A Guide on How to Stay on the Right Side of Market RiskStaying on the right side of the market is the only thing that matters in investing. The goal is simple: be long the things that go up and avoid the things that go down. Although this sounds straightforward, investors often focus too much on the upside potential and forget about the downside. In reality, avoiding the downside is by far the most important factor that will have the biggest impact on your total returns. This is because a -50% loss will always require a +100% gain just to break even.
Step 1: Follow the Trend
The most effective method to stay on the right side of the market is by following the trend, primarily through moving averages. The two most common types are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). The EMA assigns more weight to recent price movements, making it more responsive and effective for signalling the start of a downtrend, while the SMA offers a clearer view of the longer-term trend.
The simplest way to construct a trend-following indicator is to combine a short-term EMA with a long-term EMA. A buying signal is triggered when the short-term EMA crosses above the long-term EMA, and a selling signal is triggered when it crosses below. This systematic approach ensures clear and actionable signals.
Optimizing this strategy involves backtesting various EMA combinations to strike a balance between minimal trading frequency, lowest maximum drawdown, and highest profit factor. It’s also crucial to select assets that have historically adhered to trends, as these are more likely to continue doing so.
Assets that typically adhere to trends, such as cryptocurrencies, fiat currencies, commodities, and tech stocks, are often driven by speculative or uncertain future expectations. By incorporating a longer-term SMA and adding a safety margin to the calculation, you can help minimize false signals from the EMAs.
It’s advisable to compare asset performance not only against the USD pair but also against the safest investable asset in the selected asset class. This comparison helps determine if the additional risk is worth taking.
Step 2: Draw the Lines
Trend-following strategies are effective only with a clear market trend. Without it, prices may exhibit range-bound movements and generate false signals. Drawing trend lines and identifying horizontal support and resistance levels are crucial for enhancing the accuracy of these signals. The most reliable entry points typically follow a confirmed breakout from these lines, with older lines often indicating more significant breakouts.
When drawing trend lines, it’s crucial to use both normal and logarithmic chart scales. The most reliable trend lines appear consistent across these scales, with a breakout observed on both further confirming the trend.
Additionally, identifying reliable patterns like head and shoulders, inverse head and shoulders or double tops and bottoms can further validate trend breakouts. TradingView’s pattern recognition tools can automate this process and provide price targets, which can be helpful but are not always guaranteed.
Step 3: Understand the Macro
Following current macroeconomic conditions can enhance your understanding of the overall business cycle. The primary macro forces that influence asset markets are growth, inflation, and policy. These factors are subjective and not directly quantifiable, making them unsuitable for direct investment decisions. However, they are useful for assessing the market’s risk appetite, which should influence only your position size and not your systematic approach.
The US Composite Leading Indicator (CLI) is one of the most informative macroeconomic indicators, providing insights into potential economic growth trends and helping anticipate inflections in the business cycle.
Monitoring the US inflation and unemployment rates is also beneficial, as they significantly influence monetary policy. While minor fluctuations may not provide much insight, sustained trends that align with the Federal Reserve’s targets of 2% inflation and low unemployment are indicative of a healthy economy.
Furthermore, tracking global liquidity can reveal the real-time effects of monetary and fiscal policies implemented by major central banks and governments. This serves as a valuable tool to assess the market’s risk appetite.
In conclusion, this guide helps investors stay on the right side of the market by adopting a systematic approach that captures bull markets while avoiding major downturns. Recognizing that the future is unpredictable and that markets are driven by momentum, this method can both preserve and grow your wealth in a less stressful way. A disciplined, systematic approach, executed dispassionately, is essential for navigating market uncertainties. All indicators discussed are publicly available or can be accessed on my profile.
Disclaimer: This article is for informational and educational purposes only and should not be construed as investment advice.
Trendfollowing
Mastering Market Trends: An Introduction to Heikin Ashi CandlesHeikin Ashi candles, originating from Japan, are a distinct type of candlestick chart used in technical analysis to identify market trends. The term "Heikin Ashi" translates to "average bar" in Japanese, which reflects their method of calculation
This video explains Heikin Ashi candles and how they can be used to improve entrances and exits.
10 EMA strategy ^BEST TREND-FOLLOWING STRATEGY^Welcome! Today, I'm excited to share with you one of the most effective trend-following strategies that is adaptable to any timeframe and asset class ( OANDA:XAUUSD , NSE:NIFTY , FX:USDCHF ), boasting a remarkable risk/reward ratio of up to 1:10. Let's dive right in.
As mentioned, this strategy revolves around the Exponential Moving Average (EMA), specifically the 10-period EMA. For those unfamiliar, the EMA places greater emphasis on recent price data compared to a Simple Moving Average (SMA), providing a dynamic view of market trends.
When the price on your chart is above the 10 EMA, it signifies a bullish trend; conversely, when the 10 EMA is above the price, it indicates a bearish trend. Let's illustrate with an example:
Imagine a bullish trend with four consecutive green candles followed by a red candle. Our entry point occurs when this red candle, the trigger candle, fails to touch the 10 EMA. Subsequently, when a green candle crosses above the high of the trigger candle, we enter the trade. Setting our stop loss (SL) just below the EMA line beneath the trigger candle, we establish our take profit (TP) based on a risk/reward ratio, starting at 1:2 and potentially reaching an impressive 1:10.
Trailing the 10 EMA line allows us to stay in the trade longer, albeit experiencing initial stop-loss hits. However, perseverance reveals the strategy's efficacy over time.
Now, for short positions, such as during a downtrend characterized by three red candles followed by a green candle, our entry occurs when the low of the green candle is breached by the subsequent red candle. Setting the SL just above the EMA line above the trigger candle and TP based on the risk/reward ratio, we execute the trade.
For those interested in trailing stops, there are two options: firstly, trailing along the 10 EMA line; secondly, utilizing the Average True Range (ATR) for algorithmic trading enthusiasts.
With this strategy's flexibility and potential for significant returns, it offers traders a robust approach to navigating diverse market conditions.
***Here are 2 examples of Long & Short: Long position in BINANCE:SOLUSDT
www.tradingview.com
Short in FOREXCOM:EURCAD
It's crucial not only to grasp the concept of this strategy but also to put it into practice. 💼 Start by implementing it with small capital or utilize paper trading, which platforms like TradingView offer. 📝 Additionally, don't hesitate to experiment. For instance, try using an 11-period EMA and assess its effectiveness. You might find that it better suits your trading style and objectives. 🧪💡 Remember, trading is a journey of discovery! 🚀 Don't be afraid to explore new strategies and techniques along the way.
🌟 Like (boost), follow, comment, and share this strategy to spread the knowledge and empower fellow traders! 📈🚀👍
For the optimal TradingView experience, upgrade now to unlock the platform's full potential:
www.tradingview.com
How to Trade Trends the Right WayHow to Trade Trends: A Comprehensive Guide
Trend trading is a fundamental strategy for many traders, offering the potential for significant profits if executed correctly. However, mastering trend trading requires more than just following a single indicator. In this guide, we'll explore the intricacies of trend trading and how you can enhance your strategy for better results.
1. Utilize Multiple Indicators
Relying on a single indicator to gauge market trends is like trying to understand a story by reading only one page. To get a comprehensive view of the market's direction, you should use multiple indicators. This approach can help you confirm trends and avoid false signals. Some popular indicators include moving averages, MACD (Moving Average Convergence Divergence), and RSI (Relative Strength Index). By analyzing these indicators together, you can get a clearer picture of the market's momentum and make more informed decisions.
