The SimCast Episode 4 — Roman Bogomazov on Wyckoff Basics
Tag: swing trading
In Part 2 of our series with Roman Bogomazov, we jumped right into the basics of the Wyckoff Methodology. Roman has studied all the titans of technical analysis, from Dow to Gann, but Wyckoff is by far his favorite.
If you’re unfamiliar with the tenets of the Wyckoff Methodology, this episode dives into what makes it such a foundational, scalable technique to discern the markets. We discuss the history of Wyckoff and his interactions with Jesse Livermore and others.
We also dive into the schematics of Wyckoff trading ranges and how they give us a framework for almost all price movements. Later, Roman gives us his most recent analysis with Bitcoin and a few trades he’s made, both day and swing.
Episode 4: Wyckoff Basics Chapters and Topics
Intro
Who was Wyckoff — 1:38
Composite Operator — 9:50
Wyckoff Framework — 16:00
Bitcoin Schematics — 26:40
Roman’s Trades — 39:45
Outro 1:05:55
Pay close attention to the way in which Roman dissects his own trades. We think you’ll not only be amazed, but inspired by the way he applies Wyckoff’s principles of technical analysis. Our hope is that this will encourage you on your path to mastery.
Be sure to watch our Part 1 with Roman, if you haven’t already watched that interview.
The 50-day moving average indicator is one of the most important and commonly used tools in stock trading. Considered an “intermediate term” indicator, it is a multiple of the longer-term 100 and 200 moving averages. It’s use is ubiquitous on any time frame.
Therefore it goes without saying we need to unpack the relevance of this average and how you can use it when trading.
To this point, we will give a brief overview, elaborate on the six tips, and then show some real trading examples using the indicator. Lastly, we will show you where the indicator can fail you, so you are prepared for when things do not go as planned.
Why Use a Moving Average?
The moving average is a trading indicator used to smooth the price action on the chart. The moving average indicator takes into account a certain number of periods when calculating its value.
These periods can be adjusted, which also modifies the appearance of the line on the chart. The more periods it takes into consideration, the smoother the line.
Let’s say we want to calculate the 5-period moving average for the following values:
3.00 4.00 8.00 10.00 12.00
The 5-period simple moving average would equal:
(3+4+8+10+12)/5 = 7.4
For each new period, the formula accounts for the additional data point.
Therefore, the moving average is a lagging indicator. [1] The reason for this is that the moving average needs a given number of data points based on prior periods to print a value.
5-Day SMA
The purple curved line on the chart is a 5-period simple moving average. This line is not smooth at all. This is because five periods is such a small time frame and will result in many trade signals; more signals than most would care to track.
Now that we have provided a visual of a moving average let’s dig into the 50-day to see a longer time frame.
What is a 50-Day Moving Average?
The 50-day moving average indicator is one of the most common SMAs in stock trading.
This makes trade signals around this line pretty reliable based on the number of eyes monitoring the trading activity at this level. Not only will retail traders be watching this indicator, but professionals and institutions use it as wel.
Below, you will see a 50-day moving average on the chart.
50-Day Moving Average
As you can see, the 50-day SMA is much smoother than the 5-period moving average. This will naturally result in less trading signals and an increased significance on breaches of the average. [2]
6 Tips for How to Use the 50-Day Moving Average
Now that we have discussed the structure of the 50-day moving average, let’s dive into the six essential tips for how to use the indicator.
Stock price above the 50-day moving average is usually considered bullish.
Stock price below the 50-day moving average is usually considered bearish.
If the price meets the 50 day SMA as support and bounces upwards, consider a long entry.
Stock price meets the 50-day SMA as resistance and bounces downwards, consider a short entry.
If the price breaks the 50-day SMA downwards, you should switch your opinion to bearish.
If the price breaks the 50-day SMA upward, you should switch your opinion to bullish.
These six rules are crucial for understanding the character of the 50-day simple moving average indicator. They may sound like they are all saying the same thing, but they’re not.
Notice how we never said that you should just buy and sell based on the 50 moving average. Trading doesn’t require an advanced degree, but we are here to tell you that buying and selling solely on the 50 is not a strategy for success.
However, having a base understanding of these six principles will help you better navigate how to trade with the average. Next, we will explore these strategies and areas where the indicator can fail you if not used properly.
Every 50-day moving average trade should be protected with a stop-loss order. Nothing is sure in stock trading. The 50-day moving average strategy is no different. In the long-term, we expect the price action to continue in the direction of the breakout. However, there will be cases when the price action will surprise us.
The price action could sometimes rapidly shoot in the opposite direction with a big candle. This could happen due to the release of some unexpected report.
The ideal place for our stop loss is beyond a price edge created prior to the signal we use to enter the trade.
If the price breaks the 50 SMA upwards, we need to go long, placing a stop below a bottom prior to the breakout. The opposite is true for bearish trades.
If the price breaks the 50 SMA downwards, we need to short the stock placing a stop below the bottom prior to the breakout.
50-Day Moving Average Profit Targets
The rule to close 50-day moving average trades is very simple. Hold your trades until the price action breaks your 50-day moving average in the direction opposite to your trade.
