The 8 Best Day Trading Podcasts Worth Subscribing To in 2022

Podcasts are an ever-growing segment of media. In the current landscape of false information and media bias, there is really no way to tell truth from fiction. However, podcasts offer a refreshing and easily accessible approach to information distribution. Day trading podcasts are no exception, and in this post we cover the 6 best day trading podcasts worth following.

Why Day Trading Podcasts Are Important to Your Education

As we’ve said before, day trading education can be a bit like the wild west. Any Joe Blow can jump on YouTube and start advertising his/her services. And while not all of the gurus you see online are fake, you never know when you’re first getting started.

Day trading podcasts are a way to introduce you to the real traders in the community. Whether you trade forex, futures, or stocks, the podcasts we mention below can offer you a genuine look at different traders and trading styles.

Therein lies the benefit of podcasts in trading. Gone are the days of not knowing about this guru or that guru before you sign up. You can literally watch an interview on just about any of them, nowadays.

In addition, you now have a wealth of education at your finger tips, for free. While we advocate for quality education services, nothing beats a free education.

How to Get the Most out of Day Trading Podcasts

The SimCast day trading podcast
The SimCast day trading video podcast

There are a few things to pay attention to when listening to a trading podcast.

  1. Trading psychology nuggets
  2. Anecdotes about trading
  3. Trading styles and technical analysis
  4. The importance of risk management

While these are just a handful of things to watch out for, the ultimate goal of these shows is to inform you. As developing traders, you need to be reminded of what works, and what doesn’t.

Along those lines, hearing from successful traders about how they overcame adversity in order to find consistency is like finding gold. Not only does it provide you with a “virtual” form of mentorship, but it gives you access to the most successful day traders’ minds, for free.

And on that token, and in no particular order, let’s jump right into the 6 Best Day Trading Podcasts available right now. Keep in mind, each has its own strengths and style.

The 6 Best Day Trading Podcasts

1. The SimCast day trading podcast with John McDowell

The Simcast day trading podcast
Michael Covel Podcast

·         Podcast Name: The SimCast

·         Host: John McDowell & Sam Pryor

·         Podcast Type: Interview, Trade Recap

·         Link: https://tradingsim.com/blog/category/the-simcast/

·         Frequency: Weekly

·         Where to listen: YouTube, Website

We might be a little biased, but our very own SimCast is a great way to discover successful traders, their strategies, and stories. John tries to pull as much out of each guest as possible, and loves diving into charts. Not only that, but he has a knack for finding “unknown” traders who are consistently profitable.

While some podcasts focus on the story or the anecdotes, John believes in the process of discovering setups on the chart. As much as possible, he likes to know the purpose behind the trade — the thesis, if you will. In addition, he likes to know entry criteria, probabilities for success, systematic or discretionary approaches, and mindset.

Altogether, the SimCast is a top day trading podcast and a great way for new and experienced day traders to learn something new. The approach is refreshing and unbiased. John isn’t afraid to bring controversial traders on the show, just to share opposing viewpoints.

Definitely worth subscribing to, we highly recommend the SimCast.

2. Confessions of a Market Maker trading podcast with JJ and Ray

Confessions of a market maker day trading podcast

·         Podcast Name: Confessions of a Market Maker

·         Host: All day Ray and J.J.

·         Podcast Type: Talk show/Interview/Reviews

·         Link: https://www.youtube.com/channel/UCAkEaTZXiMMXKrYqwM6dZ5A

·         Frequency: Weekly

·         Where to listen: iTunes, YouTube

Ray and J.J. are fun and entertaining. J.J. is a market maker with over 20 years of experience and goes by @vwaptrader1 on Twitter. You can find J.J. at @AllxDayxRayx. Together, they provide a really unique dynamic with really high profile guests.

Some of the more popular guests they have had on the show range from Mark Cuban to Anthony Scaramucci. Topics can range from the blockchain to trading psychology. He’s had NFL coaches on the show, the youngest female floor trader in NYSE history, and a Market Wizard.

Whatever your taste in trading, you’re bound to find a lot of value in the content. J.J. provides a lot of great insight into the “behind the scenes” thought process of trading, while Ray keeps the convo fun and engaging.

Be sure to give them a follow and subscribe to the YouTube channel.

3. BtheStory day trading podcast with Alex Bustos

Alex Bustos day trader and podcaster

·         Podcast Name: BtheStory

·         Host: Alex Bustos

·         Podcast Type: Talk show/Interview/Reviews

·         Link: https://bthestory.net/

·         Frequency: Weekly

·         Where to listen: iTunes, Spotify, Google Play, Stitcher, YouTube, Website

Alex has put together a very energetic and unique approach to day trading podcasts. Starting out, his virtual interviews included many big name day traders like Tim Grittani, Nate Michaud, and others.

Recently, Alex has transitioned to more in-person interviews. Often found visiting the homes of day traders, or prop firms, he has a knack for finding good traders.

Alex’s fun personality and energy, coupled with his ability to ask great questions, leads to really great interviews. He understands the struggles that newer traders face. Along those lines, he draws from his own experience to create valuable content for his viewers.

At the end of the day, it is clear that Alex is passionate not only about his show and his trading, but also about the trading community. Most of his content is on the shorter side, but it’s very engaging and with a lot of great nuggets.

We highly recommend it.

4. SMB Capital YouTube Channel

SMB Capital Logo

·         Podcast Name: SMB Capital

·         Host: Mike Bellafiore

·         Podcast Type: Interviews/Recaps

·         Link: https://www.youtube.com/user/smbcapital

·         Frequency: Weekly

·         Where to listen: YouTube, Website

SMB Capital is proprietary trading firm. One of the founders, Mike Bellafiore, is well-known for his books and educational material. As part of his firm, he advocates for education. They actually have an arm of the company called SMB U that is dedicated to retail trader education.

Mike and his team of traders regularly put out relevant content regarding the state of the markets, what is working, and what’s not. It isn’t exactly a day trading podcast, but many of his younger traders share personal videos and stories of their successes and failures. You might also find tutorials on topics like tape reading.

While it may not be as good as sitting at a desk inside SMB Capital, their channel is a great resource for budding traders. If you can’t afford the courses they teach, its a great way to get your feet wet and discover new tips and tricks for your trading.

5. Chat with Traders podcast by Aaron Fifield

Chat with traders trading podcast

·         Podcast Name: Chat with Traders

·         Host: Andrew Aaron Fifield

·         Podcast Type: Talk show/Interview

·         Link: https://chatwithtraders.com/podcast/

·         Frequency: Monthly

·         Where to listen: iTunes, YouTube, Android, Website

Chat with Traders is a day trading podcast that stays true to its name. It features a weekly/monthly show with traders, mostly day traders but with some swing traders and investors.

Some of the most famous names in all of trading have appeared on Chat with Traders. This list includes Jack Schwager and Linda Raschke among other big names.

Aaron Fifield started the show around 2015. Since then, he has done over 200 interviews. In addition to his interviews, some of his more popular episodes are compilations. We particularly enjoy his “Best of Trading Psychology” compilations.

While Aaron’s conversational style is casual, he has a great way of getting his guests to go deep. Listeners will enjoy learning how other traders look at the markets, glimpses into what trading strategies they use, and how they’ve overcome adversity to reach success.

Unlike the SimCast or BtheStory, Aaron’s is more of an audio podcast, though he is trying to incorporate trade recaps as of late.

Chat with traders is not just “another day trading podcast,” but has been featured on big websites including Business Insider and Investopedia.

Definitely worth a subscription in our opinion.

6. TradingNut day trading podcast with Cam Hawkins

TradingNut Podcast logo

·         Podcast Name: Trading Nut

·         Host: Cam Hawkins

·         Podcast Type: Talk show

·         Link: https://tradingnut.com

·         Frequency: Weekly

·         Where to listen: iTunes, Android, Website, YouTube

TradingNut is a podcast for day traders of all asset classes, though it focuses heavily on forex.

If you prefer a more straightforward approach to trading, Cam’s show is worth a watch. The show regularly covers how other traders feel about the markets, their trading systems and strategies, and unique ways to exploit markets.

The podcast is hosted by Cam Hawkins. This weekly podcast talks about all things to do with trading, including dedicating a decent amount of air time towards trading psychology.

Cam regularly hosts professional forex traders, crypto traders, psychologists, and more. His topics can be as obscure as moon phases, or as typical as Fibonacci indicators and head and shoulders patterns.

Whatever style of trader you are, TradingNut always puts out relevant content for free.

7. Better System Trader day trading podcast with Andrew Swanscott

Better System Trader day trading podcast

·         Podcast Name: Better System Trader

·         Host: Andrew Swanscott

·         Podcast Type: Interviews/Talk show

·         Link: http://bettersystemtrader.com/category/podcast/

·         Frequency: Weekly

·         Where to listen: iTunes, Android, Soundcloud, Website

Better System Trader is a podcast and a blog that was put together by Andrew Swanscott. The content focuses heavily on systems traders or mechanical traders.

To that end, if you are looking for new trading strategy ideas or ways to improve your existing trading strategy, Better System Trader is the place to go! The podcast has received praise from different members within the trading circle.

Better System Trader is a free podcast that is not just limited to talking about trading strategies. The show also focuses on money management as well as tips and tricks from professional traders.

Although Better System Trader’s podcasts have to do with trading systems, it is not confined to just one market, therefore listeners can apply the strategy ideas to any markets of their choice.

You can listen either via iTunes store, Stitcher or Soundcloud, or simply visit the Better System Trader website. Andrew updates consistently and often shares tons of trading codes (for different trading platforms) and ideas to fine tune day trading systems.

