference. Reason being, you are buying and holding positions for days or weeks at-a-time. Your earning potential will not be as linear as that of a day trader, but may have a series of spikes up as you take profits on winning trades.

In summary

If you are day trading, you have to factor in 1.5 months a year where you will not be trading. The more you dedicate your life to trading, the closer you will land at the 251 trading days in a year. Remember though, it’s not how many days your trade, rather how much money have you made at the end of the year.

I hope you enjoyed this article. Please take a look at tradingsim.com, to see how we can help you improve your trading skills.

Photos

Calendar Photo by Joe Lanman

Sick Day Photo by Ryan Hyde

Trading Slump Photo by Lloyd Morgan

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