If you are long, you close the trade when the price breaks the 50-day SMA downwards. If you are short, you close the trade when the price breaks the 50-day SMA upwards.
Trading Example with the 50-Day Moving Average
Now let’s approach a real 50-day moving average trading example:
50 Day Moving Average Trading Example
Above you see the 50-day moving average chart of Bank of America. The blue curved line on the graph is the 50-day SMA.
The action on the chart comes at the moment when the price breaks the 50-period SMA downwards. The breakout is shown in the red circle on the image. See that the price first attempts a couple of times to break the SMA downwards.
However, we need to wait until the price action breaks the level in order to get a valid bearish signal. Therefore, we short the stock when we see a sharp decrease through the last two price bottoms below the 50-day SMA.
Stop Loss Order
We place a stop-loss order above the last big top on the chart. The right location of your stop-loss order is shown with the red horizontal line on the chart.
See that the price creates a very sharp decrease afterward and enters a bearish trend. We need to stay in the trade as long as the price is located below the 50-period SMA.
The blue channel on the chart displays when the price breaks the 50-day SMA and we close the trade.
However, this is also a long signal and we enter the market with a new trade, which is bullish. We place a stop-loss order below the last major bottom on the chart as shown on the image.
The price then returns and tests the SMA as support. A bullish bounce appears afterward, which resumes our bullish hopes. The price experiences a few bumps along the way, but the 50 SMA sustains the price action.
The price then creates a top, which is lower than the previous on the chart (pink line). Then we see a breakout through the 50-day moving average. Therefore, we close the trade on the assumption that the price action will reverse and this is exactly what happens.
This case is an example of two 50 day moving average trades, which differ in terms of their profitability.
The first trade is short and it brings a solid profit of 15.60% for three-and-a-half months. However, the second trade brings only 0.22% for about three months.
Your trading results will vary. This is a cost of doing business and is simply unavoidable in the market.
The key is knowing that your system will win in the long run and sticking to your convictions.
50-Day Moving Average vs. 200-Day Moving Average
Another important moving average is the 200-day moving average. We mention this tool because it creates a very strong signal when used in conjunction with the 50-day moving average.
The golden cross is a signal created by the 50-day moving average crossing through 200-day moving average to the upside [3].
A good golden cross trading strategy is to open trades in the direction of the golden cross and to hold them until a break in the opposite direction.
Golden Cross – Trading Example
Above is the daily chart of Google. The blue line on the chart is a 50-day moving average. The red line on the chart is the 200-day moving average.
In the green circles, we have highlighted golden crosses.
The first golden cross is bullish and we use it to buy Google.
We place a stop-loss order below the bottom prior to the cross. The trade needs to be held until the two moving averages create a bearish sell signal.
This long trade with Google generates a profit of 22.28% for one year.
50-Period Moving Average on Intraday Charts
The one area you may not think of the 50-day moving average indicator is on intraday charts. This is because when you think of day trading, you think of fast-paced trades going in and out of stocks all day.
And technically, it would no longer be called the 50-Day Moving Average. It would simply be called the 50-period SMA.
So, where does the 50-period moving average indicator come into play? Well, the 50 can be used as a larger time frame to keep an eye on for support and or resistance intraday.
50 Moving Average Intraday
Above is a 5-minute chart of Apple. Whether you know it or not, the 50-period average is a big deal as you can see by the price action on the chart.
You can see that even during pre-market trading price respected the 50-period moving average. After crossing lower, Apple respected the average all the way into late-day trading.
Where the 50-Day Moving Average is Likely to Fail
Breaking the Average
The 50 is a major trend following average to use on the chart. To this point, what you do not want to do is overreact if a stock breaks the average on one or two candlesticks. We like to call this “porosity”.
It’s like a cow leaning through the fence to see if the grass is greener on the other side, only to return back to the same pasture.
This is often a rookie mistake to make as the stock will likely recover and continue in the direction of the primary trend.
Minor Breach of the Average
Do you see how the traders “in the know” might play these silly games with you? A way to handle these situations denoted by the circles on the chart is to give a certain amount of wiggle room where you will allow the stock to go beyond the moving average and you stick to your guns.
Many traders will continue to hold as long as a stock does not close beyond the average. This is also great advice. However, over time you will notice that stocks will close beyond the average literally one or two candlesticks, then return.
The real kicker is that after this close beyond the average and subsequent continuation of the primary trend – this is where the lion share of the profits are made in the trade. Think of it like a shake out.
Day Trading Breakouts in the Morning
If you are trading volatile stocks in the morning, you have no business trading with a moving average above 20, to be honest. The price action is so fast that you’ll want to use a lower time frame and moving average to catch the right moves.
While you can use a 50sma or higher to gauge the strength of the market, you should not use the average to make buy and sell decisions.
This becomes overly apparent when you trade extremely volatile stocks as the 50-period average will likely push your risk parameter beyond any acceptable level.
50-period moving average and volatility
As you can see, giving this much space on a trade is not a good idea. Do yourself a favor and do not try and force a longer-term average on a short-term volatile stock. Again, the 50 moving average can work as long as you use the indicator on stocks with less volatility.
It is better suited to trending stocks.