8. The High Performance Podcast with Jake Humphrey and Damian Hughes

The High Performance Podcast

·         Podcast Name: The High Performance Podcast

·         Author: Jake Humphrey & Damian Hughes

·         Podcast Type: Interviews/Talk show

·         Link: The High Performance Podcast

·         Frequency: Weekly

·         Where to listen: iTunes, YouTube, Website

You might be thinking, “but what does this have to do with trading?” Well, that’s a fair question. We included this podcast because trading is a performance sport.

If you are going to perform at the top of your game, you need a keen awareness of the mindset it takes. Jake and Damian interview successful athletes, business people, artists, and more. They are constantly in pursuit of the qualities inherent with high performers.

With a background in organizational psychology, Damian is a professor and keenly aware of the best questions to ask. Jake is an anchor on BT’s Sports Premier League. So, he knows a thing or to about performance sports.

Together, they bring out some of the most inspirational content you can find on the web. It’s not over the top, either. It’s simply encouraging and motivational.

This one should definitely be a part of your regular listening routine.

Why should you listen to a day trading podcast?

The biggest benefit with podcasts (or for that matter with any audio type of content) is in the interviews. Every so often, a day trading podcast that has an interview with some traders or some experts in a certain field can give out tons of wisdom which might be missed otherwise.

Similarly, listening to a day trading podcast can be beneficial for those who are commuting to work and are seriously committed to learning how to improve their day trading.

However, there are also many video podcasts now and most of them are free. This allows you insights into technical analysis like never before.

Want more day trading podcasts?

You can visit https://player.fm/podcasts/Trading and browse through the various categories including day trading, forex, futures, economy, stock markets and many more.

Pattern Day Trading Rule Banner

Ugh, the pattern day trading rule! The name causes some discomfort to many traders. But then, rules are meant to be broken right? In the world of retail trading in stocks, this rule is hard to avoid. However, there are solutions. We’ll walk you through the ins and outs of the PDT rule in this article.

The PDT Issue

If you trade too much, chances are that your account will be flagged as a pattern day trader or “PDT”.

When your account is identified as one, the restrictions kick in. Many traders find it frustrating when the regulations kick in. Some immediately blame their brokerage. But this is a regulation put down by FINRA and the SEC.

Sometimes, trading opportunities are dime a dozen. The average trader obviously ends up ignoring the rules only to regret them later after their account is frozen from taking too many trades. Therefore, it is understandable why one would get frustrated with the pattern day trading rule restriction.

The Pattern Day Trading Rule Prevents You From Trading

Ironically, the pattern day trading rule was developed keeping a trader’s “best interest in mind.”

We’ve written extensively about the habit of new traders to “overtrade.” Well, the PDT rule is a way to force you to think more about the trades you’re taking. But is it really necessary?

Think about it for a moment. What if you were told that you could not day trade for 90 days? What if you were told that you need to top up your account before you could trade?

That would make you furious, wouldn’t it?

After all, traders, and especially those who trade on margin, prefer to keep just the right amount in their accounts and trade on leverage.

Why would you want to keep excess funds in your brokerage account when it can earn interest elsewhere?

Welcome to the world of the pattern day trading rule, which is one of the biggest obstacles traders struggle within the United States.

Definition of a pattern day trader

The legal definition of a pattern day trader is one who executes four or more day trades in five consecutive business days. This is applicable when you trade a margin account. When a trader is classified or flagged as a pattern day trader, they attract a 90-day freeze on the account.

Traders need to maintain a minimum balance of $25,000 on their account at all times when using a margin account.

The criterion for pattern day trading varies. There are some exceptions. For example, long and short positions kept open overnight but sold prior to the new purchases of the same security on the next day are exempt.

The pattern day trading rule severely limits participation in the market and also affects liquidity. This also leads to an increase in risk on the trader’s side.

Given the fact that most traders start out with smaller capital, it can be devastating to their trading journey.

History of the PDT rule

The pattern day trading rule came into effect in 2001, right after the collapse of the dot com bubble. In the run-up to the bubble, many traders categorized themselves as a day trader. Staying long in the market, traders eventually got margin calls when they were caught on the wrong side of the market correction.

As a result, the Securities and Exchange Commission (SEC) and the FINRA were led to enact the Pattern Day Trading Rule. This is also known as Rule 2520.

The goal was to prevent traders from being too over-leveraged and to maintain a considerable amount of funds to protect themselves from margin calls.

So, to summarize, if you don’t maintain a minimum balance of $25,000 in your margin trading account, you cannot trade more than three times in five consecutive trading days.

Drawbacks of being a Pattern day trader

Note that the pattern day trading rule applies only to margin accounts. A margin account is one which allows traders to trade on margin or leverage their capital. In other words, these are borrowed funds.

For example, if you had $50,000 in your margin account, you could trade two or four times this capital. This, in essence, increases your capability to $100,000 or even $200,000. It also allows you to continue trading each day while your funds are “settling.”

In all fairness, it is easy to see why the pattern day trading rule was formed. There is a big risk when trading on leverage and the PDT rule helps to keep you grounded.

If you trade with a normal unleveraged account, a cash account, the PDT rule does not apply because you are not borrowing funds in the first place.

But at the same time, this also limits your ability to day trade. In this account type, you, of course, avoid margin fees but it takes three days for trades to settle.

This can be a long wait. You also cannot short sell stocks, which you can in a margin account. Lastly, your buying power directly relates to how much cash you have in your account.

But there are some inherent drawbacks to being a pattern day trader too. Here are some of them.

Pattern Day Trading Rule Minimum balance requirement

When you are classified as a pattern day trader, you need to maintain a minimum balance of $25,000. This amount has to be maintained at all times. It is this criterion that the SEC uses to determine you as a trader.

In the event that your balance falls below $25,000 you would be asked to either replenish your account or the regulations kick in; even if it means that your balance declines by a dollar.

The minimum balance requirement can be a deterrent for many traders. Most day traders prefer to trade on margin. They make use of leverage to their advantage.

This means that traders don’t have to keep all their funds with their broker. They could easily use the funds toward other investments. But this is a misconception.

According to the Securities Investor Protection Corporation (SIPC), your securities account is protected up to $500,000 with a cash claim of up to $200,000.

When a trader is flagged as a pattern day trader, they are forced to maintain the minimum balance.

The label of being a pattern day trader with your brokerage

It is important to note that you are classified a pattern day trader based on your execution of trades; the trades that you buy and sell during a business day.

The rule leads many traders to avoid being classified as one. Traders, therefore, end up holding their positions overnight or over a period of days.

This can be risky especially when there is a big move in the after or pre-market trading sessions.

Restrictions on trading

The moment your trading account is flagged as a pattern day trader, your ability to trade is restricted. Unless you bring your account balance to $25,000 you will not be able to trade for 90 days.

Some brokers can reset your account but again this is an option you can’t use all the time.

What happens when you are flagged as a PDT?

This is a common and an obvious question that comes to mind. What happens when you are flagged as a pattern day trader and when your balance falls below the $25,000 requirement?

Well, you will have the following options.

You can either top up your balance to bridge the gap and make your balance to meet the minimum requirements.

In some cases, you will have to wait for a 90-day period before you can initiate any new positions. That’s about a three month wait before you can trade again.

Depending on the broker you are with, you can also ask for a pattern day trader or a PDT reset.

When the balance falls below $25,000 you will be prohibited from initiating any new positions almost immediately. You will have to close out any existing positions in order to revive your account back to the minimum balance requirement.

A pattern day trading reset (or PDT reset) is, of course, the best course of action. FINRA allows brokerage firms to remove the PDT flat from a customer’s account once every 180 days. When the PDT flag is removed, you can place about three trades every five business days.

How to Avoid the Pattern Day Trading Rule

It’s a common annoyance for a day trader to have pattern day trader status.  However, there are some actions that day traders can take to remove pattern day trading rule status. Here are some common ways to avoid that label.

1. Open a cash account

If a day trader wants to avoid pattern day trader status, they can open cash accounts.  They can make unlimited day trades with smaller amounts of money. While you can make unlimited trades, there is a downside.

The Securities and Exchange Commission rules state that cash profits from a transaction must settle before traders can receive the cash. That means that traders can’t use the cash until two days after the settlement date.

For example, a trader has $20,000 in their account and makes a day trade using $5,000 from the cash account. They can trade with $15,000 for the next two days.  Brandon Herman, Senior Manager of Margins and Clearing at TD Ameritrade, explained the settlement rules here: 

“In a cash account, if you buy and you sell, you have to wait for that sale to settle before you can use the funds again. Some clients may find it worthwhile to use a margin account every now and then to be able to buy what they want to buy, when they want to buy it, and borrow with margin for a short period of time,” said Herman. 

If day traders want to trade a small amount of money and are patient, cash accounts can be an option to avoid PDT status.

2. Use multiple brokerage accounts to avoid the PDT Rule

If trading three times a week is too limiting for day traders, having more than one brokerage account may be another option. When a day trader opens multiple brokerage acccounts, they can have an additional three trades for every five days. Because many brokerages have commission-free trading, this can be a viable option to avoid PDT restrictions.

While opening multiple accounts is one way to avoid PDT status, day traders should be cautious. Having too many accounts open may spread a day trader’s funds really thin.  If a day trader has funds below $25,000 in their account, their funds may get depleted quickly. 

Another downside is keeping track of the profits and losses in multiple trading accounts.  A Google doc or Excel spreadsheet can help day traders keep track of their multiple accounts. 