2. Infinite Nature of Trends
One of the most important concepts in trend trading is understanding that trends, by nature, are infinite until a clear trend change is identified. This understanding shifts the focus from setting arbitrary take profits (TPs) to managing trades with dynamic stop losses (SL). Instead of trying to predict where the trend will end, adjust your stop loss to subsequent swing highs or lows. This method allows you to stay in the trade as long as the trend continues, potentially capturing larger gains.
3. The Benefit of Longer-Term Trends
While it may be tempting to trade on shorter time frames for quick profits, longer-term trends often offer more substantial rewards. A trend that exists on a daily or weekly chart is less likely to be disrupted by short-term volatility. Although these trades may require more patience, they tend to exit less frequently, allowing you to ride the trend for greater potential profits. Exiting a trend too early or trading on a system that changes signals often can result in missed opportunities and reduced profitability.
4. Strategies for Lower Timeframes
For traders who prefer lower timeframes, the high volatility can make trend trading challenging. One strategy is to use the underlying trend from a higher timeframe as a bias and apply mean reversion strategies on the lower timeframe. This approach involves entering trades at a discount during an uptrend or at a premium during a downtrend. By aligning your trades with the overall trend direction, you can improve your chances of success even in a volatile market.
Combine multiple indicators for a comprehensive analysis.
Understand the infinite nature of trends and use dynamic SL.
Focus on longer-term trends for greater profit potential.
Use mean reversion strategies on lower timeframes with an overall trend bias.
"Trade the trend until it ends."
In conclusion, trading trends is more art than science, requiring a nuanced understanding of market indicators, patience, and discipline. By using multiple indicators, adjusting your approach based on the timeframe, and managing your trades dynamically, you can enhance your trend trading strategy for better results. Remember, the key to successful trend trading is not predicting the market's every move but rather managing your trades in a way that aligns with the overall market momentum.
The Cores of Price Analysis: Trend Following vs. Mean ReversionIn the world of financial markets, predicting future price movements is akin to unlocking a treasure chest. Two of the most prominent methodologies used by traders and analysts to decipher market movements are Trend Following and Mean Reversion. Each approach offers a unique perspective on how markets behave and provides strategies for capitalizing on this behavior. In this article, we'll dive into the core concepts of these methodologies, explore how they can be implemented, and touch on basic processing techniques like smoothing and normalization, which enhance their effectiveness.
Trend Following: Surfing the Market Waves
Trend Following is based on the premise that markets move in trends over time, and these trends can be identified and followed to generate profits. The essence of trend following is to "buy high and sell higher" in a bull market, and "sell low and buy back lower" in a bear market. This method relies on the assumption that prices that have been moving in a particular direction will continue to move in that direction until the trend reverses.
How to Implement Trend Following
1. Identifying the Trend: The first step is to identify the market trend. This can be done using technical indicators such as moving averages, MACD (Moving Average Convergence Divergence), or ADX (Average Directional Index). For example, a simple strategy might involve buying when the price is above its 200-day moving average and selling when it's below.
2. Entry and Exit Points: Once a trend is identified, the next step is to determine entry and exit points. This could involve using breakout strategies, where trades are entered when the price breaks out of a consolidation pattern, or using momentum indicators to confirm trend strength before entry.
3. Risk Management: Implementing stop-loss orders and adjusting position sizes based on the volatility of the asset are crucial to managing risk in trend-following strategies.
Basic Processing Techniques
- Smoothing: To reduce market noise and make the trend more discernible, smoothing techniques such as moving averages or exponential smoothing can be applied to price data.
- Normalization: This involves scaling price data to a specific range, often to compare the relative performance of different assets or to make the data more compatible with certain technical indicators.
Mean Reversion: Betting on the Elastic Band
Contrary to trend following, Mean Reversion is based on the idea that prices tend to revert to their mean (average) over time. This methodology operates on the principle that extreme movements in price – either up or down – are likely to revert to the mean, offering profit opportunities.
How to Implement Mean Reversion
1. Identifying the Mean: The first step is to determine the mean to which the price is expected to revert. This could be a historical average price, a moving average, or another indicator that serves as a central tendency measure.
2. Identifying Extremes: The next step is to identify when prices have moved significantly away from the mean. This can be done using indicators like Bollinger Bands, RSI (Relative Strength Index), or standard deviation measures.
3. Entry and Exit Points: Trades are typically entered when prices are considered to be at an extreme deviation from the mean, betting on the reversal towards the mean. Exit points are set when prices revert to or near the mean.
Basic Processing Techniques
- Smoothing: Similar to trend following, smoothing techniques help in clarifying the mean price level by reducing the impact of short-term fluctuations.
- Normalization: Especially useful in mean reversion to standardize the deviation of price from the mean, making it easier to identify extremes across different assets or time frames.
Conclusion
Trend Following and Mean Reversion are two fundamental methodologies in financial market analysis, each with its unique perspective on market movements. By employing these strategies thoughtfully, along with processing techniques like smoothing and normalization, traders and analysts can enhance their understanding of market dynamics and improve their decision-making process. As with any investment strategy, the key to success lies in disciplined implementation, thorough backtesting, and effective risk management.
Understanding Technical IndicatorsTrading indicators are essential tools for traders and investors to analyze and interpret financial market data. These indicators, derived from mathematical calculations based on price, volume, or open interest, etc, aid in visualizing market trends, momentum, and potential reversals. They serve as an additional layer of analysis, offering a structured and objective way to understand market dynamics.
Understanding Trading Indicators
1.1 Definition : Trading indicators are graphical tools derived from price, volume, or open interest data. They help in identifying market trends, momentum, volatility, and possible trend reversals.
1.2 Types of Trading Indicators :
Trend Indicators : These indicators, such as Moving Averages (MA), Moving Average Convergence Divergence (MACD), and Ichimoku Cloud, help in determining the direction and strength of market trends.
Oscillators : Tools like the Relative Strength Index (RSI), Stochastic Oscillator, and Commodity Channel Index (CCI) measure overbought and oversold market conditions.
Volume Indicators : Indicators such as On-Balance Volume (OBV) and Volume Weighted Average Price (VWAP) use trading volume data to confirm price movements.
Volatility Indicators : These, including Bollinger Bands and Average True Range (ATR), assess the degree of price fluctuation in the market.
Utilizing Trading Indicators
2.1 Trend Following Strategy : This approach involves capitalizing on the continuation of established market trends. Indicators like the Fourier Smoothed Stochastic (FSTOCH) help detect and follow these trends, providing smoother signals and filtering market noise for more accurate decision-making.
2.2 Mean Reversion Strategy : Contrary to trend following, mean reversion strategy focuses on price corrections when they deviate significantly from historical averages. The Bollinger Bands Percentile (BBPct) is a mean reversion indicator that uses Bollinger Bands to identify potential price reversals, indicating when an asset is overbought or oversold.
Comparing Trend Following and Mean Reversion
3.1 Key Differences :
Direction : Trend following identifies and exploits established trends, whereas mean reversion focuses on price reversals.
Risk Profile : Trend following is typically higher risk due to the challenge of timing, while mean reversion is considered less risky as it banks on imminent price corrections.
Market Conditions : Trend following excels in trending markets, while mean reversion is more effective in range-bound or sideways markets.
3.2 Combining Strategies : Using both strategies together can provide a more comprehensive market view and reduce reliance on a single approach. Mean reversion indicators can confirm trend reversals identified by trend-following indicators, while the latter can help avoid premature exits in mean reversion trades.