Conclusion
The moving average is an indicator which smoothes the price action on the chart by averaging previous periods.
The 50-day moving average is one of the most commonly used indicators in stock trading.
It averages 50 periods of a stock on any time frame.
Many investors and traders look at the 50-day moving average.
Therefore, the 50-day SMA is a psychological level, which can act as a support and resistance.
To trade with the 50-day SMA, you should remember these rules:
When the price breaks the 50-period SMA, you should trade in the direction of the breakout.
You should place a stop-loss order beyond a bigger top/bottom before the breakout.
You should stay in the trade until the price action breaks the 50-day moving average in the opposite direction.
The 50 day SMA combines well with the 200 day SMA:
The crossover of the 50-day moving average vs. 200-day moving average is called a golden cross.
When you see a golden cross, you should look to get long.
You should place a stop loss beyond a bigger top/bottom prior to the cross.
You should hold the trade until the 50-period SMA is broken to the downside.
Additional Resources
Check out this great case study on both the 50-day and 200-day moving averages on the S&P 500 if you want to learn more. The study covers a longer-term view of the indicator but it is still a great read and will provide some insights into your trading activity.
In addition, you can practice trading the strategies listed in this article by using Tradingsim. You can apply the 50-day moving average to both stocks and futures to get a feel for what works for you.
Better yet, we’ve added a new scan filter that allows you to filter stocks to within a certain percentage of the 10, 20, 50 or 200 moving averages.
Take a look:
Scan filter for 50 moving average
Using this great tool can help you narrow your results and scan specifically for stocks nearing their 50-day moving average. This way, you can practice your edge and analyze your trades more efficiently.
Be sure to check out our post on the 20 Moving Average Pullback Strategy, it really complements the 50ma and might help you discover an edge. Also, How to Catch Trending Stocks builds on the 50 moving average and offers even more examples of great trades.
We have discussed a number of candlestick patterns on the Tradingsim blog. If you haven’t checked out our other resources be sure to do so, you’ll find a really nice candlestick pattern cheat sheet to help with your training. But for today, we’ll focus on the long and short side of the Abandoned Baby candlestick pattern.
In this post, you will learn how to spot both bearish and bullish abandoned baby patterns, how to trade them, and some caveats to watch out for.
If you would like to watch a video tutorial on how to trade candlestick patterns, subscribe to our Youtube channel. Our trading expert Aiman Almansoori has put together a great webinar on the topic.
Abandoned Baby Definition
The abandoned baby candlestick pattern is a three bar reversal pattern. It is similar to the morning and evening star formations and is a very reliable reversal signal when it occurs after a sharp rise or drop.
While it is very similar to the morning star and evening star, it has one key difference. The real bodies and shadows cannot overlap from bar 1 to 2 and 2 to 3. This makes this pattern very unique, rare, and reliable at the same time.
Structure
The first candlestick is in the direction of the primary trend
The second candle is a doji which gaps in the direction of the primary trend, exhibiting no overlap with the real body or shadow of the previous candle
The third candle is in the opposite direction of the first day and gaps in the opposite direction of the doji.
When you think of the psychology of a candlestick pattern, it is best to think about the “story” between the bulls and bears. This can really help your confidence in knowing when to take the trade and understanding the context behind the pattern.
For example, during rallies off the bottom of an extended downtrend, a abandoned baby bottom can be very rapid as short sellers will be forced to cover fast.
Conversely, during declines after extended uptrends, the abandoned baby top can be just as fast as many longs sell their positions, aiming to keep most of their profits.
To that point, the abandoned baby represents a crossroads, or “indecision” at the top or bottom of a trend reversal. Within the candle is usually a lot of activity between retail buyers and institutional sellers, or vice versa. The result is typically a large amount of volume.
That volume tells us that a lot of effort went into the candle, but with little result, signaling the reversal.
Chart Example
Abandoned Baby
In the above candlestick charting example, notice how the abandoned baby top comes in after a strong uptrend. This leaves the bulls trapped at the top of the formation with very little time to exit their winning positions, especially if they were buying at the top.
To the right of this formation is the abandoned baby bottom. This is the exact opposite of the abandoned baby top and is often the sight of a sharp short squeeze.
Congratulations! You are now familiar with the structure and characteristics of the abandoned baby candlestick pattern. Now it is time to apply trading techniques to the strategy with real market examples.
Trading the Abandoned Baby Candlestick Pattern
Bullish Example #1
We will now review a couple of chart examples, which show the price behavior after an abandoned baby candlestick pattern.
Bullish Abandoned Baby – Trend Increase
This is the 5-minute chart of Bank of America from June 2, 2015.
There is a clear downtrend, followed by an abandoned baby candlestick pattern, which is shown in the green rectangle.
After we identified the pattern, a strong uptrend emerges and BAC’s stock price increases a total of $0.25 per share. This may not sound like much of an increase, but Bank of America is a Titanic of a stock.
With larger cap stocks, what you are giving up in profits you don’t have to worry about in terms of risk.
Bullish Example #2
Let’s now review another example of this unique candlestick pattern.
Abandoned Baby – Trend Decline
This is the 5-minute chart of Netflix from May 5, 2015.