3. Have an offshore account

If U.S. brokerage accounts are too restrictive, then offshore brokerage accounts are another option. Day traders can open offshore accounts and trade more often with fewer restrictions.

If a day trader opens an offshore account, they should be cautious. The rules that govern U.S. investors may not apply. The protections offered to investors may not be present, either. There may extra fees to open these accounts as well. 

4. Trade Forex and Futures to avoid the PDT Rule

In addition to having an offshore account, day traders can avoid the PDT Rule by trading foreign currency or futures. Neither of these asset classes require a certain level of cash. In fact, you can open an account with many brokers for just a few thousand dollars.

Some things to watch out for are the massive amounts of leverage inherent with trading these accounts. You’ll need to be disciplined to understand how to trade Forex and Crypto. 

5. Options trading

Options trading is another choice to avoid PDT restrictions. James Schultz, an options trading expert, spoke here about options trading.

Schultz explained how he started trading options.

“The simple fact that the only unknown variable in the model, the implied volatility, was consistently higher than the realized volatility that actually unfolded in the market left me convinced that there was an opportunity in trading options, ” said Schultz.

Schultz explained how day traders can start trading options.

“Start very small and focus exclusively on defined-risk strategies, until you’re comfortable with how the market moves and your options positions bounce around,” said Schultz.

“While a virtual, “paper” money account is useful for learning the mechanics, it cannot and does not simulate the actual emotions that are felt with real, live trading. So, even if it’s only a small amount of money, start with small trades in a real money account, as soon as you can,” added Schultz.

Offshore Brokers with no PDT restrictions

Now to the best part! There is at least one reputable broker we’re aware of, possibly two, through which you can avoid being labeled a pattern day trader.

But you might already guess that this is an offshore brokerage. The offshore jurisdiction gives these brokers more flexibility. This means such brokers can also avoid having to follow the FINRA rules.

But if something goes wrong, chances are that you do not get the same level of assurance as a trader trading with a U.S. registered brokerage. You are also liable to pay higher commissions. But this is a trade-off considering that you want to avoid the pattern day trading rules.

Here are some of the brokers that have no pattern day trading rule restrictions. They also allow you to trade on margin.

Capital Markets Elite Group (CMEG)

CMEG is based out of Trinidad, though their banking is done through an Australian bank. One of our staff members has actually used this service and can recommend it.

Although they allow you to open an account with as little as $500 on their active trading service, margin goes all the way up to 6:1 around $2500.

In our experience, the service was very reliable, with order executions lightning fast. The only thing we would complain about are commissions. With a small account, commissions and fees can add up really fast. So can network fees, wiring fees, and platform fees. Just be aware of this.

One positive of CMEG is that they do have access to hard to borrow stocks. So, if you’re a short seller, this may be of interest to you. Regardless, it will like you cost you about $300+ just to get started with either the DAS or Sterling trading platforms, along with wiring fees, etc.

AllianceTrader

AllianceTrader is the brand name for Alliance Investment Management limited. It offers online equity trading service and the company is domiciled in Jamaica. The company is licensed by the Financial Services Commission of Jamaica under the securities Act of 1993.

For the record, we have not tried this service, nor do we know if it is real. We did try to call them, but got a voicemail for MagicJack.

According to their website, AllianceTrader allows you open an account for as little as $1000 for a cash account or $2000 for a margin account. You get a leverage of 4:1 on your margin account. This means that if you deposit $2000 in a margin account, your leverage goes up to $8000.

Of course, the leverage falls to 2:1 if you keep positions open overnight.

The brokerage claims to have no annual fee and no trade restrictions on intraday securities buying and selling.

There is an intuitive trading platform that allows you to place multiple stop orders and advancing charting techniques. You can either download the trading platform or use the web-based version.

If you are interested, you can get a two-week demo as well to test drive the trading platform.

TradeZero

TradeZero is another broker that circumvents the pattern day trading rule. The company is domiciled in the Bahamas. However, note that the brokerage does not allow accounts from U.S. citizens. This is a bit disappointing considering that you can open a margin trading account for as little as $500.

They also offer higher leverage of up to 6:1 when you deposit $2,500 or more. Limit orders are offered free of cost and regular market orders come at a certain fee.

TradeZero offers its own proprietary trading platform that can be downloaded or accessed via the web. Other versions include dedicated smartphone apps as well.

There is also a free demo version for you to test drive their platform.

SureTrader

Suretrader used to be another option for brokerage from the Bahamas. We mention it because it is still talked about in forums. They are closed down now, however.

Margin account or cash account or offshore account?

In conclusion, you can see that there are basically three choices available for you as a trader. Each of the accounts has its own pros and cons.

A margin account as you know gives you the option to leverage your trades by trading on margin. However, if you trade too much or if your balance falls below the $25,000 threshold you end up being marked as a pattern day trader.

This could potentially restrict you from trading by up to 90 days.

On the other hand, a cash account clears you of the PDT restrictions. However, your buying power is vastly restricted to the amount of capital you have. While there are some advantages you will be limited unless you have a huge capital to trade with.

Finally, you can choose an offshore brokerage that can allow you to circumvent the pattern day trader rule restriction. While this seems like a good compromise, remember that there are some risks.

Because the brokerages are offshore, the FINRA or SEC rules do not apply. This means that in the event the brokerage goes bust, it would be difficult to get your money.

While the odds of this happening are little, there is always this risk that you need to bear in mind.

To summarize, many traders do not like the pattern day trader rule. However, remember that the rule came into effect following the dot com bubble burst. Trading on margin is always risky, which is why the rules such as pattern day trader have been implemented.

Finding consistency as a trader isn’t easy. Much less, knowing where to get started. You hear it said all the time, “if you want to find longevity as a trader, you must study.” But where do you begin? That’s the question many have who want to enter this crazy world of infinite possibilities. To that end, in this post we’ll discuss where to begin finding an edge in trading, and the fastest way to consistency.

Why It’s Hard to find an Edge in Trading

Trading markets can appear overwhelming to outsiders. For that reason, retail traders are more than willing to hand their hard-earned dollars over to someone who seems more knowledgeable than themselves. Yet, more often than not, someone gets burned along the way.

Then, as you begin to seek out education to manage your own money, you find there is no standard. There is no Trading University to attend — no 4-year degree with a certain outlook on your income potential once you graduate.

Sure, there are plenty of finance majors who end up on Wall Street or working for a bank or institution, and they may have a salary expectation. But for all intents and purposes, the majority of us are just stuck piecemealing our own course together — here a little, there a little. Shooting for the stars and hoping we make a million bucks, we’re really just flying by the seat of our pants.

Not only that, but there are so many things to study, it can be overwhelming trying to figure out where to focus our efforts.

Education Services – The Pros and Cons

While there may be no standard of education for the market, there are plenty of people willing to sell you their services. Many will promise you the moon. They will attract you with catchy personalities, brokerage statements, promises, flashy cars, and the like. You’ve probably seen the ads on YouTube and all of their “subscriber success stories.”

We don’t doubt that many of these traders have made a lot of money. But at the end of the day, they’re selling you something. At $2000/subscriber and a chat room filled with 1000 subscribers, that’s $2,000,000/year in subscription revenues they’re raking in. Trust us, to them you’re just a number. Who needs to make millions in the market with that kind of revenue?

Others may appear more real, less in your face, and more devoted to their constituents’ actual progress. No doubt, there are some great services out there — great teachers, too. But the hard part is knowing who to go to, who to trust.

Too often we hear of newer traders who get burned too badly before they find the right mentor or education. It’s a sad reality.

So it’s no surprise that finding an edge in the market is difficult. Our advice is to simply be aware of what’s out there, and protect yourself and your capital by doing your research first.

The Myriad of Different Strategies

If the number of different gurus and services isn’t overwhelming enough, then imagine when you’re faced with a million different strategies for making money. After all, you can trade futures, equities, forex, crypto. You can make money buying, you can make money selling short. Options, derivatives, indicators, algos, etc.

At the end of the day, you don’t have enough time in your life to study all the different ways you could find an edge in trading. They’re endless.

While we discuss a lot of the more popular strategies here at TradingSim, the truth is that we only scratch the surface.

So, what can you do? Where do you begin?

That’s the very question this trader asked on Twitter recently, hoping for some wisdom from a popular online trading personality named AllDayFaders:

Trading struggling to find an edge in trading
Trader struggling to find an edge in trading

Such is the plight of many beginners. So many directions, so many choices. Where do you begin?

The 5 Steps to Finding an Edge in Trading

AllDayFaders (ADF) had a great response to this person. It’s very simple, straightforward, and for that reason we wanted to share it with you. In the rest of the post, we’ll pick apart each one and add some extra insight. But the simple answer is right here:

https://twitter.com/team3dstocks/status/1440896994562777089?s=20

ADF always has a wealth of great tweets to discuss the deeper details of consistency in the market, just a simple search for #beartipoftheday will turn up some great resources. And while his advice here sounds simple, there are a few caveats to consider when you start out.

  1. Are you needing to trade as a source of immediate income?
  2. Do you have the time and patience to discover what works best for you?

The answer to these two questions may determine what path you take to find an edge in trading. But regardless of the answer to either of those questions, you must start some where. And no matter what, the 5 things you need to do remain the same.

Bruce Lee get it done quote

In large part, your success will depend upon how disciplined you can be at following his advice, along with how realistic you can keep your expectations and resilience. The most important thing is that you get started, not where you start.

On that token, let’s find out how to pick a style that will lead to your edge in trading.