Binary and Discrete Indicators
4.1 Binary Indicators : These indicators, like the Alpha Schaff, offer clear, binary (yes-or-no) signals. They are ideal for straightforward decision-making, indicating when to buy or sell.
4.2 Discrete Indicators : Unlike binary indicators, discrete indicators, such as the Average-True-Range, provide a range of values, offering more nuanced insights into market conditions.
The Importance of Using Both Types of Indicators
Combining binary and discrete indicators equips traders with a broader perspective on market conditions. While binary indicators provide clear entry and exit points, discrete indicators offer detailed insights into the strength of market trends and potential turning points. This combination enhances decision-making by enabling traders to cross-reference signals and identify high-probability trading opportunities.
Conclusion :
In the dynamic world of finance, trading indicators are invaluable for providing insights into market trends, momentum, and conditions. Utilizing a combination of trend following, mean reversion strategies, and both binary and discrete indicators, traders can develop a comprehensive and effective toolkit for navigating financial markets successfully.
EDUCATIONAL: F 200%+ move in 82-84I want to start periodically sharing my retrospective analysis of market leaders, that made triple digits gains during bull markets in different time-periods.
The purpose of this analysis is to find commonalities in price patterns and behaviour among the best-performing stocks, that repeat themselves in each and every up-cycle throughout market history. That will help new stock market participants to better exploit new emerging opportunities.
As my stock market history teacher - John Boik - use to say it: "Study the past, so you can profit in the future".
Retrospective analysis of Ford ( NYSE:F ) during 1982-194:
0. Great Relative strength. When SPX (see the upper chart) makes lower lows, FORD is making higher highs on noticeable pick-up in average daily volume. Also notice who price creates a flat-base and latter breaks out (BO) from it with volume surging above average;
1. First BUY could be made here with very tight 3% stop, a bit or right after W. O'Neil's «shake-out + 10%» rule (buy if price shakes you out and quickly reverse and runs higher by 10%) after the double bottom pattern in the bottom of the base.
2. Because of the bear market nature of the general index, quick 12-15% gain could be used to trim 1/2 or 2/3 of the position to guaranty profits, and selling the rest for break-even during the following re-test of break-out area;
3. Could be bought again during the BO of perfect VCP with tight 2.5% stop, and...
4. ...sold for the quick 5-7x return-to-risk gain.
5. When the index makes its final lower-low, F's price rebases, making a higher-low, and quickly runs higher and breaks out in Aug82 along with the SnP500.
F could be bought and shaked out during initial BO attempt, and then re-bought after price follows through in two days with volume support.
Notice how price pattern rhythms with prior Dec81-Mar82 base.
6. This big red reversal bar with substantial volume pick-up could be used to book another 15-17% gain with only initial 3-4% stop.
7. It is already clear that F is the new market leader of this new up-trend and it makes sense to track how the price acts if it corrects to 50MA (Red line) that coincides with re-tests of prior BO point.
If to zoom in into the volume dynamics of this basing actions around 50D MA, accumulation (surge in volume with closes in in upper part of the bar dominate volume on corrective bars) becomes very evident.
8. New BUY coming from this low cheat BO with massive volume support. Because the average cost was so low, one may want to move stop to break-even or tracing 50D MA.
9. Price closed in the upper third of the day - good supportive actions on the 50D MA. If stopped-out, shares could be re-bought by the end of the day or on next day BO with tight stop and low of the day.
10. Shares could be sold into this kind of climactic run above the 7 month channel line + the general market barely moves to old highs indicating relative divergence and lack of overall momentum in the market.
11. Good tight area. Could have been bought at BO and sold at BE after the BO proved to be fake one.
12. New BUY under shake-out + 10% rule with stop bellow
50D MA after it crosses the buy price. Massive volume advance on BO day acts as confirmation of large institutional interest in the stock (notice how these green volume sky-scrapers bars tend to dominate the red selling bars latter-on until the up-trend changes).
Notice again how the price shows the same character shake-out pattern it made during Dec81-Mar82 and May-Aug82. As Nicolas Darvas observed that "stocks have characters just like people".
13. Perfect selling area: price moves above the channel line in negative divergence to the market (index is not making higher-highs).
14. Same type of character behaviour with shake-out and Mark Minervine's «slingshot» move on volume support, where «shake-out +10%» buy rule could be used to establish the position with tight stop bellow the short-term 8/21emas.
15. Sell 3/4 of position or all in this first evident distribution bar + the market seems tired and is loosing momentum.
Very noticeable distribution bars starting to appear - some heavy selling and not much buying.
Important sign of character change.
16. This low volume pattern during this up-move shows that late retail buyers are stepping in with no institutional support.
That is the hint that price advance is prone to failure.
17. Definite selling signal. Price dives bellow 50MA with substantial distribution started dominating the volume pattern.
HOW-TO: Navigate the Market with the Darvas Box Strategy
🚀 Introduction to the Darvas Box Strategy
Nicolas Darvas, a dancer by trade, crafted a unique and potent trading strategy during his global tours, famously turning $36,000 into $2 million within an 18-month timeframe during the 1950s. His approach, detailed in his book "How I Made $2,000,000 in the Stock Market," revolves around the concept of the "Darvas Box" - a method that encapsulates price movements and leverages breakout patterns, all while keeping a keen eye on volume.
Darvas sought stocks carving all-time highs and observed their trading ranges, creating a "box" from the consolidation periods. He would buy on the breakout above the box and implement a stop-loss below it, ensuring a meticulous risk management approach.
🛠️ Harnessing the Darvas Box Strategy with Our Script
Our Darvas Box strategy script is designed to encapsulate the essence of Darvas’s strategy, providing traders with a tool to not only identify and visualize Darvas Boxes but also to backtest the strategy across various assets and timeframes on the TradingView platform.
🗝️ Key Features:
Backtesting Capability : Evaluate the Darvas Box strategy’s historical performance on your chosen asset.
Versatile Entry Filters : Customize your entry criteria, ensuring alignment with your risk tolerance and trading style.
Volume Analysis : Integrate volume filters to validate breakout movements, adhering to Darvas’s emphasis on robust volume to confirm breakouts.
Visual Aids : The script visually plots Darvas Boxes and potential entry/exit points, aiding in swift analysis and decision-making.
📊 Utilizing the Script for Informed Trading Decisions
The script is not a 'get-rich-quick' tool but a sophisticated aid to navigate through the markets using a time-tested strategy. It allows you to:
Identify and visualize Darvas Boxes on any chart.
Backtest the strategy to understand its historical performance.
Customize settings to align with your trading preferences.
Receive alerts for potential entry and exit points based on your criteria.
📘 Dive Deep with Upcoming Publications
In the subsequent publications, we'll delve deeper into the various configuration sections of the script, exploring settings, filters, and optimizations to ensure you can tailor the strategy to your unique trading approach.
🔍 Explore, Analyze, and Trade Wisely
While the Darvas Box strategy has its merits, always remember that no strategy is foolproof. Ensure to utilize it as a component of a well-rounded trading plan, incorporating sound risk management and continual learning.
📈 Try the Darvas Box Strategy on Your Chart!
Eager to explore the Darvas Box strategy on your own charts? Navigate through the markets with a strategy that has stood the test of time. Click on the following link to learn more about how to apply the script to your chart and begin your journey with the Darvas Box strategy!
👉 Try the Strategy Now!
Stay tuned for the upcoming ideas where we dissect the script’s functionalities and showcase its application across various assets and market conditions!
