How to Trade Stochastics

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In our last lesson, we learned about the relative strength index, and different ways that traders use this in their trade. In today’s lesson, we’re going to learn about another momentum oscillator, which is known as stochastics. So, let’s get started.

I’ll start by saying that there are three different types of stochastic oscillators: the fast stochastic, the slow stochastic, and the full stochastic. All of these operate in a similar manner, however. And when most traders refer to the stochastic, they’re talking about the slow stochastic. So, that’s going to be the focus of this lesson. The basic premise of a stochastic is that prices tend to close in the upper end of their trading range when the financial instrument you’re analyzing is in an uptrend. And in the lower end of their trading range, when the financial instrument you’re analyzing is in a downtrend.

When prices close in the upper-end of their range in an uptrend, this is, obviously, a sign that momentum of the trend is strong, and vice-versa for a downtrend. The stochastic contains two lines, which are known as the percent K line, and the percent D line.

I’m not going to go into the formulas for each, because most charting packages, if not all charting packages that you’ll use, will calculate these lines for you. However, you should know that this is a momentum oscillator. So, when the percent K line is rising, that is an indication that momentum in the market is increasing. And when the percent K line is falling, it’s an indication that momentum in the market is decreasing.

The percent D line is, very simply, a simple moving average of five periods; simple moving average of the percent K line, and it acts to smooth out the price action of the indicator, and slow it down a little bit. And also acts as a signal line for the faster, percent K line, which we’re going to learn about later in this lesson.

It’s a banded oscillator, just like the RSI, so, it fluctuates between 0 and 100. And the upper end of the range is marked by a line at 80. And the lower end of the range is marked by a line at 20. The first way that traders use this is to trade overbought and oversold levels.

George Lane, who invented the indicator, recommended waiting for a cross, back below the 80 line, when the market went from an extremely overbought area before placing a trade to the down side, and waiting for a break, back above the 20 line, before signaling a trade to the upside.

So, you see here, you have the overbought area. You have the break below the 80 line, and then you do have a sell-off that results after that. You have an oversold area here. You have a break back above the 20 line, and then you have a rally.

Again, hindsight is 20/20, and there are going to be false signals with this indicator, as with any other indicator that we’re going to look at. One of the ways to reduce the amount of false signals that you’re going to get is by combining indicators and combining methods of analysis, using some of the things that we’ve learned, so far.

Here you have a false signal. The indicator was in an overbought area, traded back below the 80 line. You did not have a sell-off after that. But hopefully, if you would have watched our lessons on trends and Dow Theory, you would have been watching this strong uptrend here, and you would have not been taken into that trade there to the downside, because there was not a break in that trend line.

Here, however, there was a break at the trend line, and you had, not only, the break of the trend line, which is a very strong signal, but also, the break back below the 80 line of the oscillator. And you did have a sell-off that resulted after that.

A second way this can be traded as crossover signals. Remember from earlier, the percent K line is the faster line. The percent D line is the slower line. So, when the percent K line crosses above the percent D line, this is an indication that it may be a good place to buy.

And when the percent K line crosses below the percent D line, this is an indication that it might be a good place to sell. This is, basically, a way for aggressive traders to catch earlier signals, particularly from overbought and oversold areas.

Here, we’ve got a Bearish cross from our overbought area. We’ve got the Bearish cross with the black line; the percent K line, and trading below the red percent D line. And we’ve got the break below 80 there.

You could have gotten in, however, earlier into the trade, had you been trading the Bearish cross from the overbought area, instead of waiting for the break. But that’s not recommended. And this indicator like the cross of the RSI is very prone to false signals. So, be careful there.

The divergence is the third way. And, very simply, when the market is making new highs, and when the market is trading in the opposite direction of the indicator, that’s an indication that a reversal may be coming. So, you have divergence here, and, as you can see, the market’s making new highs there.

But you can see by looking at the stochastic, that momentum in the market is not following upwards. So, that might be a good place to look for a sell-trade. If you remember from previous lessons, hopefully, you’ll also see something else there, which is a double top.

So, you have two things confirming that, that might be a good place to place a sell-trade. You have the divergence plus the chart pattern there; the double top. And you do have a nice sell-off that results after that.