1. What is Your Style of Trading?

Trading is very much dependent upon personality. Some of us are more qualitative, others quantitative. You might excel with spreadsheets (no pun intended), while others are better at intuition. Maybe you’re a cautious, slow mover, while others are more energetic with a need for speed and danger. Long-term relationship kind of gal? Or short-term kind of guy?

Pick a style that suits you. Perhaps you have a full-time job so you’re forced to either swing trade or day trade for a very narrow time of the day. A lot can dictate where you get started as a trader.

Authenticity In Your Trading Style

Too often we find that beginners try to emulate the gurus they watch and learn from. And while some may become successful doing this, we argue that it’s largely due to similarities in personality and style.

For that reason, it’s important that you strive to find a style of trading that fits you. Be true to yourself while you learn, but take everything you learn with a grain of salt. Better yet, take everything you learn and apply it to the crucible of your own goals, personality, and aspirations.

Absorb what is useful, discard what is useless and add what is specifically your own.

Bruce Lee

Our suggestion is to take the following list as a guide to think about this question as you explore. Meditate on it for a bit, do some research, and then figure out which one you want to be. After doing so, narrow your “universe” of education/educator results to what resonates best with you.

Swing Trader

  • Are you willing to hold stocks over night? How will this affect you?
  • Is a few weeks to a few months too long for your patience?
  • Are you ok with slower growth at the start?
  • Can you handle larger price swings in your account?
  • Are you a patient person?
  • Do you have the time to generate ideas at night and on weekends?
  • Can you be disciplined to set entries, stops and targets and stick to your system?

Day Trader

  • Do fast decisions make you nervous?
  • Are you good at hand-eye coordination?
  • How is your spatial memory and recognition?
  • Do you handle pressure well?
  • Does your schedule allow you to spend enough time trading during certain hours of the day?

These are just a few things to consider when getting started. Ultimately, you’ll have to make the best decision for yourself. But know this: there is no holy grail in the markets. Simply be authentic to who you are and where you want to be, and get started.

2. Pick a Side to Find an Edge in Trading

We can’t stress the importance of this enough. ADF really hit the nail on the head here.

There’s an old proverb that says, “a double-minded man is unstable in all his ways.” Consider this as you being your trading career.

Juggling too much at one time is hard to do when you really don’t even know what you’re doing yet. It’s a recipe for disaster. You don’t see accountants managing operations and marketing and customer service. You see them doing what they do best, keeping the books for the company.

Trading is no different. Treat it like it were a career path. The more you specialize, the better off you’ll be.

Think about the following as you make your decision:

Long Bias or Short Bias

  • Are you optimistic or pessimistic on the stocks you play?
  • Have you studied the impact that fundamentals and offerings could have on certain stocks?
  • Do you like a fast buck or slow and steady growth?
  • Will you trade low priced, higher-volatility stocks or higher priced growth stocks?

Regardless of your choice, its best you make one. A lot of what will determine your success is mastery of a very narrowly focused effort.

You don’t find many professional players playing two sports anymore. Deion Sanders and Bo Jackson were the exception in the old days. Stick to what you do best. There will be plenty of opportunities on either side you choose.

Like ADF says, you’ll have plenty of time to learn the opposing side later on — if you so choose.

3. Observe and Track until You Find ONE Setup That Fits Your Style and Side

Trust us when we say it won’t take long to find a setup. There are thousands. We’ve written about 100s of them on this blog. A simple good search will turn up even more.

Once you’ve narrowed your style of trading and decided whether you are a long-biased trader or short-biased trader, you’ve done half the work. This brings you to the climactic part of your early career — deciding what your “setup” is.

You can be a long biased pullback scalper. Or, if you like the short side, perhaps the vwap boulevard or 3pm bloodbath is more your style? If you’re a swing trader, you might like the high velocity moves that liquidity traps provide. No matter what you choose, we suggest finding the strategy that returns the biggest bang for the buck. High time value, as it were.

Likewise, the strategy or “setup” that you choose should fit your personality just as much as your style and side.

The Fastest Way to Find a Profitable Edge in Trading

Observation. Screen time. Turning over charts. Reading books. Having at least a basic understanding of chart patterns and tape reading. They are all great things to do to get you where you want to be.

But if you’re still struggling with seeing the markets on your own, it would behoove you to borrow on the wisdom of those who’ve gone before you.

Every other profession in the world requires some amount of proper education and modeling. Trading is no exception. The trick is whether or not you have found the education you want and the quality of that education.

In a prior post, we discuss ego as a subconscious habit that might be affecting your performance. We mention this here because the longer you find yourself trying this or trying that, the longer it will take you to find your edge. In other words, the sooner you can check your ego at the door and stick to what your trusted educator(s) are modeling for you, the sooner you will achieve success.

Bruce Lee on focus

This doesn’t mean to forego your own research and diligence on educators or systems. It simply means, find one you trust, and stick to it. Buy into it and get the most out of it.

How Do You Know You Have an Edge?

Dr. Steenbarger does a great job of answering this question in one of his blog posts. He essentially boils it down to two categories: backtesting or trading outcomes.

With backtesting, you can determine positive outcomes over a set period of time with certain variables and criteria. There are some great sites available for this nowadays, like Spikeet.com, if you’re inclined to go this route.

Trading outcomes, on the other hand, are more for the discretionary trader. You may not have fixed signals from your data. Rather, you’re relying on pattern recognition. For this reason, you must track your data with some degree of fixed criteria for your pattern in order to know your outcomes.

4. Master Your Setup

This is where things start to get fun. Confidence comes through knowing your probability of success.

If you knew you only had a 20% chance of success on a speculation and that you’ll lose money more often than not, would you like those odds?

What if you had a 60% chance of success and you know if you cut the 40% losers quickly enough, you’ll end up compounding your money over time?

Now what if you don’t know either one of those odds? It becomes a craps shoot. You have no idea.

Trading without mastery on a setup is gambling. And not knowing what makes your setup successful is gambling.

Speeding up the Process of Finding an Edge in Trading

Pattern recognition is the fastest way to profitability in the market without pure luck. If you want to master your setup, you must study it deeply. Replay charts, find commonalities, and even discover fundamental circumstances for your trades.

7 Things to Consider When Mastering Your Strategy:

  1. What is the float, market cap, price, and average volume of your best winners?
  2. If day trading, what time of day does your setup work best? Worst?
  3. Does volume predict anything in your setup? Compared to float?
  4. What about short % of float should you consider?
  5. Do fundamentals like potential offerings have any affect on your strategy?
  6. What do you observe in the tape?
  7. How do your successful trades’ charts look visually similar

Ask around for help on what to study, what to track, what to observe. It never hurts to get a second opinion, and never be afraid to learn. If you don’t have 100s or 1000s of charts saved in a OneNote file on your computer, are you really studying?

At the end of the day, you must put in the time yourself. Even if you build off a strategy from someone else, you must make it your own. Cut out what doesn’t fit for you. Add what does.

5. Trade only Your Edge

Notice that ADF saves this for last. There is really no sense in trading until you’ve seen success in simulation. As our friend Dr. Brett Steenbarger notes, there is nothing to gain by jumping in to early. In fact, it’s incredibly reckless.

If you’re motivated to learn and master markets, you’ll enjoy simulation and playing with trading ideas.  If you’re motivated by making money and showing off pictures of your new cars on social media, simulation won’t hold much appeal. 

When surgeons learn new techniques, they practice on models and cadavers before “going live”.  If a surgeon told me he didn’t think such practice was important, I’d likely look elsewhere for my procedure….

Dr. Brett Steenbarger, Ph.D.

If you treat your hard-earned money with the same reckless abandon as you would at a slot machine, your chances of survival in the markets is slim.

Trading becomes easier the more confidence you build in knowing what makes your strategy work. Consider not making any real trades until you have the following defined:

  • What your setup is
  • Entry trigger/criteria based on volume/price/indicator/condition
  • A consistent area to define risk, every time (setting your stop out)
  • Rules for trade management
  • Profit Targets
  • Exit criteria
  • Your probability of success with at least 20+ tracked trades
  • Caveats for when the setup goes wrong

If you don’t have definitive answers for all of these. It isn’t time to trade. Head back to the sim, find your criteria, then start small.

Conclusion

There are two types of people who start out as traders: the systematic, disciplined type and the over-confident explorers and risk-takers.

Most of us are want to jump right in and start pushing buttons as new traders. We would encourage you take a step back and have an honest look with where your progress is.

It doesn’t really matter where you begin studying. It doesn’t matter what you study to begin with. What matters most is that you narrow your focus, observe, and orient yourself in this industry slowly and diligently. Above all, protect your capital until the time is right to employ it safely, long after you know what your trading edge is.

Stock Float Explained

Stock float is one of the most important metrics that can influence the price of a security. While it can be a confusing term to understand as a beginning trader, it is worth the effort to know. After all, it can mean the difference between big gains and big losses.

Why Stock Float Is Important

The more metrics you have to evaluate a security before trading it, the better. As a rule of thumb, anyway.

Perhaps you won’t be too concerned with a dividend if you’re only looking to day trade a specific stock. You won’t own the stock long enough for the dividend to matter.

But one metric that can dramatically affect a stock’s price movement and volatility, is the float.

Therein lies the importance of this numerical data.

The Role of Insiders

Of the number of shares that are tradable for any given security, those shares are either freely tradeable on the market or insider-owned shares that are locked up. That is, unless the insiders decide to sell more shares, which is another subject in itself.