Disclaimer : Trading involves risk and is not suitable for every investor. The information provided is for educational purposes and should not be considered financial advice. Always conduct your own research and consider your financial situation carefully before engaging in trading.
The Fundamental Concepts of Technical IndicatorsTrading indicators are essential tools used by traders and investors to analyze price data, identify trends, and make informed decisions in financial markets. They provide valuable insights into market dynamics, helping market participants gain a competitive edge. This comprehensive explainer will delve into what trading indicators are, how they are utilized, and the differences between two prominent strategies: trend following and mean reversion. Additionally, we will explore the importance of using binary and discrete indicators together to enhance trading effectiveness.
Part 1: Understanding Trading Indicators
1.1 Definition of Trading Indicators
Trading indicators are mathematical calculations based on price, volume, or open interest data that provide graphical representations of market conditions. These calculations help traders visualize price trends, momentum, volatility, and potential reversals. Indicators serve as a supplementary layer of analysis, offering a structured and objective approach to interpreting market behavior.
1.2 Types of Trading Indicators
Trend Indicators: Identify the direction and strength of prevailing trends, such as Moving Averages (MA), Moving Average Convergence Divergence (MACD), and Ichimoku Cloud.
Oscillators: Measure overbought and oversold conditions, such as Relative Strength Index (RSI), Stochastic Oscillator, and Commodity Channel Index (CCI).
Volume Indicators: Assess trading volume to confirm price movements, like On-Balance Volume (OBV) and Volume Weighted Average Price (VWAP).
Volatility Indicators: Gauge the level of price fluctuations, including Bollinger Bands and Average True Range (ATR).
Part 2: Utilizing Trading Indicators
2.1 Trend Following Strategy
Trend following is a popular trading strategy that capitalizes on the continuation of established trends. Traders using this approach seek to identify uptrends or downtrends and ride them for extended periods. Trend following indicators are ideally suited for identifying the direction of a trend and capturing profits during strong market movements.
Example of Trend Following Indicator: Fourier Smoothed Stochastic (FSTOCH)
(Indicators like the FSTOCH help traders reveal underlying trends in the market)
The Fourier Smoothed Stochastic is an advanced tool that utilizes the Stochastic Oscillator in combination with Fourier Transform analysis to identify and ride prevailing trends. By providing smoother signals, it helps traders stay on course with the established trend, allowing for more accurate entries and exits. Its ability to filter out market noise makes it an ideal choice for trend followers seeking a clearer view of market momentum, enabling them to capitalize on prolonged price movements.
2.2 Mean Reversion Strategy
Mean reversion is a counter-trend strategy that assumes prices will revert to their average or mean over time. Traders using this approach aim to profit from price reversals when an asset's price deviates significantly from its historical average. Mean reversion indicators are ideal for identifying overbought and oversold conditions and anticipating potential reversals.
Example of Mean Reversion Indicator: Bollinger Bands Percentile (BBPct)
(The BBPct indicator marks out price extremes which may lead to potential reversals)
The BBPct (Bollinger Bands Percent) is an indicator designed for mean reversion trading strategies. It utilizes Bollinger Bands to determine overbought and oversold conditions in the market. The indicator calculates the percentage of the current price's position within the Bollinger Bands' upper and lower boundaries. When the price is near the upper band, it suggests an overbought condition, indicating a potential mean reversion towards the lower band. Conversely, when the price is close to the lower band, it indicates an oversold condition, suggesting a possible mean reversion towards the upper band. Traders can use this information to identify potential reversal points and make informed decisions to capture price movements back towards the mean.
Part 3: Trend Following vs. Mean Reversion
3.1 Key Differences
Direction: Trend following aims to identify and ride established trends, while mean reversion seeks to capitalize on price reversals.
Risk Profile: Trend following strategies typically involve higher risk, as traders enter positions in the direction of the trend, which may be challenging to time accurately. Mean reversion strategies are often considered less risky as traders expect price reversals to occur relatively soon after significant deviations from the mean.
Market Conditions: Trend following tends to perform well in trending markets, while mean reversion thrives in ranging or sideways markets.
3.2 Combining Trend Following and Mean Reversion
While trend following and mean reversion strategies have distinct approaches, they can complement each other when used in confluence. Combining both strategies can provide a more comprehensive view of the market and reduce reliance on a single indicator. For example:
Confirming Trend Reversals: Mean reversion indicators can be used to confirm potential trend reversals identified by trend-following indicators, increasing the probability of successful entries and exits.
Managing Risk: Trend following indicators can help traders stay in trends longer and avoid premature exits when using mean reversion strategies.
Identifying Range-Bound Markets: Mean reversion strategies can be employed during periods of low volatility or when the market lacks a clear trend, while trend following indicators can be set aside until a new trend emerges.
Part 4: Binary and Discrete Indicators
4.1 Binary Indicators
(The Super Schaff gives out binary signals when it detects a potential change in trend)
Binary indicators provide straightforward, yes-or-no signals, indicating the presence or absence of a particular condition. Examples include Moving Average Crossovers and Super Schaff, which produce buy (long) or sell (short) signals when specific conditions are met.
4.2 Discrete Indicators
(The Volume-Trend Sentiment displays the overall implied sentiment based on volume and price action)
Discrete indicators generate signals based on a range of values or levels. These indicators offer more nuanced insights into market conditions, allowing traders to interpret the strength or weakness of signals. Examples include RSI and VTS.
Part 5: The Importance of Using Both
5.1 Diverse Perspectives
Combining binary and discrete indicators provides traders with diverse perspectives on market conditions. Binary indicators offer clear entry and exit signals, while discrete indicators offer a finer understanding of price trends and potential turning points.
5.2 Enhanced Decision-Making
Using both types of indicators helps traders make more informed and confident decisions. By cross-referencing binary and discrete signals, traders can filter out false signals and identify high-probability trading opportunities.
Conclusion:
Trading indicators play a vital role in modern financial markets, providing traders and investors with valuable insights into price trends, momentum, and market conditions. Trend following and mean reversion strategies offer distinct approaches to trading, each with its unique advantages and risk profiles. However, combining these strategies and utilizing both binary and discrete indicators can provide a comprehensive and powerful toolkit for traders seeking consistent success in the dynamic world of finance.
Check out the indicators mentioned in this post:
Trading is Patience #ABNBOnce you have selected a stock with decent fundamentals (review every month if the stock still fundamentally sound), then you just need the chart to tell you when to buy it.
Trading is all about waiting/patience.
When price is below the 20/50/200, you stay in cash. You wait.
When price is above 20/50/200, you wait for a base/pullback and a trigger.
In this example, there was a decent gap up breakout but got stopped out. So what? A good system just need a 30-40% winning rate.
Look for a base and you WAIT.
Trading should be made simple. #GOOGLYou don't need a super complicated trading strategy to make money. You need a sound risk/money management, realistic expectations and abuncance of patience.
When price is below 20/50/200, you just simply stay in cash. When price is above 20/50/200.. wait until it has form a base and/or made a decent pullback. Wait.
Trend following trading strategy (works on all markets)This strategy is a trend following strategy to be applied when the market is uptrending. It demonstrates the significance of breakout levels which are very often retested prior to continuation to the upside.
For Trend visualisation, 10, 20 and 50 Moving averages are used.
If you apply ONLY this setup and and nothing else, you will have a statistical edge and be consistently profitable!
All other info is on the chart.
Good luck!
aFew Trendline basics ♧"A overview in the definition and importance of using trendlines , consolidation and breakouts in trading"
-Understand the basics of drawing trendlines, identifying consolidation and support and resistance levels. Get familiar with connecting highs and lows and forming a trendline or reconize consolidation.
