Tag Archives: daytrade

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.