For the most part, inside shares are owned by the employees of the company they work for. The insider owned shares are not easily tradeable as they come with restrictions. For that reason, the market at large doesn’t bother much about the insider owned shares.

On the other hand, free floating shares are owned and traded by general investors. Investors like you, perhaps.

Institutions

In many cases, institutions also own a majority of these publicly available shares. These institution-owned stocks are typically held for a long time. Examples of institutions include pension funds or hedge funds.

Because most institutional firms are not actively trading their portfolio every day, this leaves only a remaining portion of the overall shares of a company that are readily tradable.

What Is A Stock Float?

The float of a security measures the total amount of shares that can freely change hands. In many ways, it depicts the liquidity of the market for certain companies.

The more number of shares there are to change hands, the greater the liquidity.

Calculating Stock Float

To better understand “floating stock,” let’s illustrate this with an example.

A company ABC Inc. has 100,000 shares outstanding.

Of the shares outstanding, 5000 are held by its employees, 40,000 shares are held by institutions. The remaining shares are held by regular investors.

From this, the stock float is 55,000. This is the sum of the total outstanding shares minus the shares held by insiders and institutions.

Stock float explanation

As you can see, while the outstanding shares may be as high as 95,000 for this particular hypothetical company, the actual shares available at any given time, may be much lower.

Float Impact

The impact this has on stock prices and volatility can be dramatic. After all, it is supply and demand that dictate the prices of stocks.

To that end, if more and more institutions gobble up the oustanding shares of a company, it takes less and less demand for the price to rocket higher.

Scarcity of shares, as it were.

This is exactly what happens during the early period of a company’s publicly traded life.

Low Float Stocks

A low float stock as the name suggests indicates that the number of shares outstanding are low. For such stocks, the daily and average volume tends to be low. The low volumes of such stocks lead to volatility and as a result, wide bid and ask prices.

Before the company dilutes its value by throwing more shares into the market, the lower float in the beginning can cause its price to skyrocket as long as demand is there.

For such low float stocks, a fundamental driven rally creates demand. In other words, investors are stumbling over themselves to buy shares when they are scarce, driving the price higher in dramatic fashion.

Over The Counter Stocks

There is a myth that low float stocks are mostly stocks on the pink sheet or OTCBB market listings.

However, this is not the case. In some cases you can find some micro-cap stocks with listings on the main exchanges such as the NASDAQ or the NYSE. A stock can also be low float if for some reason the float reduces relative to its usual average.

While the definition is a bit flexible, a stock is considered a low float stock which has fewer than 50-100 million in tradable shares.

High Float Stocks

Stocks with a high float tend to be more predictable and less volatile. For all intents and purposes, you can expect a stock to be a “high float stock” with anything above 100 million available shares.

Due to the large number of shares in the float, the liquidity can absorb any big moves. Therefore, while it is common to see 30% or 40% or even 100% moves during a short amount of time in a low float stock, this is not often seen with high float stocks.

The lack of scarcity means the value is often at “equilibrium” with the amount of shares being traded. Thus it takes more effort to move the price.

Larger companies such as AAPL or FB are examples of stocks with high float.

Comparison Between High and Low Floats

To imagine the difference, lets take a stock with a float of 18 million and 23.5 million outstanding shares, and compare it with AAPL at 16.68 billion float and 16.75 billion shares outstanding.

EYES ran 1293% in just 4 trading days:

EYES 1293% small stock float example
EYES small float stock example

AAPL moves 18% in 38 trading days.

Large stock float example
AAPL large float stock example

Clearly, there is a difference. For most investors or traders, it is usually a safe bet to trade stocks that have a higher float.

Trading low float stocks can be lucrative in the short run, but they typically come with the headaches of volatility and a lack of secure fundamentals.

Market Cap vs. Free-Float Market
Cap

Market capitalization, or market cap for short, is closely linked to the free float of the stock.

When researching stocks, companies are usually categorized based on their market capitalization. Pull up any ticker on finance.yahoo.com or any other site, and you’ll see Market Cap at the top of the list, usually:

Yahoo Finance Market Cap for AAPL
Yahoo! Finance Market Cap for AAPL

The important question for traders, is whether you should pay attention to this.

Market cap is a measure of a company’s size: the total value of a company’s outstanding shares of stocks. These outstanding shares include publicly traded shares as well as restricted shares that are held by insiders.

How To Calculate Market Capitalization

To calculate market capitalization you simply take the number of a company’s shares that are outstanding. Multiply the shares outstanding by the current stock price in order to get the market cap of the stock.

Let’s illustrate this with a simple example.

Say a company ABC Inc. has a total of 5 million shares outstanding. If this company is trading at a stock price of $10, you can get the market cap by multiplying the shares outstanding with the stock price.

In this example, we get $50 million as the market capitalization of the company.

Within market capitalization, there are certain classifications. The different categories can vary depending on who you ask. However, market capitalization is broadly classified into the following:

Now that we understand what market capitalization is, we can see the difference.

Market cap is based on the total value of the company’s shares.

Float is the number of outstanding shares that are available for general trading by the public.

The Free Float Market Cap Calculation Method

There is also another measure called the free float market cap method of calculation. In the free float calculation method, the market cap excludes shares that are locked in. The shares that are locked in are inside shares that are not available for the general public.

Generally, the free float method of calculating the market cap is widely used. Major indexes such as the Dow Jones Industrial Average and the S&P500 make use of the free float method.

Free float and market cap are important metrics for investors. When combined together, these two values show the total available shares for the public to trade.

Stock Price Manipulation Through Float

One common question among traders is whether one can manipulate the price of a stock based on the float.

As mentioned above, a reduction in the float can almost immediately raise the price of a security. This might seem contrary to the notion of “higher the float, bigger the price.”

This is not the case however. For example, when risk averse investors are on the short side of the stock, reducing the float can squeeze these investors out of the market.

This research paper of Float manipulation and stock prices gives insight into how firms can expand or shrink the float. The researchers observe Japanese stock listings and the price impact of firms who reduce their float between 0.1% up to 100% for periods of one to three months.

The study concludes that the price of a stock tends to rise when the float is reduced and conversely, the price of the stock falls when the float is increased.

The returns of the stock are also said to be cross-sectionally related to the reduction in the float.

There is strong evidence that firms tend to issue equity or redeem their convertible debts when the float is low. After all, they want the highest price they can get for their shares.

For this reason, firms have strong incentives for manipulating the stock price via its float.

Can A Company Increase or Decrease Its Float?

The answer to this is yes. Companies can raise or decrease their float in a handful of ways.

  • A company can raise the float by issuing new shares and it can reduce the float by announcing buy back of its shares.  Other examples include a company announcing a stock split which could impact the float.
  • Insider activity is also one of the factors influencing the float. For example, insiders who usually own options can choose to exercise their option. This can also influence the float. However, for this to occur there needs to be a significant amount of option exercises.
  • A company can also increase its float by deciding to sell some of the inside shares. This is done for legitimate reasons such as raising cash, but there could also be ulterior motives.
  • Typically, you can see the float changing when there are some big changes. The trigger for the changes to the float can be due to the fundamental drivers such as news events or company reports and rumors.

Pros and Cons of Trading Low Float Stocks

As you might expect by now, there are pros and cons when it comes to trading stocks with a low float. For a more in depth look, be sure to check out our post on Float Rotation.

Let’s talk about the upside first!

Pros

Because low float stocks are volatile, there is a tremendous upside to the stock. Traders who can take a calculated risk on low float stocks could end up with big returns.

Despite the inherent risks, traders can find an occasional good trade with tremendous upside potential in low float stocks. One of the important things to look for is liquidity.

Cons

In many ways, trading low float stocks can be similar to trading penny stocks or micro-cap stocks.

Low float stocks can be very risky to hold because they can have violent moves in either direction. With so few shares available to trade, the impact on supply and demand can be significant.

Low float stocks can be easy to manipulate with large unexpected orders. This is something that investors need to bear in mind.

Stocks with low floats also tend to be volatile around fundamental news releases. These include any type of news that is related to the industry or the sector in particular. Liquidity also increases around such events which can give good opportunity for investors to exit the stock after making a good trade.

Be sure to check for any filings with the SEC as these companies tend to offer shares during price spikes.

How To Find Float Data

There are a number of services that offer float data. Yahoo Finance and Finviz are just a few of the popular ones. Popular charting platforms may offer this as well, usually with a subscription to fundamental data.

Here is a snapshot of some of the fundamental data that finviz.com provides free of charge:

finviz.com float data
finviz.com fundamentals data

Regardless of the service you use, you may find some discrepancies from one to the next.

Conclusion

Hopefully this helps fill in some gaps when it comes to stock float and the impact it may have on your trading.

As with any piece of information in the markets, it is always wise to study the context and historical examples. Here at TradingSim.com, we can help with this as we have the ability to filter your search for simulated trades based on float size.

Hopefully you’ll take the time to develop your playbook and decide whether you like the price action and risk of low floats or high float stocks.

Best of luck!

Today we will dive deep into the significance of Pivot Points for day trading. When you finish reading this article, you will understand the 5 reasons why day traders love using them for entering and exiting positions, and how you can employ them as a part of your overall trading plan.

Feel free to watch our free tutorial on Pivot Points by in-house daytrading expert, Al Hill. Al is a 20-year trading veteran.

What Are Pivot Points

As a technical analysis indicator, a pivot point uses a previous period’s high, low, and close price for a specific period to define future support. In addition, other small calculations determine the “outside” points.

Together, these can determine the bounds of a stock price over different time periods giving traders an edge on the market.