As you probably noticed in this lesson, the stochastic oscillator is very similar to the RSI, and they’re both momentum oscillators. So, many traders will use one or the other. They’ll try out both, and figure out which one works better for them, for identifying the momentum in whatever instrument they’re trading. Another way that’s it’s used is with, in conjunction with the RSI, to confirm each other; so to confirm opinions on momentum.

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A lesson on how to trade the stochastic oscillator for active day traders and investors.

In our last lesson we learned about the RSI indicator and some of the different ways traders of the stock, futures, and forex markets use this in their trading.

In today’s lesson we are going to look at another momentum oscillator which is similar to the RSI and is called the Stochastic. Let me start by saying that there are 3 different types of stochastic oscillators: the fast, slow, and full stochastic. All of them operate in a similar manner however when most traders refer to trading using the stochastic indicator they are referring to the slow stochastic which is going to be the focus of this lesson.

The basic premise of the stochastic is that prices tend to close in the upper end of their trading range when the financial instrument you are analyzing is in an uptrend and in the lower end of their trading range when the financial instrument that you are analyzing is in a downtrend. When prices close in the upper end of their range in an uptrend this is a sign that the momentum of the trend is strong and vice versa for a downtrend.

The Stochastic Oscillator contains two lines which are plotted below the price chart and are known as the %K and %D lines. Like the RSI, the Stochastic is a banded oscillator so the %K and %D lines fluctuate between zero and 100.

How to Trade the MACD Indicator

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Today’s lesson will look at an indicator which is based on moving averages which is known as the Moving Average Convergence/Divergence. So let’s get started.

One of the advantages of using the MACD indicator instead of the moving averages is that the MACD gives you an indication not only of what’s happening with trends in the market but also what’s happening with momentum, so you’re given an addition to the picture there that this indicator paints for you. The indicator is constructed by taking a 12-period exponential moving average of a financial instrument and subtracting its 26-period exponential moving average. The resulting line is then plotted below the price chart and fluctuates above and below a center line which is placed at value zero. A nine-period exponential moving average of that MACD line is normally plotted along with the line and is used as a signal of potential trading opportunities which we are going to look at in our next lessons.

Look at what this looks like on a chart. You can see here the MACD below the price chart and you can see here the black line is the MACD line and the blue line is the nine-period exponential moving average of that black MACD line which is the signal line. OK.

Now, when the MACD line is above zero this tells the trader that the 12-period exponential moving average is trading above the 26-period exponential moving average and when the MACD line is below zero this tells the trader that the 12-period exponential moving average is below the 26-period exponential moving average.

So that it is the simplest, the first thing that this is, is an easier way to look at a moving average crossover system. Traders are going to watch the MACD line and when it’s above zero and rising, they’re going to look at this as a sign of positive bullish momentum in the market as the gap, the positive gap, between the exponential moving averages is widening.

When it’s below zero and falling, they’re going to look at this as a bearish sign for the market as this indicates that the negative gap between the two moving averages is widening. So you can see here the MACD line is above zero and rising and that is bullish and you can see here it is below zero and falling and that is bearish, so it did play out there for us.

The purpose of the nine-period exponential moving average is to further confirm the bullish changes in momentum when the MACD crosses above the zero line and the bearish changes in momentum when the MACD crosses below the zero line. You can see here the MACD crossing above the signal line is further confirmation that there’s a bullish momentum in the market.

You can see here it crossing below and it actually crosses below at the top peak of the market there and that was a bearish sign and that was a very good signal that this particular indicator caught to the bearish side because the market did sell off after that. Lastly, mini-traders and charting packages will plot a histogram along with the MACD which is representative of the distance between the MACD and its signal line.

When the MACD histogram is above the zero line, this is an indication that positive momentum is increasing. Conversely, when the MACD histogram is below the zero line, this is an indication that the negative momentum is increasing. OK.

You should now have a good understanding of the different components of the MACD and in our next lesson we’re going to look at exactly how you can use some of the signals that this indicator generates in your trading and how you can use those actually to place trades and how you can actually use the indicator to get it a feel for direction in the market and momentum in the market.

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How to trade the Moving Average Convergence Divergence (MACD) in the stock, futures, and forex markets. The indicator, which was developed by Gerald Appel, is constructed by taking a 12 period exponential moving average of a financial instrument and subtracting its 26 period exponential moving average.

The resulting line is then plotted below the price chart and fluctuates above and below a center line which is placed at value zero. A 9 period EMA of the MACD line is normally plotted along with the MACD line and used as a signal of potential trading opportunities in the stock, futures and forex markets. When the MACD line is above zero this tells the trader that the 12 period exponential moving average is trading above the 26 period exponential moving averages.