In the chart above, we see a bearish trend followed by an abandoned baby reversal candle pattern. You can see the formation in the green rectangle.
This time, the abandoned baby is a doji candle, which gives additional reliability to the pattern. The next candle opens with a gap from the abandoned baby, which confirms the pattern.
The followed bullish move is so strong, that even the next candle after the confirmed pattern opens with a bullish gap.
This trend reversal leads to a $3.42 price increase in Netflix.
Bearish Abandoned Baby Example
The lesson wouldn’t be complete without seeing this pattern play out bearishly.
Before the Covid Crash of 2020, the QQQ etf produced a beautiful climactic abandoned baby pattern before crashing for the next 4 weeks.
QQQ bearish abandoned baby chart
As you can see, this topping pattern occurred at the very top of an extended bull run, signaling the reversal. Perhaps the astute trader could have foreseen the crash if he’d known about this pattern?
Trading the Abandoned Baby
The good thing about the abandoned baby candlestick pattern is that if you spot it on the chart, you can trade it right away!
It is not necessary to use additional trading indicators to confirm the signal, because the pattern is pretty reliable.
This doesn’t mean that the pattern will work 100% of the time, so don’t go overboard!
Stop Loss Orders
When you trade the pattern you should always protect your trade with a stop loss order. The proper location of your stop should be or below the middle candle of the formation, depending on the direction of your trade.
Also, feel free to put the stop as tight as possible.
Profit Targets
You can always use a moving average or an oscillator to exit a trade. The other option is to rely on basic price action rules to close your profitable position.
In order to understand how this works, we’ll show you how to implement a few techniques when trading the pattern:
Abandoned Baby – Stop Loss
Above is the 5-minute chart of Electronic Arts from Oct 20, 2015.
After a strong price decrease, we see a candle which gaps down from the bearish trend (green rectangle). The next candle gaps up and we confirm a bullish abandoned baby.
We go long when the last candle of the pattern closes the period. Lastly, we put a stop loss order right below the lower wick of the abandoned candle as shown on the image.
EA’s stock price begins an impulse move higher and we start following the price action. Notice that the first candle from the pattern and the previous candle form a resistance area (blue horizontal line).
On its way up, EA breaks this resistance level. The price starts consolidating and the previous resistance begins acting as support (See the black arrows on the chart for reference).
The price starts increasing afterwards and breaks the high of this congestion area.
Notice that the two low wicks during the price hesitation help us build a bullish trend line – starting from the abandoned candle. The EA price tests the trend a couple more times without breaking it.
For this reason, we stay with our long position until the market closes.
In this trade, we generated a profit of $0.74 (74 cents).
Money Management when trading the Abandoned Baby Pattern
The abandoned baby candlestick pattern is one of the most reliable patterns.
As shown above, you can place tight stop loss orders when trading abandoned babies. This is because even a small contrary move will indicate that the pattern is false.
In the trade above, our stop loss was 0.42% from our entry price. Therefore, if you were to invest $40,000 of your buying power, a false pattern will lead to a maximum loss of $168.
However, the trade was successful and lead to a profit of 1.1% which translates to $440.
Managing with Moving Averages
Let’s now review another abandoned baby trade. This time though, we will rely on an exponential moving average to exit our trade.
Abandoned Baby – Profit Targets
Above you see the 5-minute chart of JP Morgan Chase & Co. from Nov 3, 2015. I have placed a 30-period exponential moving average on the chart, which is the blue curved line.
The chart begins with a price decrease, marked with the red arrow. At the end of the price decrease, we see a candle gapping down. This should be a signal for us that a potential abandoned baby candlestick pattern might occur on the chart.
Entry
The next candle gaps up and we confirm the pattern with its closing – we go long!
Let’s say we have a bankroll of $25,000. Since we have a day trading account we have a maximum buying power of $100,000.
Since the bullish and the bearish abandoned baby candlestick patterns are considered very reliable, we will invest 20% of our buying power. So, we invest $20,000 in a long trade based on an abandoned baby signal.
Stop Loss
Our stop loss is set below the lower candle wick of the abandoned candle. This is shown on the image above. In this trade, the stop is -0.45% from the entry price. This way, if our trade is unsuccessful, we will lose $90 (20,000 x 0.0045).
Abandoned Baby – Profit Targets
After the confirmation of the pattern, JPM stock begins increasing. JPM reaches $65.86 and starts a corrective move. Notice that the price decreases, but it finds support at our 30-period EMA.
JPM price expands and breaks the $65.86 top and shoots to $66.06. Then we see a new decrease to the 30-period EMA. The price starts crawling on the exponential moving average afterwards; however, the level sustains the pressure of the price and we notice a new bounce from the 30-period EMA.
Exit
Although the price makes more of a sideways move rather than an increase, we see a new top at $66.10. The followed price action is in a bearish direction. The JPM stock price breaks the 30-period EMA, which is our signal to exit the trade.
In this trade, we managed to catch a .71% increase in JPM. This breaks down to a profit of $142 while risking $90. This gives us a 1: 1.58 risk-to-return ratio. Although this doesn’t look very impressive, $142 dollars here or there can add up to a mortgage payment at the end of the month.