7 Pivot Point Levels Explained

There are seven basic pivot levels on the chart:

Pivot Point Levels Explained

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

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

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

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

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

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

Support 3 (S3) – This is the third pivot level below the basic pivot, and the firs below S2
7 key Pivot Points explained

History of Pivot Points

Pivot points were originally used by floor traders on stock exchanges. They used the high, low, and close prices of the previous day to calculate a pivot point for the current trading day.

This calculation helped them notice important levels throughout the trading day. Pivot points have predictive qualities, so they are considered leading indicators to traders. 

The main pivot point is the most important price level for the day.  Essentially, it represents the balance between bullish and bearish forces.

In other words, when prices are above the pivot point, the stock market is considered bullish. If prices fall below the pivot point, the market is considered bearish. 

While pivot points were originally used by floor traders, they’re now used by many retail traders, especially in equities and forex. 

5 Reasons Why Day Traders Love Pivot Points

1) Unique for Day Trading

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

2) Short Time Frames

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

The best timeframes for the pivot point indicator are 1-minute, 2-minute, 5-minute, and 15-minute. Hence, its use for day traders.

3) High Accuracy

The pivot point indicator is one of the most accurate trading tools. The reason for this is that the indicator is used by many day traders, professional and retail alike.

This will allow you to trade with confidence and the flow of the market.

4) Rich Set of Data

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

5) Easy to Use

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

Pivot Point Calculation

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

When you add the seven pivot levels, you will see 7 parallel horizontal lines on the chart.

Pivot Points
Pivot Points

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

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

PP Calculation

Below is the formula [1] you should use to determine the PP level on your chart:

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

R1 R2 S1 S2 Pivot Levels Calculation

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

R1 = (2 x Pivot Point) – Prior Daily Low

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

S1 = (2 x Pivot Point) – Prior Daily High

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

R3 S3 Pivot Levels Calculation

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

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

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

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

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

Pivot Points 2
Pivot Points 2

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

  • Daily High = 14.39
  • Daily Low = 14.28
  • Close = 14.37

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

  • PP = 14.35
  • R1 = 14.42
  • R2 = 14.46
  • R3 = 14.53
  • S1 = 14.31
  • S2 = 14.24 (not visible)
  • S3 = 14.20 (not visible)

5 Different Kinds of Pivot Points

Here are five types of the most popular pivot points.

1. Standard pivot points

Standard pivot points are the most basic pivot points that day traders can calculate. First, traders start with a base pivot point. That’s the average of the high, low, and close from a previous period.

Below is the complete calculation for standard pivot points.

  • To calculate the Base Pivot Point:
    • (P) = (High + Low + Close)/3 calculate the First Support Level: Support 1 (S1) = (P x 2) – High
  • When calculating the Second Support Point:
    • Support 2 (S2) = P  –  (High  –  Low)
  • To calculate the First Resistance Level:
    • Resistance 1 (R1) = (P x 2) – Low
  • When calculating the Second Resistance Level:
    • Resistance 2 (R2) = P + (High  –  Low)

2. Fibonacci Pivot Points (The Most Popular)

The Fibonacci pivot point is perhaps the most popular among traders.

Fibonacci extensions, retracements, and projections are commonly used in forex, but are used with equities as well. The Fibonacci retracement levels are named after a mathematical sequence.

Ken Ribet is professor of mathematics at the University of California, Berkeley.  He points out that a Fibonacci number started out having a simple formula.

“A lot of things in mathematics and probably in the real world are governed by simple recursive rules, where each occurrence is governed by a simple formula in terms of the previous occurrence. And a Fibonacci number has the simplest possible formula, just the sum of the previous two.”

Ken Ribet

Katie Stockton is the founder and managing partner of the technical analysis firm Fairlead Strategies, LLC in Stamford, Connecticut. She has an interesting speech about the impact of the Fibonacci on gold. 

In the her speech, Stockton points out that Fibonacci levels can become so “widely followed level that…there becomes some self-fulfilling property to it.”

The Key Levels

On that token, the main Fibonacci levels that traders monitor are the 38.2% and the 61.8% retracement levels

Here is the calculation for the Fibonacci pivot point.

  • To calculate the Base Pivot Point:
    • Pivot Point (P) = (High + Low + Close)/3
  • When calculating the First Support Level:
    • Support 1 (S1) = P – {.382 * (High  –  Low)}
  • To calculate the Second Support Level:
    • Support 2 (S2) = P – {.618 * (High  –  Low)}
  • When calculating the First Resistance Level:
    • Resistance 1 (R1) = P + {.382 * (High  –  Low)}
  • To calculate the Second Resistance Level:
    • Resistance 2 (R2) = P + {.618 * (High  –  Low)}
  • When calculating the Third Resistance Level:
    • Resistance 3 (R3) = P + {1 * (High  –  Low)}

3. Woodie’s Pivot Point

Woodie’s pivot points place more weight on the closing price.  However, the calculation is similar to the standard pivots formula. 

The calculation is as follows:

R2 = PP + (High – Low)

R1 = (2 X PP) – Low

PP = (High + Low) + (2 x Closing Price) / 4

S1 = (2 X PP) – High

S2 = PP – (High + Low)

4. Camarilla Pivot Points

Another pivot point that traders use are Camarilla pivot points. Nick Scott invented the Camarilla pivot point in the 1980s.

It’s similar to the Woodie’s pivot point. However, there are four resistance levels and four support levels. In contrast, the Woodie pivot point has two Resistance levels and two Support levels. 

This is the calculation for the Camarilla pivot point:

R4 = Closing + ((High -Low) x 1.5000)

R3 = Closing + ((High -Low) x 1.2500)

R2 = Closing + ((High -Low) x 1.1666)

R1 = Closing + ((High -Low x 1.0833)

PP = (High + Low + Closing) / 3

S1 = Closing – ((High -Low) x 1.0833)

S2 = Closing – ((High -Low) x 1.1666)

S3 = Closing – ((High -Low) x 1.2500)

S4 = Closing – ((High-Low) x 1.5000)

5. Demark Pivot Points

Demark pivot points have a different relationship between the opening and closing prices.  Noted trader Tom Demark introduced this version. 

The Demark pivot point uses the number X to calculate the lower level line and the upper resistance level. It also emphasizes recent price action.  The calculation is as follows:

If Close > Open, then X = (2 x High) + Low + Close

If Close < Open, then X = High + (2 x Low) + Close

If Close = Open, then X = High + Low + (2 x Close)

Pivot Point = X/4

Resistance 1  = X/2 – Low

Support 1  = X/2 – High

How to Draw the Pivot Point Stock Market Indicator

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

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

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

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

Thankfully, these days many charting platforms have a built-in pivot point indicator. This means that the indicator could be automatically calculated and applied on your chart with only one click of the mouse.

This will definitely save you a ton of time.

How Pivot Points Work

Pivot points provide a standard support and resistance function [2] on the price chart.

When price action reaches a pivot level it could be:

  • Supported/Resisted
  • Extended (breakouts)

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

However, if the price action breaks through a pivot, then we should expect the action to continue in the direction of the breakout. This is called a pivot point breakout.

Day Trading with Pivot Points

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

1. Pivot Point Breakout Trading

To enter a pivot point breakout trade, you should open a position using a stop limit order when the price breaks through a pivot point level. These breakouts will mostly occur in the morning.

If the breakout is bearish, then you should initiate a short trade. If the breakout is bullish, then the trade should be long.

Always use a stop loss when trading pivot point breakouts.

A good place for your stop would be a top/bottom which is located somewhere before the breakout. This way your trade will always be secured against unexpected price moves.

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

How it works:

Pivot Point Breakout Strategy
Pivot Point Breakout Strategy

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

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

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

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

There is a long lower candlewick below R2, which looks like a good place for our stop loss order.

The price then begins hesitating above the R2 level. In the last hours of the trading session, BAC increases again and reaches R3 before the end of the session.

This is an exit signal and we close our trade.

2. Pivot Point Bounce Trading

This is another pivot point trading approach. Instead of buying breakouts, in this pivot point trading strategy we emphasize the examples when the price action bounces from the pivot levels.

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

Conversely, if the price is testing a pivot line from the lower side and bounces downwards, then you should short the security.

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

To be clear, pivot point bounce trades should be held at least until the price action reaches the next level on the chart.

How it works:

Pivot Point Bounce Strategy
Pivot Point Bounce Strategy

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

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

Immediately following, the price enters a bullish trend. Because of this, we stay with the trade until Ford touches the R3 level.

At this point, we close the trade.

However, the price bounces downwards from the R3 level after the second test. This is another pivot point bounce, so we short Ford security as stated in our strategy.

A stop loss order should be placed above the R3 level as shown on the chart.

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

5 Common Mistakes when Trading with Pivot Points

5 Common Mistakes when Trading with Pivot Points

1. Only looking at teh current days pivot points
2. Shorting stocks that gap over R4 pivot level
3. Trading low float stocks
4. Placing stops right at support and not slightly below
5. Greed - not exiting at PP level

Trades that Clear S4 or R4

These are the setups you really want to hone in on.

Think about it, why buy a stock that has resistance overhead. You can just as easily invest in a stock that has the wind to its back and you can ride the wave higher.

If there is no one looking to sell at a pivot point resistance level and there are no swing highs – that equals odds in your favor.

Even when things go wrong, you are still likely to come out even or at least have a fighting chance.

This going with the trend, of course, works just as well with shorts that clear S4 support.

Here is a real example of this pivot point trading strategy with Advanced Auto Parts (AAP).