When the MACD line is below zero this tells the trader that the 12 period exponential moving average is below the 26 period exponential moving average. Traders will watch the MACD line as when it is above zero and rising this is a sign that the positive gap between the 12 and 26 EMA’s is widening, a sign of increasing bullish momentum in the financial instrument they are analyzing.

Conversely when the MACD line is below zero and falling this represents a widening in the negative gap between the 12 and 26 day EMA’s, a sign of increasing bearish momentum in the financial instrument they are analyzing.

See Trade the MACD Indicator Like a Pro Part 2 >>

How to Trade Triangle Chart Patterns

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In our last lesson we learned about the flag and pennant chart patterns as well as strategies for trading each when we find them in an uptrend or down trend. In today’s lesson, we’re going to look at a similar chart pattern which is known as the triangle chart pattern, so that we can then learn some strategies for trading this chart pattern.

The triangle pattern can be broken down into three categories. And these are the ascending triangle, the descending triangle, and the symmetrical triangle. While the shape of the triangle is significant, of more importance is the direction that the market moves when it breaks out of the triangle. Lastly, while triangles can sometimes be reversal patterns, they are normally seen as continuation patterns. So let’s take a look here. Start with the ascending triangle here, and the ascending triangle is formed when the market makes higher lows and the same level highs. OK. These patterns are normally seen in an uptrend and viewed as a continuation pattern as the bulls gain more and more control running up to the top resistance line of the pattern. While you normally see this pattern in an uptrend, if you do see it in a down trend, it should be paid special attention to as it can be seen as a powerful reversal signal if it does show up in a down trend.

Chart of Walgreen Company here. And you see the higher lows there. All right. And then you see the same level highs. And what that indicates there is that as the market and the buyers continue to bump up against that top resistance line, you can see they’re gaining more and more control.

As the market does sell off but it sells off less and less as the pattern matures, indicating that the buyers are getting more and more control. And therefore, a lot of traders are going to look for a break out there of the top line to be imminent in that situation.

The descending triangle is basically the opposite or the ascending triangle flipped upside down. So you can see that this is formed when lower highs and the same level lows are made. These patterns are normally seen in a down trend and viewed as continuation patterns as the bears gain more and more control running down to the bottom support line, in this case, not the resistance line.

And while you normally see this pattern in a down trend, like the ascending triangle, if you do see this in the opposite trend, which is the uptrend in this case, you should pay special attention because this can be seen as a powerful reversal signal.

We have a chart of the dollar/yen here. And we see the lower highs there and then the same level lows. So you can see, basically, flipped upside down there. And again here, what the market is showing from a supply/demand perspective and why this pattern is paid attention to is because as the lower highs are made, it indicates that the buyers are having less and less control running down into the support line. And the sellers are getting more and more control and therefore, a lot of traders will look at that as the break at that bottom support line is imminent there.

The symmetrical triangle is unique in the sense that a lot of times you’re going to see this, not in the uptrend or a down trend, but in a directionless market as neither the bulls or the bears or the buyers or the sellers are in control of the market. So we see a contracting range and a directionless contracting range. So unlike the rising or falling wedge, the triangle which is similar to those, points off to the side indicating that neither the buyers nor the sellers are having any control over the market.

And this is formed when the market makes lower highs and higher lows and basically, is going to be seen, if it is in an uptrend or a down trend, is going to be seen as a continuation or reversal pattern depending on which way it breaks out of the pattern. So we can see here the lower highs and then the higher lows forming the pattern, the contraction there. And eventually the market does break out of the bottom of that pattern. And when it does, it breaks out pretty forcefully as you can see there.

The pattern matures the range gets narrower and narrower indicating that neither the buyers nor the sellers have control. So once the pattern does break, that’s an indication that the sellers have taken control in this instance, and therefore the markets have broken pretty significantly there. OK.

You should now have a good understanding of the different types of triangle patterns and what each signifies. In our next lesson, we’re going to go over strategies for trading each of these patterns complete with entry and exit points.

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The first lesson in a two part series on how to identify and trade the ascending, descending, and symmetrical triangle chart patterns using technical analysis in the futures market, forex market and stock market for day traders and investors.