-Run with the runners by understanding market momentum.
Identify runners and follow their trend and use other tools for identifying presure on the runners (such as RSI4) and manage the risk while trading in profit.
-Trading the reversal of the breakout as a cycle and understand the breakout and its significant counter value. Identify the breakout and entry points. Recognize the signs of a reversal and exit the position to trade the reversal to the breakout.
In this lecture, i hope to cover the basics of drawing trendlines, how to identify runners and trade with them, and how to trade the reversal of the breakout as a cycle.
By the end of the lecture, you should have a solid understanding of how to use trendlines to your advantage in your trading strategy.
" Trendlines are lines drawn on a chart that connect two or more price points, used to identify trends and potential trading opportunities. Knowing these basics of drawing trendlines, identifying runners, and trading the reversal of the breakout can be a powerful tool when traders look to identify trends and determine entrys & exits points and potential trading opportunities."
There are three types of trendlines: uptrend, downtrend, and horizontal (or sideways) trendlines.
- Uptrend lines connect 2 a 3 higher bulls (uprising bars),
- Downtrend lines connect 2 or 3 lower bears (downsetting bars)
- High & Lows trendlines connect high with hights and Low with lows
- Horizontal trendlines occur when the price remains relatively flat.
• Drawing the trendline and understand the basic is by identifying at least two points on a chart and draw a line that connects them. The line should be drawn along the slope of the trend, either up or down.
• Highs and lows trendlines are realized by connecting highs with highs and lows with lows. You should draw a line that runs along the top of the highs. When connecting lows, you should draw a line that runs along the bottom of the lows.
• Support levels are price points where demand for an asset (EURUSD) is strong enough to prevent the price from falling further, while Resistance levels are price points where supply is strong enough to prevent the price from rising further.
Run with the runners and understand the market momentum.
Market momentum is the strength of the current trend in a market and the momentum can be positive (upward trend) or negative (downward trend).
Runners are assets with strong positive or negative momentum trends. Traders can identify runners by looking for assets with strong upward price movement, high trading volume, and positive news or market hype.
Tools for identifying runners are the use of technical analysis tools such as moving averages, relative strength index (RSI4), and trendlines.
Managing risk while trading with runners is the way traders gain profit. Stop-loss orders should be set and avoid trading with too much leverage is necesary to manage risk while trading with runners.
Trade the reversal of the breakout as cylce. Understand the breakout and its significance when they occure as an asset's price moves beyond a key support or resistance level, indicating a potential trend reversal and identify potential breakouts and entry points by the use of trendlines and technical analysis indicators to take entrys and exits.
Recognizing the signs of a reversal as they occur when an asset's price movement changes direction, signaling a change in trend. Signs of a reversal may include a change in momentum, a break in a trendline, or negative news or market sentiment. Exit the trend for trading the reversal of the breakout should be accomlplished throught soul desire, set profit targets and or the use of a trailing stop-loss orders to manage the risk or take profit while trading the reversal of a breakout.
"Support and Resistance & Consolidation"
A consolidation occurs when the price of an asset moves within a range, between a defined level of support and resistance. Consolidations can provide traders with opportunities to identify potential breakouts and to trade with runners as they move the price towards the breakout level.
Support levels are price points where demand for an asset is strong enough to prevent the price from falling further, while Resistance levels are price points where supply is strong enough to prevent the price from rising further.
"Trendlines can be drawn to connect the highs and lows of the price movement during the consolidation period.
These will form the upper and lower boundaries of the consolidation range."
"Technical analysis tools such as Bollinger Bands, RSI, and Moving Averages can be used to confirm the consolidation and identify potential breakout levels."
During consolidations, runners can be identified by looking for assets with a consistent pattern of higher lows or higher highs.
Traders can buy when the price is moving towards the resistance level and sell when the price is moving towards the support level. You should set stop-loss orders and avoid trading with too much leverage to manage risk while trading in consodilations ranges.
Potential breakout levels can be identified by looking for price movements that break through the upper or lower boundaries of the consolidation range.
Traders can enter a long or short position once the price breaks out of the consolidation range.
Stop-loss orders can be placed below the support level for a long position or
above the resistance level for a short position.
Managing risk while trading the breakout is through a set profit targets and or use of trailing stop-loss orders to manage risk when trading the breakout as breakouts are reasons why traders intent to spot and run with runners , without jumping the gun.
"Recap the lecture by knowing the basics of drawing trendlines, identifying runners, and trading the reversal of the breakout."
The basics of identifying consolidations, trading with runners during,
the 3 trends, consolidations and trading the breakout
..all may provide traders with opportunities to identify potential profitable Forex trades and trade with runners as they move the price more than often.
"Traders use it as a powerful tool to identify trends and potential trendline breakout trading opportunities!"
• HappyForexTradingJournal
J
TrueLevel Bands: One of the Most Useful IndicatorsThe TrueLevel Bands Indicator: Why It's One of the Most Useful Indicators Out There
The TrueLevel Bands indicator is a powerful technical analysis tool that helps traders identify trends and potential reversal points in the markets. It is a versatile and customizable indicator that can be used on any financial instrument, including stocks, commodities, forex, and cryptocurrencies.
In this article, we'll explore the TrueLevel Bands indicator in detail, and explain why it's one of the most useful indicators for traders.
What Are TrueLevel Bands?
TrueLevel Bands are a type of envelope indicator that helps traders identify the upper and lower boundaries of a trading range. They are similar to Bollinger Bands, but instead of using a fixed number of standard deviations from the moving average, TrueLevel Bands use a multiple of the standard deviation that is determined by the length of the moving average.
The TrueLevel Bands indicator consists of two lines: an upper band and a lower band. The upper band is calculated by adding a multiple of the standard deviation to the moving average, while the lower band is calculated by subtracting the same multiple of the standard deviation from the moving average.
How to Use TrueLevel Bands
TrueLevel Bands can be used in a variety of ways, but their primary purpose is to help traders identify trends and potential reversal points in the markets. Here are a few ways that traders can use TrueLevel Bands:
1. Trend identification
One of the most significant advantages of TrueLevel Bands is the cloud created by the transparency of the fill color between the upper and lower bands. This cloud makes it easy to visualize the trend at a glance, without having to rely on complex technical analysis tools or methods. The cloud effect also provides a clear indication of the strength of the trend. The wider the cloud, the stronger the trend, while a narrow cloud indicates a weaker trend or consolidation. This feature is particularly useful for traders who prefer to use visual cues to make trading decisions.
TrueLevel Bands make it easy to identify the direction of the trend. When the price is above the cloud, it is considered to be in an uptrend. Conversely, when the price is below the cloud, it is considered to be in a downtrend.
2. Reversal points
TrueLevel Bands can also be used to identify potential reversal points in the markets. When the price reaches the upper band, it is considered to be overbought, and a reversal to the downside may occur. Similarly, when the price reaches the lower band, it is considered to be oversold, and a reversal to the upside may occur.
3. Support and resistance levels
TrueLevel Bands can also be used to identify support and resistance levels. When the price is trading within the bands, the upper band serves as a resistance level, while the lower band serves as a support level. Traders can use these levels to identify potential entry and exit points for their trades.
4. Volatility
TrueLevel Bands can also be used to measure volatility. When the bands are narrow, it indicates that the market is experiencing low volatility. Conversely, when the bands are wide, it indicates that the market is experiencing high volatility.