Pivot Points and FIbonacci Levels
Pivot Points and Fibonacci Levels

Is there anything different on the chart that you weren’t expecting to see?

If you can’t point it out, it’s the Fibonacci levels in the upper left of the chart.

Fibonacci Levels

Once a stock has cleared all of the daily pivot points, the next thing you need to look for are the overhead Fibonacci extension levels and swing highs from previous moves.

These levels can be used as your target areas for your trades. You can then use these levels to calculate your risk-reward for each trade.

After purchasing the stock on the break of both the pre-market and intra-day high, it’s now about holding on and riding the trend up to the next Fibonacci level at around 261.8% (2.618) retracement.

At this point, you do not want to get greedy. You should always look to clean off your trade slightly below that level.

Try applying these techniques to your charts to identify the levels tracked by professional traders.

Pivot Points and High Float Stocks

Nowadays many gurus are talking about low float, momo stocks that can return big gain. There may be a place for trading those stocks if you are highly experienced and accustomed to volatility and high risk.

However, when it comes to Pivot Points, high float stocks are still in vogue [3].

The beautiful thing about higher float stocks is that these securities will adhere to and trade in and around pivot point levels in a predictable fashion.

If you are a trader just starting out with pivot points and want to get a handle on things, you will want to start with these large-cap stocks. Once you get a handle on things, you can always progress to the penny stocks.

How Pivot Points Help Build Consistency

Do you find yourself obsessing about when to exit your trades. Maybe your entries are solid but you always have sellers remorse.

You either regret getting out too early or holding on too long.

This is something many traders struggle with for years.

To this point, including pivot points in your trading could be like going from the dark and stepping into the light. The beauty of using pivot points is that you have three clear levels:

  1. where to enter the trade
  2. when to exit the trade
  3. how to place your stop

If you are the type of person that has trouble establishing these trading boundaries, pivot points can be a game-changer for you.

To further illustrate this point, check out the below charts

Entry, Exit, Stops
Entry, Exit, Stops
Entry, Exit, Stops - 2
Entry, Exit, Stops – 2

Do you see the beauty of the pivot points on the chart?

If you struggle with where to place your stops, entries and profit targets, pivot points take care of all of that for you.

You do not need an expensive trading system or AI program to accomplish this goal.

The other major point to reiterate is that you can quickly eyeball the risk and reward of each trade. Therefore over time, you will inevitably win more than you lose, and the winners will be larger.

This, my friend, is how you build wealth – one trade at a time.

Knowing When You are In a Losing Trade with Pivot Points

The other key point to note with pivot points is that you can quickly identify when you are in a losing trade.

Cannot Hold Pivot Level

If you are going long in a trade on a break of one of the resistance levels and the stock rolls over and retreats below this level – you are likely in a bad spot.

Cannot Hold the Level
Cannot Hold the Level

This should give you pause for concern when it doesn’t pan out the way you had planned.

This does not mean you need to run for the hills, but it does mean you need to give the right level of attention to price action at this critical point.

Time Lapse

The other point is to consider the amount of time that passes after you have entered your position.

If your position is sitting below or right around the breakout level 30 minutes after entering the trade – the stock is screaming warning signals.

Too Much Time
Too Much Time

Do not over think exiting bad trades. If you find yourself in a trade that is stalling or not holding a level, just exit the trade. Waiting around for something to happen can lead to more losses.

Beyond the money, the major issue you will face is the emotional turmoil of tacking such a loss. Remember, do not think – just close the trade!

Pivot Points from Prior Days

Most charting software will allow you to select whether you want to see the current day’s pivot points or if you would like to see pivot points from prior days.

At first glance, it’s easy to want to focus on the current day levels as it provides a clean chart pattern; however, prior days levels can trigger resistance on your chart.

R4 Level Cleared
R4 Level Cleared

In the above chart of NANO you can see that the R4 level was cleared. The next question you are likely to ask yourself is where will NANO stop?

Unfortunately, simply looking at the pivot points for one day gives you no way of making that determination.

Multiple Days of Pivot Point Levels

Now, let’s take another look at that example with more than one day’s worth of pivot point data.

Multiple Days of Pivot Points
Multiple Days of Pivot Points

As you can see in the chart, there are a number of resistance levels near our closing price on the day. Like any other indicator, there is no guarantee the price will stop on a dime and retreat.

The point of highlighting these additional resistance levels is to show you that you should be aware of the key levels in the market at play.

You will need to look at the level 2 or time and sales to see which level you need to focus on. This is the real challenge. If you immediately sell you might possibly forego big profits.

As an option, you could sell out at the next resistance level up. You might be leaving money on the table, but there is a greater risk of being greedy and looking for too much in the trade.

Placing Stops

Trading with pivot points allows you the ability to place clear stops on your chart. What you do not want to do is simply place your stops in line with the next level up or down.

You have to take more care when identifying your stop placement.

Remember, you are not the only one that is able to see pivot point levels.

Anyone with a charting application can know the R1, R2 and R3 levels.

So, how do you still protect your trade but without risking too much?

Beyond Key Psychological Price Levels

For starters, you could place your stop just beyond the levels. In other words, you will want to hide the stop behind logical price levels.

For example, if you have an S1 level at $19.65, then you will want to place your stop at $19.44. Why at this level? 50 cents is a big mental price level for stocks under $20 bucks.

Therefore, you will likely have a large number of stops right at the level. Therefore, if you place your stop slightly beyond this point, you might avoid being stopped out of the trade as a shake out.

Volume at Price

Another method is to look at the amount of volume at each price level. If you are long and are eyeing an S1 level to stop the selling pressure, you can also see how much volume has been traded at a certain price level.

The idea is to then place your stop slightly below or above these levels. Let’s look at a chart to illustrate this point.

Volume at Price - Pivot Points
Volume at Price – Pivot Points

In the above example, notice how the volume at the support level was light. This shows you that there was not a lot of selling pressure at this point and a rebound was likely to occur at this level.

Next, notice how the price barely breached the S3 level and then reversed higher. For this type of setup, you want to see the price hold support and then set your target at a resistance level that has accompanying volume.

After BLFS bounced, it ran up to the R1 resistance before consolidating which coincidentally had a decent amount of volume at the $19.15 price level.

If you were long, a stop directly below the S3 level would have kept you in the trade.

How to Practice with Pivot Points

Hopefully you now have an intimate knowledge about Pivot Points: their formulas, strategies, and usefulness for day traders.

As with any trading strategy, it takes time and practice to really gain the upper hand on the market. For this reason, there is no better way to practice Pivot Points than in a simulator.

We suggest trying at least a 20-trade sample of this strategy and analyzing those trades before putting real money to work.

External References

  1. Pivot Points. Wikipedia
  2. Aspray, Tom. (2012). The Most Powerful Pivot Point Level. Forbes
  3. Miller, Terin. (2019). What are Blue Chip Stocks and Why Should You Invest in Them?. thestreet.com

Bullish Two-candle Patterns

A proper education in price action wouldn’t be complete without understanding when, how, and where to go long on a stock. Especially using bullish candlestick patterns.

While we’ve discussed some of the history of candlesticks in other recent posts, and outlined the 8 most popular bearish candlestick patterns, today we’re going to talk about the following:

  1. The Hammer
  2. Bullish Engulfing Crack
  3. Bearish Engulfing Sandwich
  4. Morning Star
  5. Tweezer Bottom
  6. Piercing Line

In addition, be sure to use our Bullish Candlestick Pattern Cheat Sheet for your trading and training purposes as you read along!

Bullish Candlestick Patterns Cheat Sheat

Bullish Candlestick Patterns Explained

Let’s face it. Day trading is difficult. It can be fast and furious, especially for beginners.

Stocks are up one minute, down the next. You want to get in at the bottom, but you’re unsure of yourself. You want to short the top, but how do you know it will come back down?

Not knowing how to make sense of charts in the heat of the battle only adds to the difficulty of day trading.

Thankfully, a lot of the work has been done for us – four centuries ago, actually. It is simply up to you to put in the time to understand price action trading.

Therein lies the importance and functionality of bullish candlesticks and candlestick patterns.

In this post we’ll explain the most popular bullish candlestick patterns. For each pattern, we’ll cover:

  1. What these patterns look like
  2. How to set entries and risk for each
  3. What are the criteria for confirming them
  4. What story do they tell
  5. Some common mistakes when interpreting them
  6. A few strategies for each

1. The Hammer

Hammer Candle Pattern

If you are familiar with the bearish “Hanging Man”, you’ll notice that the Hammer looks very similar. But as the saying goes, context is everything. Much like the Hanging Man, the Hammer is a bullish candlestick reversal candle.

The context is a steady or oversold downtrend. This creates the plot for the story that builds within the next few candles. As price declines more rapidly, we anticipate the eventual bounce.

But how do we anticipate without getting caught in more of the selloff?

This is where the Hammer comes into play. It offers us evidence that selling pressure is diminishing or being absorbed. In addition, if the volume signature associated with the Hammer candle is significant, it adds even more confidence to our thesis.

We are looking to capitalize on shorts who are taking their profits and covering, along with dip buyers who are taking a chance here on the oversold conditions. The expectation? A rally.

Ideally, you identify the hammer candle, take a position long on the break to the upside of the candle, and set a risk in the body of the Hammer, or at the lows.

Bullish Hammer Example

Let’s look at a real-life example with PLUG. Right off the open, PLUG retests the lows from the pre-market. Once it reaches those levels, volume increases slightly as it reverse on the 5-minute chart seen here.