Although the example above only uses 20% of your buying power, you can always invest more if you have really tight stops.
In comparison to other patterns, where you sometimes risk 2%, the abandoned baby candlestick pattern does not require you to have wide stops.
Just remember: you must use a stop loss order when trading abandoned babies. If you don’t place a stop, an unlucky trade might lead to tremendous losses, since you are leveraging your capital.
Recap
The abandoned baby is a three candle formation.
It resembles the evening and the morning star.
The doji candle needs to gap from the two candles which sandwich the pattern.
There should be no overlaps between the middle candle and the two candles surrounding it.
The abandoned baby is one of the rarest candle patterns.
A stop loss order should always be used when trading the abandoned baby candlestick pattern.
Stop loss proper location is at the end of the lower candlewick of the abandoned candle.
You can invest more than you usually invest in your deals when trading abandoned baby candle figures. There are two basic reasons for this:
The abandoned baby is a pattern with a very high success rate.
The stop loss when trading abandoned baby figures is usually placed very tightly. In some cases, you will risk less than 0.5% of your investment.
For this reason, there is no better way to practice than a stock simulator.
Be sure to ask yourself questions along the way, like these:
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?
In time, you’ll find yourself confident in the pattern. Good luck!
Trading Strategy
Everybody wants to be a successful trader. While there are many strategies to become a successful trader, there are 10 pivotal ways that traders can have to build a winning portfolio. This TradingSim article will give traders the top 10 strategies on how to develop a solid trading strategy, highlight 5 specific investing strategies, and will assist investors who want to choose the best stocks or other investment instruments.
Why do investors need a trading strategy?
Investors need a trading strategy to avoid emotional investments. Trading strategies are necessary to avoid irrational actions during extreme swings in the stock market. It’s especially important to have a framework for trading during a bear market. Legendary investor Warren Buffett noted that investors have to remain calm to pick the best trading plan.
“Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well, ” said Buffett.
Buffett added that an emotionless trading strategy is crucial.
” You need a stable personality. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd because this is not a business where you take polls. It’s a business where you think,” added Buffett.
Having a trading strategy with predetermined rules that help investors make decisions help investors make the best choices. Here are 10 steps that will help formulate an effective trading plan.
1. Determine a trading goal.
When formulating an investment strategy, an investor should know what they want at the end of investing before they begin. If an investor has a set goal, it will give the investor more discipline to stick to them. For example, an investor may also want to set a short-term goal of buying a certain amount of shares of an in-demand stock, like Amazon(NYSE:AMZN). An investor may also set a long-term goal of increasing their portfolio by 15% over a year. A trading strategy will help an investor focus and reach that goal sooner.
2. Test a trading strategy
Once an investor has a plan, they can test it out. Backtesting a trading strategy could help test out the framework for a testing strategy. Using a simulator like TradingSim can help investors try out trading strategies before risking real capital.
Backtesting a trading strategy by analyzing the Dow Jones
3. Set aside a certain amount of time for a strategy
In addition to setting a realistic goal for trading, an investor must decide how much time they can dedicate to an investment plan. If an investor only has limited time to invest in the day, the quick action of day trading may be the best option. If investors want to take a long-term strategy, they can place trades for a longer period of time in swing trading. Investors can also determine a set time to invest each day to keep track of their investment goals.
The other key thing is making sure you spend the time to learn the basics of how to invest in the stock market with affordable introductory courses at a low price point. There is no point in spending a ton of money on anything related to the market until you feel this is something you are interested in over the long haul.
4. Determine which markets to trade.
Once a trader determines how much time to devote to trading, they should choose which market they will choose for investment. Traders may want to just focus on US stocks on the New York Stock Exchange or NASDAQ. For traders who want to explore other options, they can trade foreign exchange currency (forex) or futures.
5. Assess risk tolerance.
An investor must determine how much money they are willing to risk when placing a trade. Ideally, an investor shouldn’t risk any more than 5% of available capital.
Investors can determine a risk-reward ratio as well. A risk-reward ratio can be 1:3 if an investor has a $300 maximum potentially to lose and $600 maximum potentially to gain in investments.
Brandon Pizzurro, portfolio manager of public markets at GuideStone Capital Management in Dallas, noted that risk assessment is crucial, especially in this volatile stock market.
“Investing, in general, requires an assessment of one’s risk tolerance, and never is that risk tolerance tested more than in the midst of a bear market,” said Pizzurro.
6. Always have a stop-loss.
Traders should only risk what they can afford to lose. Instituting a stop loss will help investors stay withing their investing limits, especially in forex. A stop-order loss is a deal to sell a stock once it reaches a certain price. By setting a stop-loss, investors can limit their exposure to risk.
For example, a trader could be trading the euro and dollar at 1.1233. The trader could promise to sell the EUR/USD when it drops below 1.12. A stop-loss can set a limit on how much an investor loses on a trade.
“Whenever I enter a position, I have a predetermined stop [loss]. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop [loss], and the stop is determined on a technical basis. I always place my stop beyond some technical barrier,” said Kovner.