5. Fibonacci-based length options
In addition to the standard length options (250, 500, 750, 1250, 2000, and 3250), TrueLevel Bands also offer Fibonacci-based length options. These lengths are spaced out in a way that allows traders to capture different time frames and market movements, from short-term fluctuations to longer-term trends.
The Fibonacci-based length options were chosen by multiplying 125 (which represents 6 months of daily data) by a sequence of Fibonacci numbers, starting with 2. The resulting lengths are: 250 (125 x 2), 375 (125 x 3), 500 (125 x 4), 325 (125 x 5), 750 (125 x 6), 1000 (125 x 8), 1250 (125 x 10), 1625 (125 x 13), 2000 (125 x 16), 2625 (125 x 21), 3250 (125 x 26), 3750 (125 x 30), and 4250 (125 x 34).
By using these Fibonacci-based length options, traders can take advantage of the natural patterns and rhythms that exist in the markets. These lengths are spaced out in a way that allows traders to capture different time frames and market movements, from short-term fluctuations to longer-term trends.
Why TrueLevel Bands Are More Accurate Than Moving Averages
Moving averages are a popular technical analysis tool that help traders identify trends and potential reversal points in the markets. However, they have a few drawbacks that make them less accurate than TrueLevel Bands.
1. moving averages are based on past prices, which means they lag behind the current market conditions. This can lead to false signals and missed trading opportunities.
2. moving averages use a fixed number of periods, which may not be suitable for all market conditions. For example, a 50-period moving average may work well in a trending market, but it may be less effective in a choppy or range-bound market.
TrueLevel Bands, on the other hand, use a multiple of the standard deviation that is determined by the length of the moving average. This means that the bands are more responsive to changes in market conditions, and they can adapt to different market environments.
Conclusion
The TrueLevel Bands indicator is a powerful and versatile tool that can help traders identify trends, potential reversal points, support and resistance levels, and measure volatility. It offers a range of length options, including Fibonacci-based options, that allow traders to capture different time frames and market movements.
Compared to moving averages, TrueLevel Bands are more accurate and adaptable to changing market conditions. They can help traders make better-informed trading decisions and improve their overall trading results.
If you're looking for a reliable and versatile technical analysis tool, give the TrueLevel Bands indicator a try. It might just be the missing piece in your trading toolbox.
TURTLE TRADING - STRATEGY EXPLAINED ✅Currently, the forex market offers numerous different tools to improve trading. Experts in financial markets develop both simple trading strategies, which will be convenient for novice traders, and complex systems, combining several strategies. Besides, experienced participants in the market develop their own strategies for their trading. They base their systems on the elements of technical analysis, trend lines as well as support and resistance indicators.
At the same time, the quality and efficiency of a trading strategy are not measured by its complexity and the presence of a large number of elements. One such example is the Turtle trading strategy developed by trader Richard Dennis in the 1980s.
As an experiment, Dennis decided to form a trading strategy that would help beginner traders to become professionals. That being said, financial markets are full of risks and no strategy guarantees a market participant a 100% achievement of profit. The only commitment that can lead a trader to success is to follow the rules of money management. In addition, traders must accurately use their trading strategy.
The market shows that even in the same market positions and quotes of trading assets, traders act differently and the result of the trade is often different. That is, it depends on the actions and decisions of a market participant whether a trading strategy will work to achieve profit or not. One unsuccessful trade can make a trader slacken, and someone, after making a loss, is sure to win and get a good profit.
Richard Denis's Legendary Experiment
Richard Denis once argued with his friend William Eckhardt. The latter assured him that trading is a talent. To be a successful trader a person must have certain qualities: an analytical mind and intuition. Denis proved that to be a successful trader it is enough to follow the strategy rules. As a result, an experiment was conducted.
Denis recruited a group of 23 volunteers who came to him by advertisement. There were 21 men and two women who had never dealt with trading. Among the volunteers were ordinary people.
The training lasted 14 days. After that, the generous teacher allocated his students a million dollars of initial capital each and sent them on a consolidated exchange voyage. The further experiment lasted for 5 years.
After it was over, it turned out that 23 million dollars invested brought a total income of 175 million, i.e. the initial capital was increased 7.5 times.
Some became successful traders and made a lot of money. Others went bust. Who was right? Most likely both. To be successful, it is necessary not only to have a good strategy but also to have certain qualities. Subsequently, one of the first students of Richard Denis, Curtis Faith, wrote a book about this method, "The Turtle Way. From Amateurs to Legendary Traders", which became a bestseller.
The Essence Of The Turtle Trading
It involves a time interval of 20 and 55 days. The trend is monitored at a given time interval. The entry is carried out at the moment of breakout. If the price exceeds the limits, it is the entry signal. The exit signal is a price break out in the opposite trend direction of the same time interval. This strategy allows for insignificant losses, but as a result, the trader still makes a profit.
Turtle strategy requires careful monitoring of the trend because with the time interval of 55 days for a year can be placed from 3 to 5 positions. Things are a bit easier with the 20-day interval, but it also has its own peculiarities. Denis has developed the following rule: at the breakout of the price on 10-day intervals the previous entrance is considered. It may not have been performed, but the analysis is mandatory. If that entry has brought profit, the current breakout is ignored. This rule is not valid when working with the 55th extremum.
Particular attention is paid to the volatility of the trade at the moment. If volatility is low, placing a trade is not recommended because a multimillion-turtle entry could change the situation on the market.
Of course, there is risk in every trade. According to Richard Denis, the risk should not exceed 1% of the deposit. In the process, if there was a steady trend, orders could be added. The risk on additional orders should not exceed a quarter of a percent of the deposit. The deposit should withstand losses and wait for a steady trend, which would invariably bring profit. To control the deposit the notion of the unit - the minimum transaction amount was introduced.
Indicators And Tools For Turtle Trading
The work according to this trading strategy can be done on a clean chart, but it is somewhat inconvenient. You will have to count candles and rebuild levels on your own daily. Indicators solve this problem and do not distort the essence of the Turtle strategy.
Among the indicators, we will need the Donchian channel, the standard ATR, and The Classic Turtle Trader, which will be described below. The last tool is used to exit the market.
Market Entry And Stop Loss
Three Donchian channels with periods of 10, 20, and 55 are set in the chart. There are 2 types of entries:
Breakout of the 20-day Donchian Channel. There are no special filters to identify the breakout, it is enough to exceed the High or Low by at least one point. If the first signal of this type has already been closed with a profit and a second one is formed, it is not considered;
Breakout of the 55-day Donchian channel. A slower variant of work. If the filter on the previous rule is triggered and the entry point on the 20-day Donchian Channel is not taken, you can enter by the slower indicator. When working with a slower Donchian Channel, there is no such filter as in the previous case.
The Turtle strategy in the stock market did not involve physical Stop Losses, they were rather virtual. Traders worked with too much volume; if they placed stops, other speculators would have seen them and adjusted their work. Instead, a level was calculated at which the position was manually closed at a loss.
For forex, it could be taken as 2 x ATR with a period of 20. Since the work is done on daily charts, the stop value will be higher in pips.
Manual loss fixing was not a problem for the Turtles. Volatility was relatively low at the time. It is not advisable to trade forex without stops, there is a risk of getting caught in an impulse movement, and without SL the loss may be too big.
Turtles agreed that the win rate will not be in their favor. The strategy is based on breakouts of levels and is trend-following, but not every breakout turns into a trend. The point is that a profit on one trade that has worked in the positive direction will make up 2-3 losing trades and bring the total result in the positive direction.