See How to Trade Triangle Chart Patterns Like a Pro Part 2 >>

How to Trade the Head and Shoulders Pattern

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In previous lessons we looked at the double top pattern and the double bottom pattern which are two charting patterns which show that the momentum needed to break a resistance level, if we’re talking about a double top, or a support level, if we’re talking about a double bottom, is not there in the market. Because of this, when these patterns show up on a chart, traders look to trade a reversal of the current trend.

In today’s lesson we’re going to look at two more patterns which also show that the momentum needed to break a resistance level or a support level is not there in the market, which are known as the head and shoulders pattern and the reverse head and shoulders pattern. After we have a good understanding of these two indicators, then we’re going to look at a specific strategy with exact entry and exit points of how you can trade them. So let’s get started.

A head and shoulders pattern is basically defined as one peak in the market followed by a second higher peak in the market followed by a third peak which is lower than the second peak. So let’s take a look at what we’re seeing here on a chart. So you can see here, what forms the first peak is buyers in control drive the market up to a certain level, and then sellers take back control driving the market down which forms the first trough. Buyers then take back control which runs up to the second higher peak which forms the head of the pattern.

Sellers back in control to form the second trough before buyers take back control and form the second shoulder of the pattern which is the third peak. And then the pattern is completed when the neckline is broken which is formed by the two troughs.

The support level for this pattern is the two troughs which are formed between the shoulders and the head of the pattern. So you can see that there. So once that level’s broken that completes the pattern, and the market is theoretically supposed to sell off from there. And you can see why because the markets tried to push up three times, to go higher, and failed. So you can see where sellers will take control there.

The reverse head and shoulders is basically a mirror image of the head and shoulders pattern. And, basically, this is defined as one trough in the market followed by a second lower trough followed by a third higher trough. And you can see here the first shoulder being formed by sellers in control driving down into the first shoulder, and then buyers taking back control which forms the first peak of the pattern.

Before sellers take back control forming the head of the pattern. Buyers back in control forming the second peak of the pattern. And then sellers back in control to form the second shoulder of the pattern. And you can see there the neckline being drawn off of the top of the two peaks in between the two shoulders and the head this time.

And traders look for a break of that neckline which confirms the pattern is in place and has completed. OK. So you can see there instead of the resistance levels on the head and shoulders pattern, what is happening here is the market is failing to break support. And so, after it’s failed three times at three different levels, buyers theoretically will be in control for a good portion of the time after that.

So you should now have a good understanding of two more reversal patterns. In the next lesson, we’re going to look at a specific strategy with entry and exit points that traders use to trade these patterns.

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The 3rd lesson in a series on charting patterns which looks at the head and shoulders pattern and how traders use them.

How to Trade Moving Averages Like a Pro

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In today’s lesson, we’re going to look at one of the more popular technical indicators, the moving average.

There are several types of moving averages which we’re going to look at here, all of which are used by traders to try and smooth out price action of a financial instrument and get a better feel for the longer term direction without all the noise that’s often associated with just looking at price.

In addition to getting a better feel for the longer term trend of a financial instrument, most averages are also used to spot potential support and resistance levels, and are often used in conjunction with one another to generate buy and sell signals.

Before we get into the details, however, let’s first have a look at the two main types of moving averages; the simple moving average and the exponential moving average. The simple moving average is the most basic type of moving average and it’s calculated by taking the past X number of points, averaging them and then plotting the resulting line on a chart.

The reason why it’s called a moving average is because as new data points become available, the average moves forward to incorporate the new data point and drops the last data point in the series.

For example, if we’re looking at a financial instrument here that has the following 10 days – let’s look at a 10 period simple moving average, 10 day moving average. How we would calculate the first data point there is we would take the sum of day one through 10, divide that by 10 and then we would get 5.2 for the first data point, using this as an example.

To get the second data point, the 10 days used would be day two through day 11 as the moving average shifts forward after the close of day 11 of trading. So we would then – the 10 days used would be day two through day 11, divide that by 10 and we get 5.4.

You don’t really need to understand all the math behind this as most charting packets, if not all charting packages, will calculate the simple moving average for you and plot it on the chart. That’s what it looks like there. You can see how the price action is smoothed out using the moving average.

The exponential moving average was basically created to do away with some of the weaknesses that traders were sighting with the simple moving average, primarily that the simple moving average gives the same weight to each data point in the series that you’re using to calculate the data points of the simple moving average.