Real example of a bullish Hammer candlestick pattern
PLUG reversing in the first 30mins of trading with a Hammer candle pattern

Visibly, there is a “shelf” forming near the lows of the hammer candle’s body. The bar to the left and right also close and open in that price “shelf” area.

The second 5-minue chart opens with a bit of weakness, then rallies strongly above the Hammer candle.

This is your signal to go long. The break of the Hammer candle body.

Set the stop below the close of this bullish 5-minute candle.

2. Bullish Engulfing Crack

Bullish Engulfing Candle Pattern

Imagine the surprise if you are a short seller when a stock appears to confirm your downward thesis, only to completely reverse on you. Such is the case with the Bullish Engulfing Crack.

The down trend appears to be continuing. Shorts are nice and comfortable. Then suddenly we get a complete retracement of the preceding bearish candle.

How do we explain this?

Well, you can imagine that shorts will begin covering as they witness the rising price of the stock. This adds fuel to the buying pressure already present.

The result is a bullish candlestick pattern that engulfs the efforts of the bears. For the long-biased trader, the opportunity is perfect.

As with any setup, we are looking for evidence to build our confidence in either direction. The fact that bears were completely overcome in this single bar, is evidence enough for us.

You go long at the break of the prior bar, and set a stop at the lows.

Bullish Engulfing Examples

Let’s use PLUG as another example, on the same day as the prior example.

This time, later in the day, PLUG has a sharp selloff. After the steep decline, price reaches the support level from the prior Hammer candle mentioned above. This time, we get two bullish reversal candles that completely engulf the prior bearish candles.

PLUG with a bullish engulfing candlestick pattern
PLUG with a Bullish Engulfing Crack reversal pattern mid-day

Again, notice that the context is everything here. We are in an oversold condition with climactic selling pressure. Analyzing the volume at the lows, we can see that support is coming in as weak hands cough up their shares.

Let’s look at another example.

Here is a snapshot of TLRY, which offered us a beautiful Opening Range Breakout (ORB) opportunity right out of the gate on this particular day:

TLRY Opening Range Breakout and Engulfing Bullish candle example
TLRY with the ORB off the open using a Bullish Engulfing Crack pattern

After the selloff, buyers come in and overcome the prior selling pressure from the pre-market, engulfing the bears before moving higher.

To be safe, you would enter long on the break of the red candle, setting your risk at the lows, or in the body of the first green candle.

There are some advanced traders who are more aggressive and may take their positions early if they sense the reversal is imminent.

3. Bearish Engulfing Sandwich

Do not be confused. Just because the name says “bearish” doesn’t mean this is a bearish pattern. Far from it, actually. It is often referred to as the Stick Sandwich

The name is derived from the sandwiching of a “bearish engulfing” candle by two bullish candles. Thus, it is a bullish candlestick pattern in this context.

Very similar to the above example of the Bullish Engulfing Crack, this pattern simply takes a bit longer to “get going,” so-to-speak. An extra bar, essentially.

Again, the idea here is to think about who is getting trapped. In this case, the bears think that they have won the battle.

The assumption is that the trend has reversed and we are now headed down. After all, the Bearish Engulfing candle gives us that confidence, right?

Well, if you are on the short side, that is the hope. However, stocks don’t always do what we want them to. We have to react to what the market gives us, not what we think should happen.

In this case, the Bearish Engulfing Crack is consumed by two bullish candles that resolve to the upside. If you are short, hopefully you have respected your stop loss. If you are long-biased, you have a great opportunity here.

Bearish Engulfing Sandwich Example

PLTR offers a great visual of this in real-time after the open with a 5-minute candle chart.

PLTR Bearish Engulfing Sandwich
PLTR with a Bearish Engulfing Sandwich at the opening bell

In this case, the right side of the sandwich acts very similar to a Bullish Engulfing Crack candlestick pattern. For all intents and purposes, you should treat your entries and risk similarly to that pattern.

4. The Morning Star

Morning Doji Star and Morning Star Candlestick patterns


Technically speaking, the morning star should gap down. This is difficult to find on an intraday basis. For that reason we suffice for solid doji candle reversal pattern.

The initial candle should be long-bodied and bearish. The middle candle is short-bodied. The reversal candle is another long-bodied bullish candle (typically a gap up). The close of this bullish long-bodied candle should close above the midpoint of the 1st candle.

What is the story behind this pattern?

The plot is typical: oversold conditions (the gap down). But the body of the middle candle tells us that there is either indecision, or lack of follow through to the downside.

The result: without further selling pressure, the candle rallies to higher prices as sellers cover and buyers take advantage of discounted stock pricing.

Morning Stars can also appear as Morning Doji Stars. They look almost identical except for the body of the middle candle. The story of buyers and sellers remains the same.

Bullish Morning Star Example

You can see this in action with the PTON example below. A long bodied bearish candle, followed by a narrow bodied indecision candle. The bulls take control on the next candle and the rest is history.

PTON Morning Star Example
PTON displaying a Morning Star reversal pattern

It is worthwhile to note the volume in the first candle. We cannot assume that it is completely bearish. As you can see, there is some buying pressure at the lows. This gives us confidence as the doji candle forms.

Consequently, as price moves away from the lows in the green candle; it does so on low volume.

How can we explain that?

It took less effort for the price to rise. Therefore, we can assume that there is “ease of movement” to the upside. This should give us confidence in our long position.

For more examples of the Morning Star and other doji candles, visit our tutorial.

5. Tweezer Bottom

Tweezer Bottom Candlestick Pattern

The Tweezer Bottom bullish candlestick pattern consists of two candles– usually with small bodies. The first should be a red/bearish candle, the second a green/bullish candle.

The bodies of the candles are typically very close with regard to their closing and opening prices, or wicks. This produces a “visual” of a pair of tweezers.

Thematically, the Tweezer Bottom alerts the chart reader to the fact that price is trying to be pushed lower, but to no avail. The two small-bodied candles represent the presence of demand in the market.

The volume signature will likely appear elevated as supply is being absorbed, keeping the candles small in the presence of selling pressure.

Entry should be taken as price breaks higher from the second candle. Stops can be set at the lows.

Bullish Tweezer Bottom Example

BNGO displays a beautiful Tweezer Bottom candlestick pattern for us here on the 5-minute chart. Pay close attention to the narrow body of the two candles, their symmetry, and the red to green close.

BNGO with a Tweezer Bottom reversal pattern
BNGO with a Tweezer Bottom reversal pattern

The volume is of particular interest on this first red doji. Notice how elevated it is here. Given the context, we can interpret this as absorption of supply.

The second candle (green) then diminishes rapidly in volume. Thus, our thesis is confirmed that selling has been absorbed and exhausted.

And what happens in the absence of selling pressure?

The price of the stock rises.

6. Piercing Line

Piercing Line Candle Pattern

The Piercing Line can look very similar to a Bullish Engulfing pattern. The exception is that the Piercing Line doesn’t completely engulf the prior candle.

It is still considered a bullish candlestick pattern because it overcomes the downward momentum to close at least midway into the body of the previous candle.

Hence the name: it pierces the lower line, but inevitably retracts.

The entry is on the next candle, confirming the uptrend, with a stop at the lows

Bullish Piercing Line Example

Piercing Lines can offer a great risk to reward at the lows of support. They can even act like springs in trading ranges.

This 5-minute chart of BB shows a combination of an Opening Range Breakout (ORB) with a Piercing Line. Together, it is a combination that can really add confidence to our entry.

BB Piercing Line and Opening Range Breakout Strategy
BB with an ORB and Piercing Line pattern

As with any setup, the more evidence we have to confirm our bias and plan, the better. For this reason, it is always good to ask yourself:

  • Is the trend in my favor?
  • Is it time for a reversal?
  • Does volume confirm my thesis?
  • Is the stock at an area of support or resistance?
  • Do multiple timeframes align with my idea?
  • What will I risk to, and where should I target for profit taking?

Your criteria may be more involved, but the idea is the same. Candlestick charts are just a last line of confirmation for a overall plan of attack.

Think of them like an extra indicator.

Conclusion

You may be asking yourself, “How do I recognize these patterns in real time?”

That’s a great question.

The answer lies in practice, practice, practice. Trading Psychologist Brett Steenbarger, Ph.D., believes that this is exactly “how expertise is created.” According to him, if we turn trading into a series of performance drills, it can increase our chances of consistency.[efn_note]Steenbarger, B. (2014, November 14). The One Trading Drill That Can Most Improve Your Trading Performance. TraderFeed. https://traderfeed.blogspot.com/2014/11/the-one-trading-drill-that-can-most.html.[/efn_note]

You may be thinking, well I don’t have the luxury of 10,000 hours of practice. And that may be true. You have a job, kids, obligations, whatever the case may be.

But as Steenbarger notes, if you can drill down the process to specific repeatable patterns, you can achieve mastery much faster.

There is no better way to do this than training your “chart eye” with a stock simulator.

How does this work?

Build Your Mental Repertoire

Imagine being able to replay three years worth of stock trading days.

For each “training” session, you decide to focus on a single candlestick pattern. As you click through the stock charts for any random day, you look for examples of that one pattern. Over time you save a repertoire, mentally (and digitally if you can take screen shots).

Once you feel you can recognize this pattern, you practice it in replay mode. You spot the pattern, you make the trade. You make notes on what confirmed the pattern, what was the context, what you did right and what you did wrong.

Then, you move on to the next pattern.

Repeat.

This is what we call deliberate practice. And it pays off in the end.

Want to learn more about Candlestick Charts? Check out our free resources here.