7. Conduct thorough research.
In addition to having set limits with investing, conducting research is key. Investors can delve into a stock’s earnings report, price-to-earnings ratio, or track an investment on TradingSim’s charts. By conducting thorough research, investors can build a successful trading strategy. The TradingSim chart below shows the way investors can track Apple stock.
Apple stock
8. Have a trading journal
No, the journal isn’t to write about crushes. A daily trading journal can help an investor keep track of how the trades are going and how your plan is doing overall. A trading journal helps an investor keep track of what is working in a trading strategy and what doesn’t work. Trading journals should have these main aspects.
Date and time of trade. Keep track of when trades were made. Trades made in the morning may be more beneficial to investors than trades at different times.
Trace different instruments. An investor may have capital in different instruments, like commodities and stocks. Investors can track the performance of each different instrument to determine how their trading strategy works for each investment.
Entry and exit prices. An investor should keep track of the prices of stocks when they enter and exit trades.
Results of trades. Review the results of the trades. Investors can then go over successes and mistakes.
9. Learn from mistakes.
While checking a trading journal, an investor can notice a pattern in a trading plan-especially, when there are losses. An investor has to learn from mistakes to perfect their trading strategy. Forex trading expert Bill Lipschutz believes that losses are a natural part of trading and that investors can learn from trading losses and errors.
“I don’t think you can consistently be a winning trader if you’re banking on being right more than 50% of the time. You have to figure out how to make money being right only 20 to 30% of the time,” said Lipschutz.
“Poor risk management, for example, using too much leverage. Having a bad risk/reward profile on trades is a staple of poor risk management that I come across (as a rule of thumb a trader should not enter into a trade unless analysis suggests they can make at least ~$2 for every $1 risked),” said Rosenberg.
Knowledge of trading information is important. However, Rosenberg also noted that overanalysis can hinder traders as well.
“Over-complication of the analytical process. Many traders utilize too much information to arrive at decisions, which causes contradiction and indecisive behavior,” said Rosenberg.
An investor can learn what worked and what didn’t work from their trading strategies.
10. Keep trading.
Even if a trading strategy didn’t work, they can learn from their mistakes to continue as a trader. Investors can tweak their strategies or try a new one altogether. Traders shouldn’t get discouraged by losses. They should just re-assess their strategy and stay in the investing game. Investors should stay encouraged by remaining confident and treating investing as the serious business that it is.
Different trading strategies can lead to success
There are many different trading strategies that investors can use. Some of the most popular plans will be explored with the steps mentioned in this TradingSim article.
Day trading can be successful for traders who want quick stock action
Day trading is a popular trading strategy for investors want to make a lot of quick trades- and possibly profits- every day. Short-term trading is the essence of day trading.
Owen Murray, director of investments at Horizon Advisors, notes that day trading may pay off most during a bull market because there are greater profits.
“Day trading typically becomes very popular during bull markets, because on balance, stocks are mostly moving higher and it is easier to make profits,” said Murray.
How to have a better day trading strategy
Day trading can work for traders in a bull or bear market if they take the right precautions. There is no one right way to day trade. However, using the above steps can help create a successful trading strategy. As mentioned in an earlier TradingSim article , investors must treat day trading as a business. Day traders can take these steps to be a more successful trader.
Day traders want to make profits s quickly, so they can set a goal of trading 5 stocks or so a day. As a trader’s confidence and track record grow, they can make dozens of trades a day. However, Merlin Rothfeld, an investment strategist, advises against making so many trades in such a hurry.
“When I started day trading back in 1998, I was a total gunslinger, averaging 550 trades per day,” said Rothfeld. “This caused me to be reckless in my trade selection and execution – not to mention that my broker was making a killing off the commissions I was paying on all those trades. “
“For this reason, I recommend that every day trader set a maximum number of trades to take in a day. Think of it like having a six-shooter: You only have six bullets in your gun, so you better make them count,” added Rothfeld.
Have the capital set aside for day trading.
While day traders may crave the excitement of making lots of trades, they must have the money to make the trades. Day trading is usually the most costly investment. The capital required to trade stocks could climb up to $25,000. Trading futures and commodities like oil may only require about $1,000 to invest in the stock market. The forex market may require about $1,000 or even less. There is no set amount for investing, but day traders shouldn’t risk more than 1% of their capital on trades.
Set aside a lot of time for trades.
Day trading happens quickly all day, so day traders have to be ready to trade at a moment’s notice. Traders must treat day trading as a second job and dedicate hours a day to tracking trades.
The best time to trade could possibly be when the market opens from 9:30 AM-11:30 AM EST. The first two hours of trading are often the most active, so day traders have the potential to earn the most money. The best time to trade futures is usually in the morning as well. Forex can be traded 24 hours a day because of the global trading around the clock.
Test day trading strategies often.
If traders want to try out their strategies before investing capital, backtesting day trading could be best. Day trading strategies can be tested on TradingSim before they’re implemented in real life. Simulated trades can help traders analyze how well or badly their trades are doing. Testing out trades can help determine which strategy is best for day trading. For example, if an investor wants to backtest day trading Coca-Cola stock, they can use charts like the TradingSim chart below.
Coca-Cola stock
Conduct up-to-the-minute research.