Market Exit
In this strategy, some of the profits will inevitably be missed. No trend-following strategy allows you to take all of the trend movement at 100%, the Turtle system - is no exception to this rule. It is necessary to make sure that the trend is over, because of this the profit is somewhat reduced.
The basic rules do not provide a fixed Take Profit. The trade is either closed by a Stop Loss or manually.
At the beginning of each trade, the Stop Loss is placed 2N below the entry price in case of a long position or 2N above the entry price in case of a short position. This helped to reduce losses if the price did not change favorably after entry.
If new positions are added (on every 1/2N favorable move), the last Stop Loss was also moved by 1/2N. This usually meant that the Stop Loss would always be 2N away from the most recent entry (although it could vary slightly depending on the slippage).
There is another Stop Loss method called Whipsaw. With this method, the Stop Loss is placed 1/2N away from the entry point.
If the price did not reach the Stop Loss, then System 1 and System 2 exit methods were used.
If there is a breakout of the 20-day channel, the position is closed if the chart crosses the 10-day Donchian channel in the opposite direction.
If the market entry was upon the breakout of the 55-day High/Low, the position is closed if the chart crosses the 20-day channel in the opposite direction.
It is psychologically difficult to hold a profitable position and watch profits decline, but it is a must. If one fixes a profit before these rules are met, there is a great chance of not making a profit.
Short-Term And Long-Term Turtle Trading
When short-term trading, an interval of 20 days is considered. A maximum and minimum are determined. If the price breaks out the maximum by at least 1 point, it is a signal for buying. If the price breaks out the minimum over the same period, it is a signal to sell. If the previous trade in this system is profitable (it does not matter if it is executed or not), then it is not recommended to place an order. If the trend reverses on the 10-day extrema in the opposite direction from the position opening, it is a closing signal.
The long-term system involves the use of daily candlesticks for a period of 55 days. The principle is the same: when the price breaks out the maximum - is bought, and when it breaks out the minimum - is sold. But it is recommended to place an order only with one unit (minimum amount). Then if the trend is steady the orders can be added, but no more than one unit each time. The signal for closing is considered to be a trend moving in the opposite direction to the opening at the 20-day extremums.
What Are The Best Assets For Turtle Trading?
The Turtles traded in large liquid markets. They had to do this because of the size of the positions they entered. They basically traded in all of these liquid markets except meat and grain.
Grains were banned because Dennis himself reached the maximum amount in his trading account. The trader was limited to the number of options or futures he could have, which meant that there were no Turtles left to trade under his name.
Here's an example of what the Turtles used to trade:
10- and 30-year U.S. Treasury bonds and 90-day U.S. Treasury bills;
Commodities such as coffee, cocoa, sugar, cotton, crude oil, heating oil, and unleaded gas;
Currencies such as the Swiss franc, British pound, Japanese yen, and Canadian dollar;
Precious metals such as gold, silver, and copper.
They also traded futures on indices such as the S&P 500.
One interesting thing to note is that if a trader decided not to trade a commodity in the market, he had to give up that market entirely. So, if one of the Turtles didn't want to trade crude oil, they had to stay away from everything else in that market, such as heating oil or unleaded gas.
How To Apply The Turtle Strategy To Forex Market
Let's consider the work of the Turtle method on forex. Let's take a short-term period of 20 days. Let's select the pair with high volatility. If you remember, this indicator has not played the last role in the application of the method. With low volatility, the Turtles could "make the market" and the strategy would be powerless. The indicator ATR (Average True Range) is used to determine volatility.
Using the Donchian Channels, we identify the trends for 10 and 20 days. The last candle is selected on the chart. Count backward from it 20 candles. The maximum and minimum are identified on these 20 candles. Horizontal lines are drawn through these points. If the price goes beyond one of the lines, it is a signal. The price breaks out the maximum - the currency should be bought The price breaks out the minimum - we should sell.
The order is placed on an amount, which does not exceed 10% of the deposit. During the process, it is possible to make "additions". It is made only if there is a profit of 0.5% of the deposit. It may look like this. We have a deposit of $1000. Let us assume that the price has broken out the upper border for 3 points and a trade was opened for $100. The trend has steadily gone upwards. "Addition" can be made only when the profit from the invested $100 reaches at least $5. At that point, another $100 is added. The next addition can be made when the profit of $15, that is when the first trade will bring 10% profit, and the second 5%.
The stop order is set at the minimum of the last three days. Count back three candles from the time of your entry, and find the minimum - this will be the stop order. If among the last three candles, a specific minimum is not traceable, then find the point corresponding to 1% of the deposit, and the stop order is set on it. For example, 1% of a deposit of $1000 is equal to $10. We analyze the price of one pip, i.e. one pip of currency movement. We divide $10 by the price of a pip. We obtain the number of pips that should be subtracted in the opposite direction from the trend direction since the trade was opened. We set the Stop Loss there. It is the same for the main trade, as well as for the ones we add.
Exit from the market occurs when the price will fall to a 10-day minimum. For a short position, the exit point is the price of the 10-day high.
For a long-term 55-day trade, 20-day candles are considered for determining the stop order and exit point.
Conclusion
In the Turtle experiment, the strategy itself is secondary. What is more important is that the real example proves that no talent is needed in trading. It is a profession, and everyone can master it. It is impossible to get the results demonstrated by the Turtles in casual trading.
As for the strategy itself, even the basic rules still work. The best result is achieved in equities trading, on forex, it is necessary to optimize, and probably revise the rules to look for entry points in the H4 time frame. Long-term trends are formed less often here, so work in D1 shows no best result.
In general, the Turtle strategy is considered quite profitable. But it is necessary to be mentally prepared for expectation and the correct arrangement of trading positions. Adhere to the conditions of entry into the market and exit from trading positions, and then you will achieve a positive result.
Beginner's Guide To Moving AveragesMoving averages are without a doubt the most popular trading tools. Moving averages are great if you know how to use them but most traders, however, make some fatal mistakes when it comes to trading with moving averages. In this article, I show you what you need to know when it comes to choosing the type and the length of the perfect moving average and how to use moving averages when making trading decisions.
What is the best moving average? EMA or SMA?
In the beginning, all traders ask the same questions, whether they should use the EMA (exponential moving average) or the SMA (simple/smoothed moving average). The differences between the two are usually subtle, but the choice of the moving average can make a big impact on your trading. Here is what you need to know:
The differences between EMA and SMA
There is really only one difference when it comes to EMA vs. SMA and its speed. The EMA moves much faster and it changes its direction earlier than the SMA. The EMA gives more weight to the most recent price action which means that when the price changes direction, the EMA recognizes this sooner, while the SMA takes longer to turn when the price turns.
Pros and cons – EMA vs SMA
There is no better or worse when it comes to EMA vs. SMA. The pros of the EMA are also its cons – let me explain what this means:
The EMA reacts faster when the price is changing direction, but this also means that the EMA is also more vulnerable when it comes to giving wrong signals too early. For example, when the price retraces lower during a rally, the EMA will start turning down immediately and it can signal a change in the direction way too early. The SMA moves much slower and it can keep you in trades longer when there are short-lived price movements and erratic behavior. But, of course, this also means that the SMA gets you in trades later than the EMA.
What is the best period setting?
When you are a short-term day trader, you need a fast-moving average that reacts to price changes immediately. That’s why it’s usually best for day traders to stick with EMAs.
On the other hand, Swing traders have a very different approach and they typically trade on higher time frames (4H, Daily +) and also hold trades for longer periods of time. Thus, swing traders should first choose an SMA and also use higher period moving averages to avoid noise and premature signals.