And basically, the critics say there that the more recent data points, if we’re looking at 10 day moving average day – say nine and 10 – should be given more weight because they’re more relevant to future price action. So the exponential moving average, it was created – what it does is it gives more weight to the more recent data points and, therefore, it reacts faster to price movement.

So here’s the formula for the exponential moving average. I’m not going to go into the details on this one because it’s much more complicated. But basically, you just need to understand that the simple moving average is going to react slower than the exponential moving average because it’s giving the same weight to the first data point in the series as it does to the last where exponential moving averages are going to give more weight to the last data point in the series than they are to the first.

Here’s an example of what an exponential moving average looks like on the chart. You can’t really tell the difference there, but I’ve included both here. The black line in this case is the exponential moving average. The blue line is the simple moving average.

You can see here that the black exponential moving average line is reacting faster. As the market turns down there on the left, the black exponential moving average line turns down much quicker than the blue simple moving average line there on the right when the market turns up. Again, there you see the black exponential moving average line moving up faster than the blue simple moving average.

As far as which moving average traders use in their trading – in general, it’s going to depend on the timeframe of their trades. If a trader is looking to capture shorter term price moves, a lot of times he’ll use the exponential moving average because it’s going to react faster if he’s looking to capture longer-term price moves, he’s going to focus on the simple moving average because it’s going to generate less faults trading signals.

Lastly, they’ll also look at the financial instrument that they’re trading and the price action in relation to both the moving averages historically and incorporate their strategy into that and look at which has given better trading signals based on their strategy and the financial instrument that they’re looking to trade.

So that’s our lesson for today. In tomorrow’s lesson, we’re going to look at some different ways that traders use moving averages to trade, so we hope to see you in that lesson. As always, if you have any questions or comments, please feel free to leave them in the comment section below. And have a great day!

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The basics of trading with moving averages in two lessons for active day traders and investors in the stock market, futures market, and Forex markets.

See How to Trade Moving Averages Like a Pro Part 2 >>

How to Trade the Flag Pennant Patterns Like a Pro

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In our last lesson, we looked at strategies for trading the rising wedge and falling wedge chart patterns; two patterns which can be considered either reversal or continuation patterns, depending on how they show up on a chart.

We start our series on continuation patterns by learning about the flag and pennant patterns so that we can then look at strategies for trading each of these patterns. So let’s get started.

Flags and pennants are generally seen after a big move in one direction in a particular financial instrument and represent brief consolidations or pauses in the market before a resumption of the trend in which they occurred. The flag and pennant patterns both contain a flagpole which is represented by the sharp move upwards or downwards which sets up the consolidation. Then the flag is represented by a consolidation which can be encompassed by a rectangular formation, and a pennant is represented by a consolidation which needs to be encompassed by a triangle.

When a flag or pennant occurs in an uptrend, a break of the top resistance line can be seen or is oftentimes looked at as a resumption of the uptrend. And conversely, when a flag or pennant occurs in a downtrend, a break of the bottom support line can often be seen as a resumption of the downtrend.

So let’s look at a couple of examples here. We have a chart of Research in Motion here (RIM). Towards the right-hand side of the chart, you can see a little jump in the market there, and then the consolidation which we can encompass with two parallel lines, so that forms our flag portion of the pattern.

And then the flagpole is represented by the up move in the market, OK. so you can see the flagpole and the flag there.

Now, for flag patterns, the flag portion of the pattern can be either pointed directly to the side or slanted downward as we here; both are relevant flag patterns there and you can see the market breaking out above that and making a pretty good run after the breakout of the top of that flag pattern.

Because this flag pattern occurred in an uptrend and it was after a big jump upwards in the market, it’s known as a bull flag.

Here, we have a chart of Travel Zoo and we can see here we have our flag portion, a brief consolidation in the market after our move downward which is represented by the flagpole.

It’s basically the exact same as the bull flag example, except flipped upside down because we’re in a downtrend here, we have a big move downward, then a brief consolidation in the market before resumption of the downtrend. So you can see there.

And again here. The flag portion of the pattern can be represented by a rectangle that either points directly to the side or slightly upwards; either would be considered a valid flag pattern.

OK. So for the pennant pattern, the difference between a flag and a pennant is when a pennant is formed, the consolidation after the big move upwards or downwards narrows as it matures.