Since day trading is so volatile, it’s important to remain on top of financial news. By following blog posts on sites like TradingSim, day traders can stay informed on the latest financial news to make better-informed trades. Day traders should also have an up-to-date trading journal to keep track of the many trades that made.
Have stop-losses to minimize risk.
Stop-losses are important to stay ahead in trading. Kenny Polcari, senior wealth strategist at SlateStone Wealth, noted that it’s important to change course, change position size, and cut losses when necessary.
“Don’t get married to a position just because you like the name. Don’t be married to it if it’s going in the wrong direction. You’ve got to be able to cut your losses and then look at it again at a different time,” said Polcari.
Dennis Dick, proprietary trader and market structure analyst at Bright Trading, notes that it’s important to minimize risk since day trading is one of the most unpredictable trading strategies.
“The goal is to try to eliminate the overall market risk, which is essential in the current market environment,” he says. “Even if a stock has good relative performance, if the overall market has a significant decline, I am likely to lose money on that trade.”
A stop-loss order on a certain stock price will ensure that investors won’t risk more than necessary while making day trades.
Practice and dedication build better day traders
Research, patience, and limiting losses are key to being a successful day trader. Trader Deyanna Angelo noted that day trading is not an easy way to get rich.
“Day trading is a very difficult performance discipline, much like becoming a professional football player or playing a musical instrument to a virtuoso level. You first need to have a natural talent, followed by years of practice,” said Angelo.
Swing trading strategy an option for investors
In addition to day trading, successful trading plans can be applied to swing trading. Swing trading is a trading strategy in which investors strike during two major swings in the stock market. They enter or exit trades when the market swings high or low. In a bull market, swing traders can go long and trade at highs. In a bear market, swing traders can go short and sell when stock prices plunge.
Swing trading is similar to day trading, because an investor holds a stock for a short period of time. However, while several day trades could be placed every day, swing trades could be placed every few day or weeks. Investor Evan Medieros noted that traders should minimize their risk while swing trading stocks.
“I risk anywhere from 0.50 to 1% per trade. Position sizing and managing individual trades include stop losses, both timed & price,” said Medieros.
Similar to day trading, Medeiros noted that he has a series of stocks ready to trade over a few days.
“At any given time, I have 50 to 100 stocks on my bench that I want to get involved in once they ‘set up’. So it is a combination of waiting for the setups and aligning that with my target portfolio exposure, given the market environment, “said Medieros.
Best time of day to swing trade may not be at opening bell
As opposed to day trading, the best time of day to swing trade may not be when the stock market opens at 9:30 EST. At the opening bell, stocks generally move higher, so that may not be the best time for swing trading. When there is a pullback between 10AM-11AM, that may be the best time for swing trading.
Use swing trading indicators
There are three main swing trading indicators that swing traders can use to monitor stocks.
Moving averages
Moving averages help investors identify or confirm trends. In a simple moving average, all the closing prices are added up for a certain number of days. After the addition, the total is divided by the same number. For example, a 10-day moving average would take the closing price of the last 10 days. It would then be added up and divided by 10 to get the average price.
10 -day moving average
2. Relative Strength Index
The relative strength index (RSI), which helps determine if the stock market is overbought or oversold. The RSI is on a chart of 0 to 100. The market is considered overbought if the RSI presents any number over 70. If the price is below 30, the market is considered oversold.
3. Visual analysis indicator.
Visual patterns on charts can help investors easily keep track of what is happening in the stock market.
With indicators and risk management, investors can make the best of swing trading. While day trading isn’t for every trader, with research and persistence, investors can try day trading as a method to potentially increase profits.
Scalping trading strategy another option for investors
In addition to switch trading, scalping trading is another short-term trading strategy that investors can use. It’s similar to day trading, but differs in an important way. Scalping make numerous trades for smaller profits. Scalping traders can profit from small price changes. Instead of holding positions for a few hours or weeks, scalpers may just hold a position for just a few minutes.
Small goals and a lot of time are key to scalp trading
Scalping is about getting smaller profits faster, so incremental goals are pivotal. Traders should start by looking for gains in the range of $0.10-$0.25.
Scalping is such a high-volume trading strategy that quickly changes. So, scalpers need a lot of spare time to monitor the markets. Watching the stock market for hours is a must to catch any slight price changes.
Scalping trading strategy has low risk, but requires high wins
A benefit of scalping is that it is low risk. However, a trader must have a higher number of wins because the profit margin is so minuscule. Traders need a large amount of capital to enact dozens or even hundreds of trades.
Traders should make sure the risk/reward ratio is 1:1. As noted in a previous article about scalp trading, a trader shouldn’t risk more than .1% of their capital on a trade.
If an investor’s trade position is $100 and the stop price is $99.50, the risk and reward must equally be 50 cents. The trader should exit a trade at $100.50 to turn a profit.
Technical analysis can help scalpers
Scalpers can hone their scalping trading skills by using technical skills. Just as moving averages can help with swing trading, they can be useful with scalp trading as well. The simple moving or exponential moving average indicators show the average stock price over a particular time. The exponential moving average may be better for scalpers because it monitors price changes quicker than simple moving averages.