The best moving average periods for day-trading
9 or 10 periods: Very popular and extremely fast-moving. Often used as a directional filter (more later)
21 period: Medium-term and the most accurate moving average. Good when it comes to riding trends
50 period: Long-term moving average and best suited for identifying the longer-term direction
The best periods for swing trading
20 / 21 periods: The 21 moving average is my preferred choice when it comes to short-term swing trading. During trends, price respects it so well and it also signals trend shifts.
50 period: The 50 moving average is the standard swing-trading moving average and is very popular. Most traders use it to ride trends because it’s the ideal compromise between too short and too long term.
100 period: There is something about round numbers that attract traders and that definitely holds true when it comes to the 100 moving average. It works very well for support and resistance – especially on the daily and/or weekly time frame.
200 / 250 period: The same holds true for the 200 moving average. The 250 period moving average is popular on the daily chart since it describes one year of the price action (one year has roughly 250 trading days)
How to use moving averages
Trend direction and filter
you can use a fast EMA to stay on the right side of the market and filter out trades in the wrong direction. Just this one tip can already make a huge difference in your trading when you only start trading with the trend in the right direction.
The Golden Cross and the Death Cross
But even as swing traders, you can use moving averages as directional filters. The Golden and Death Cross is a signal that happens when the 200 and 50-period moving average cross and they are mainly used on the daily charts.
In the chart below, I marked the Golden and Death cross entries. Basically, you would enter short when the 50 crosses the 200 and enter long when the 50 crosses above the 200 period moving average. the screenshot shows that during the last bitcoin cycle if you stuck to the moving averages you would have been profitable most of the time both in the long and short directions. Also please notice how when the market is moving sideways it's not favorable to use the moving averages.
I will end this article here, I hope you now have a better understanding in moving averages and how to utilize them to follow the trend.
Knowing if a trend is still valid or is beginning to failin the above image you can see, that when all moving averages do not cross or overlap one another, this indicates a strong trend/price sentiment in this direction, even after a major pullback, you'll notice the moving averages still dont cross or overlap.
also on the chart image ive touched upon the very popular 1, 2, 3 trading pattern and highlighted that there's a not so obvious 4 reset wave before the 1, 2, 3 pattern starts again, the trick is check to see if the phase 4 wave causes any of the moving averages to cross/overlap before setting up your 1, 2, 3 move! because if they have crossed or one of them is overlapping the other, this signals the trend is weakening and the market may be looking at beginning a range or and new trend in the opposite direction.
Trade every trends!!!it has been and it will allways be better to trade based on trends and the easiest way to draw trend lines is on the top left on your chart on the "trend lines tools" you will find a tool called "regression tool" try it yu'll love it, Trade every trends!!!
using MACD histrogram as a volatility toolMany traders use the MACD for divergence or crossover signals. It is my opinion that market participants trade almost every oscillator this way. This I find rather simplistic and not respecting what the data shows you. In this tutorial I will show a new approach to reading the MACD, obviously I'm probably not the only person who looks at MACD this way however.
MACD colors:
blue = MACD
orange = Signal line
green and red waves = histogram
The MACD is based on the distance between 2 exponential moving averages. The signal line is a smoothed version of the centered oscillator that difference creates. And the histogram is the difference between the MACD and signal line, this is extremely simple.
On the chart I have plotted these 2 EMA's for clarifying my approach to the MACD. Notice that when price rapidly changes these 2 lines move away from eachother, we see the MACD line also move away from the signal line in the process creating a big histogram wave. After the trend becomes less volatile and more one directional the EMA's stay at the same distance from eachother. This creates a flat histogram.
The trading approach I'm showing here is that instead of trading tops and bottoms from the histogram/crossovers you use the MACD as a directional tool and you use the histogram as a volatility tool. We wait for a crear trend to get established after a big histogram wave and then for the trend to stabilise: MACD histogram flattening. Now we have a one directional trend and it is a good place to start opening positions in the trend direction as it is stable.
Notice how we got a nice discount after the trend stabilised and became on directional. I provide below some snapshots of how the market looked when trades would have been opened:
long setup:
short setup:
result:
Use this information with caution as these examples are obviously cherry picked. I hope this gives some perspective on using the MACD in your trading arsenal.
HOW TO TRADE MARKET DIFFERENT TYPE OF STRUCTURESHOW TO TRADE MARKET DIFFERENT TYPE OF STRUCTURES:
In this video i explained how to trade different type of market structures like;
- Uptrends
- Downtrend
- Ranging Market
Don't forget to drop your contribution in the comment section.
Confirming Trends with the Lower Time Frames NZD/USD ExampleHey Guys!
As you guys know, for the past 2 weeks I've been taking multiple trades on the Nzd/usd, both short and long.
First I was taking short trades with the daily short bias, then long trades along with the bias change into long on the daily chart.
In this video, I explain how I knew the daily bias has changed into long thus aborted my initial short entry and began entering long trades.
These lower confirmation tactics play a huge role in my trading, and even if you don't trade with price action, it can be a great addition to your current strategy.
I hope it helps!
Have a great day guys!
Ken
Here is why I suggest you should use the SUPER TREND!I see the weekend is here. A new week is about to begin, and it's time to get organised, reflect on your progress so far, and learn something new to help you achieve your trading goals., and boost your profitability.
Let's be honest, I am someone who normally likes to follow the trends. A lot of the trend following indicators I've encountered along the way in my professional and career growth haven't made sense to me. Moving averages, Average Directional Index, Moving Average Convergence-Divergence, Parabolic SAR etc. I always had a lot concerns with the indicators being able to swiftly follow the price movement, as well as identify a clear reversal of the underlying trend. However, I came through to find this SUPER 'super trend' indicator some while ago, and by testing this and adding it to my intraday trading strategy, I finally see that I could rely on one single indicator to help me identify the trend quickly and more efficiently (never 100% of course it is still not a holy grail!) but the results were good enough for me to write down this post to you guys.
What is the Super trend indicator?
'Super trend,' as the name implies, is a trend-following indicator, similar to moving averages and MACD. It is plotted on prices, and the position of the prices reflects the current trend. When we build the Super trend indicator, the default settings are 10 for the ATR and 3 for the multiplier. The average true range (ATR) is important in 'Super trend' since it is used to determine the indicator's value and it indicates the degree of price volatility, which is one reason why this indicator beats Moving averages, which disregards price volatility.
Super trend Indicator Formula
The super trend indicator computation is illustrated below–
Up = (high + low / 2 + multiplier x ATR)
Down = (high + low) / 2 – multiplier x ATR
Average True Range = / 14
The number 14 represents a period in this context. As a result, the ATR is computed by multiplying the previous ATR by 13. Add the most recent TR and divide it by the time.
As a result, ATR is an essential component of the supertrend technical analysis indicator.
How to Use Super trend Indicator to Identify Buy and Sell Signals?
Super Trend, as a trending indicator, performs well in trending markets (both uptrends and downtrends). When the indicator flips over the closing price, it is easy to identify a buy-sell indication. When the Super Trend closes below the price and the colour turns to green, a buy signal is issued. A sell signal is generated when the Super Trend closes above the price and the colour of the Super Trend changes to red.
There is no such thing as a 100 percent accurate technical indicator, and Super Trend is no exception. It also produces erroneous signals in sideways markets, however it produces fewer false signals than other indicators. As a result, you may use Super Trend in conjunction with other indicators to provide more accurate trade signals.
Follow my daily analysis posts on my account to check out how to combine it with other momentum indicators as well as use it for multi-time frame analysis!