So we can see here a chart of, again, research in motion. We see a pennant formed here, and then our flagpole representing the move upward. Then we see the breakout above the top portion of the pennant.

And again here, just as with the flag, the pennant can point directly to the side or slightly downward and both would be considered valid moves there, and again here because this is an uptrend that’s represented. It’s considered a bull pennant.

OK. So here, we have a bear example. And again, just flipped upside down. Chart of Starbucks. You can see the consolidation narrowing there after the big move downward and representing the flagpole, and then you see the breakout below. OK.

You should now have a good understanding of flag and pennant patterns, and which is considered a bull flag and which is considered a bear flag, as well as with the pennants.

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In this lesson we learn about what flag and pennant patterns are in technical analysis and how to identify them on charts in the stock market, futures market, and forex market for day traders and investors.

How to Trade Triangle Chart Patterns Like a Pro Part 2

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In our last lesson, we learned about the different chart types of triangle chart patterns: the ascending triangle, descending triangle and symmetrical triangle. In today’s lesson, we’re going to learn specific strategies for trading each of these patterns, complete with entry and exit points. So let’s get started.

The direction in which the market breaks out of the triangle, and whether the market is in an uptrend or downtrend, determines whether the pattern is a continuation or a reversal pattern, and therefore whether traders are going to look to get long or go short as a result of the breakout. As with other patterns that we’ve recently learned about, when traders spot an ascending triangle, which we’re going to start with, they will look to trade the break of the upper resistance line. The target is then derived by measuring the distance between the starting high point of the ascending triangle, and the starting low point of the triangle, which is then projected upward from the break point.

The stop is then placed just below the most recent trough of the patterns. So let’s look at an example here. We’ve got our ascending triangle that we learned about in last lesson. We have the break. We then measure the distance between the high and the low of the start of the pattern, and we get five points. So that is our target for the buy entry of the trade, and then we place our stop just below the most recent trough of the pattern. OK?

The descending triangle is basically just the opposite. It’s a mirror image. We’re normally going to see these in down trends, and we’re going to look to trade, or traders are going to commonly look to trade the break of the lower support line. The target is then calculated in the same way as the ascending triangle, by measuring the distance between the high and the low points, and then projecting that distance downward from the break.

The stop is then placed just above the nearest peak. Here’s our descending triangle. You can see there, the same one from last lesson. We see the break here. We see the distance between, or measure the distance between the high and low at the start of the pattern. We get 800 points there, so that’s our target for the trade. And then we place our stop just above the most recent peak. All right.

The symmetrical triangle can be seen in either up trends, down trends, or most of the time it is commonly seen in directionless markets. As it’s an indication that neither bulls or bears are winning out. That’s why the market range contracts as they continue to fight each other.

That’s why traders are going to look to trade in the direction of the breakout. It doesn’t matter which side it breaks out on, because the break out is an indication of the side that’s won. So if it breaks to the upside, the bulls have won, if it breaks to the downside, the bears have won.

We’ve got our symmetrical triangle here that we’ve looked at from last lesson, and in this instance, it’s broken to the downside, so traders are going to look to get short there, commonly. And the target is measured in the same way as it is with the other two triangles, by getting the distance at the start. So this case, it’s 1050. Project that downward, and that’s our target for the trade.

And then the stop, because it’s broken to the upside, is placed just above the most recent peak. If that trade had broken to the upside, or if the market had broken to the upside of the symmetrical triangle there, then everything would be done in reverse. All right.

As with our other lessons, and the other patterns that we’ve looked at recently, in those volume is often looked to as a confirmation of all three of these patterns. Traders are going to like to see a decrease in volume as the pattern matures, and then an increase in volume on the break, of the break out from the triangle. So keep that in mind just as with our other strategies that we’ve looked at most recently.

All right. That’s our lesson for today, and that’s going to complete our lessons on charting patterns. In our next lesson, we’re going to start to look at a trading indicators, or technical indicators, which are going to be good for complementing a lot of the stuff that we’ve learned so far.

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The second lesson on how to identify and trade triangle chart patterns in the stock market, forex market, and futures market using technical analysis.

How to Trade Double Tops Like a Pro

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In our last lesson we looked at the basics of charting patterns and two of the more common patterns you find in the market, double tops and double bottoms. In today’s lesson we’re going to look at a specific strategy that many traders use to trade these set-offs or these charting patterns complete with specific entry and exit points. So let’s get started.

The double top and the double bottom are signs that a financial instrument has failed to break through a specific level, considered resistance on the double top side and support on the double bottom side. So because of this they’re considered reversal patterns and where traders will look to these patterns or place a lot more significance on these patterns is when they’re occurring as part of an uptrend on the double top side and as part of a downtrend on the double bottom side. They’re going to look for, when they see a double top in an uptrend, they’re going to see that as a signal that the uptrend may be coming to an end and look to possibly trade that reversal. When they see a double bottom in a downtrend they’re going to look to that as a signal that the downtrend may be coming to an end and look to trade the potential reversal there.

Let’s start with a basic strategy for trading a double top. You can see the double top here forming our resistance level. The middle of the two points there, referred to as the trough, is considered our support level and so traders commonly wait for the market to pull back and break below that support level as a confirmation that the double top is actually in place.

They’re going to wait for the break there and then they’re going to enter on that break and then they’re going to measure this move here, the bottom of the trough, up to the top of the two points, and then that is going to be their profit target, OK? And then the stop loss is placed just above the second peak there. So a fairly basic strategy, but one that is commonly used to trade double tops and one that you may see a potential to use fairly often.

A second thing which traders are going to use for confirmation here is volume. I don’t actually have volume on this chart because this is an Forex chart, but if you’re trading futures or equities, you would have volume available and they’re going to look for a decrease in volume on the second peak, indicating that the buyers there driving up to the second peak were not as strong as they were into the first, and then an increase in volume on the break of the support level there indicating that that’s a true break, OK?

Double bottom strategy is the mirror image of the double top strategy. We have the double bottom in place here. We have the peak between the two double bottoms as our resistance level. We are waiting for a break to enter on the break of that resistance level as the common strategy. Measure the move there. Measure the difference between the highest trough and the middle of the peak and you get 174 points in this example. That’s the profit target.

Stop loss placed just below the lowest trough in the double bottom, OK? And again here looking for confirmation from volume. If you were looking at a stock market chart a futures market chart you would look for falling volume on the second trough that forms the double bottom and rising volume on the break of the resistance line.

OK, so you should now have a good understanding of one possible strategy for trading tops and bottoms that is commonly used in the market. In tomorrow’s lesson, we’re going to go into something which is known as head and shoulders, which is another charting pattern and lead into a potential strategy for trading that, OK? So starting to get a little interesting now with the trading strategies. Be careful when using these. A lot of practice, and make sure you understand exactly what you’re doing.

* As, the financial markets and trading in general is very risky, you should only trade with risk capital, money that you can afford to lose, and there’s no system or strategy that’s going to win all the time or that can guarantee profits or anything like that, so make sure you do your homework. As always, if you have any questions or comments, please feel free to leave them in the comments section below and have a great day.

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The 2nd lesson in a series on charting patterns for traders and investors in which goes into specific strategies which can be used to trade double tops and double bottoms in the Forex market, stock market, and futures market.

Trade the MACD Indicator Like a Pro Part 2

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Because the MACD indicator is a trending indicator, you’re going to want to shy away from using it when the market is in a range, even to try and predict new trends. So in addition to being able to tell whether the financial instrument that you’re analyzing is in a trend just by simply looking at the chart, you can also get a better indication of whether it’s in a trend or not and how strong that trend is by looking at the MACD indicator.

And how you tell that is if the MACD indicator is close to zero, close to the zero line, then that’s an indication of a range bound market.

So you can see here that the MACD is close to zero and there you’re in a range bound market conditions, where over here it shows the right-hand side of the chart. You’re trending up away from zero and that’s an indication of a pretty strong trend in the market there.

So once you’ve determined that the market is in a range, there’s a couple of different ways that you can trade the MACD. Which we’re going to look at first, something called the MACD divergence.

Basically, very simply, this means when the indicator, the MACD indicator, is trading in the opposite direction of the market, that’s a signal that the trend that’s in place there may be due for a reversal.

So you can see here that the market is making new highs here, but the MACD is actually trading down and that’s an indication that that trend is running out of steam. If it was a down trend there that we were looking at and the MACD was trading up, that would be an indication that the down trend was losing steam.

But here we have our uptrend and we can see here by looking at the MACD that that uptrend might be in danger. You can see the market did sell off, although it did take a little while.

Like all the other indicators that we’re going to look at, you’re going to want to use this in conjunction with some of the things that we’ve learned so far to confirm your signals there, but you can see that that diversion is there and it did call the market top there. It just took a little while.

The second way is what’s known as the MACD crossover. Very simply, when the MACD line crosses above the signal line, this is a bullish sign and some traders will trade this as a buy signal and when it crosses below the signal line, then that is a sell signal and traders will look to go short or exit their long positions on that cross.

Again, this can be traded by itself, although not recommended. It’s recommended to trade that if you’re going to trade it in line or in conjunction with some other indicators and some other of the things that we’ve learned so far, but it can also be used as additional confirmation for other things that you may be trading.

So you can see here, great buy signal. It caught the very bottom of the trend there and then great exit there. It caught the very top and got you out there. So a good indicator, but because it generates lots of signals, it’s also going to generate a lot of bad signal in addition to the good ones, so you want to have some confirmation there. So you can see the market went up there as a result of that.

All right. That’s our lesson for today. Since there’s a lot of different ways that you can trade the MACD and a lot of people have a lot of different opinions on some of the inputs for the indicator and exactly when to use it, and what markets to use it in and those types of things. You should now have a good understanding of the three main ways that traders look to trade the MACD indicator.

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The second lesson of two on how to trade the moving average convergence divergence (MACD) for day traders and investors using technical analysis in the stock market, futures market, and forex market. The link that I reference in my video is here: www.informedtrades.com

In addition to being able to tell if the stock, futures contract, or currency you are analyzing is trending or not from simply looking at its price action on the chart, you can also use the MACD indicator. Very simply if the MACD line is at or close to the zero line, this indicates that the financial instrument you are analyzing is not exhibiting strong trending characteristics, and thus should not be traded using the MACD.

Example of Trending and Non Trending Markets Once it is determined that the financial instrument you are analyzing is exhibiting trending characteristics, there are three ways that you can trade the MACD. 1. Positive and Negative Divergence 2. The MACD/Signal Line Crossover 3.

The zero line crossover Trading the MACD Divergence: Divergence occurs when the direction of the MACD is not moving in the same direction of the financial instrument you are analyzing. This can be seen as an indication that the upward or downward momentum in the market is failing. Traders will thus look to trade the reversal of the trend and consider this signal particularly strong when the market is making a new high or low and the MACD is not.

How to Trade the Average Directional Index (ADX)

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In today’s lesson, we’re going to learn about the average directional index, or ADX for short; an indicator which helps traders determine whether the market is trending or not, how strong that trend is and whether the market may be switching from a trend to range or vice versa. So let’s get started.

Here’s what the ADX indicator looks like when it’s plotted on a chart. As you can see, it’s made up of three lines.

But what I feel is important to know is that the ADX line is composed of the two other indicators which are known as the positive directional index or +DI line for short, and the negative directional index which is the -DI line for short.

Here’s the ADX line in black, the -DI line in red and the +DI line in green. The +DI line is representative of how strong or weak the uptrend in the market is. Or another way of saying that would be how strong or weak the buyers in the market are.

The -DI line is representative of how strong or weak the downtrend in the market is. Or another way of saying that obviously is how strong or weak the sellers in the market are.

As the ADX line is comprised of both the +DI line and the -DI line, it doesn’t indicate whether the trend is up or down, but simply the strength of the overall trend in the market.

One of the unique things and one of the reasons why I really like this indicator is it paints a really nice picture of both the buying pressure and the selling pressure as two different lines, and then gives you one line which gives the overall strength of the underlying trend.

When the ADX line is above 40 and rising, this is indicative of a strong trend. And when the ADX line is below 20 and falling, this is indicative of a ranging market.

So you can see here it’s below 20 and the market is ranging there, and there it’s above 40 and the market is trending strongly.

And some people will put that, just for your knowledge, some people will put that 40 number at 30 for the strong trend. Some people will say you can start looking to trade trends above 25. There’s a lot of debate as to what’s the best number to use there.

But anyway, one of the first ways that traders will use the ADX in their trading is as a confirmation of whether or not a financial instrument is trending and to avoid choppy periods in the market

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In this lesson we are going to learn about the Average directional Index (ADX), an indicator which helps traders determine when the market is trending, when the market is ranging, when the market may be about to change from trending to ranging or vice versa, and to gauge the strength of the trend in the market. When plotted below the chart the ADX Line is normally accompanied by two other lines which are known as the +DI and -DI Lines.