The Stochastic Oscillator Indicator is another way to monitor momentum. Traders use the Stochastic to predict the momentum before a price change. The Stochastic Oscillator and the exponential moving average are just two methods to analyze stocks for scalp trading.
With analysis, a lot of time to invest, and interest in incremental gains, traders can test out the scalping trading strategy.
Position trading strategy is a long-term option for traders
In contrast to scalping, long-term investors that want a longer-term trading strategy can try position trading. Short-term trading can last for minutes or hours. However, position trading can stretch for weeks, months, or even years. Position trading is a long-term stock market trading strategy in which traders want to catch long-term trends in the market.
Position trading strategy may be best for passive traders
Traders that don’t have a lot of time to invest-and more-capital- could try the position trading strategy. For traders that want to more closely emulate long-term investing, position trading could be a better option. Some position traders may just place a few big trades a year, so they can trade part-time if they want. Beginning traders that want to gently wade into trading may find position trading best for them. Position traders hold positions for a longer period of time, so more capital is required to invest.
Bear market may be good time for position trading
Ironically, a bear market may be a better time to try position trading than in bull markets. In a bull market, positions may eventually tumble in a correction. A trader placing positions at the end of a bear market may be in a better position when the stock market eventually recovers. If a position trader is patient and rides out the end of a bear market, they could potentially profit when a bull market comes around again.
Specialized position holding is key
Because a trader is holding a position for a long time, it’s pivotal that position traders have specific holdings. If a position trader focuses on one or two sectors to follow, like tech or healthcare, it will be easier to spot trends.
Position trading uses many research tools
Position trading takes a long-term view, so traders can use two types of analysis. Traders can use fundamental analysis to study earnings reports of stock and overall market trends to determine how to trade.
Position traders can also use technical analysis to monitor their positions. They can use the 200-day exponential moving average to identify long-term trends. It could possibly be a bullish signal when a price of a market rises above the 200-day average. Traders can watch the 200-day exponential moving average to determine where the market is trending.
Traders that have patience and want to minimize risk may find that position trading is the best option for them.
Trend trading may be best for long-term investors
Similar to position trading, trend trading is ideal for traders who want to hold positions for a long time. Trend traders look at a stock’s price trend over a long period of time. A trader then compares the price to broader market trends. An investor then makes a trade based on that knowledge about the market trends.
Legendary trader Paul Tudor Jones noted that the 200-day moving average indicator is important to monitor trends. Trend trading can use the 200-day moving average indicator to watch assets.
“My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks, and commodities. The whole trick in investing is: ‘How do I keep from losing everything?’ If you use the 200-day moving average rule, then you get out. You play defense, and you get out, ” said Tudor Jones.
Trend trading requires fewer trades
Google stock the week of March 19
Similar to position trading, few trades are required to start trend trading. A trend trader could just make about a dozen trades a year to remain active.
Because turtle trading is a slow and steady process, trades can be made at any time. There is no rush at the beginning of the day like day trading. There is also no need to wait for a pullback later in the trading day, such as with swing trading. Whether it’s at opening bell in the US stock market or after-hours with forex, turtle trading has a flexible timetable.
“The trend is your friend” in this trading strategy
Financial adviser Ali Hashemian noted that trend trading may be best for trading commodities like oil or gold. The trends in those commodities may be easier to track than stocks, so trend trading may be best for commodities.
“Trend trading is commonly utilized by commodity traders. Most often this trading style will include price calculations, moving averages, and take-profit or stop-loss provisions. Traders will use price movement and technical tools to determine trading signals,” said Hashemian.
Trend trade signals and indicators help traders make best picks
A number of different trade signals can be used, and traditionally there are set rules and risk controls put into place when using this trading strategy. Other than the moving average, there’s the Moving Average Convergence Divergence (MACD). If the MACD moves above 0, that’s usually a sign to buy. If the MACD moves below 0, that’s usually a bearish sign for trend traders to sell their assets.
The aforementioned relative strength index (RSI) signals a buy trend if it moves above 50. An on-balance volume indicator can be used to measure an asset’s trading volume. Joseph Granville, the developer of the metric, believed that an increased volume in an asset means a bullish or bearish turn.
Risk management key to trend trading
Famed trend trader Paul Tudor Jones also advises having a “5:1 risk /reward. Five to one means I’m risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%”, said Tudor Jones. Minimizing risk is key to get ahead in trend trading. A maximum 2% stop is also advisable for beginning turtle traders.
Turtle trading is most famous form of trend trading
Turtle trading is the most famous form of trend trading. The popular method emphasizes a purely technical and methodical approach to trades. Financial analyst Zaheer Anwari noted that turtle trading can pay off if traders are patient and emotionally detached while making trades.
“With time and experience, it becomes a detached, robotic and stress-free approach to the markets, as the initial risk is always very low and well managed and only the very best trades are taken,” said Anwari.
Turtle trading could be best for traders who want to bide their time in the markets. The turtle trading strategy could also work traders who want or need set trading rules.
Different trading strategies can help create success
There is no one trading strategy that will create a successful framework for a trading strategy. Just as the stock market is different every day, so is a trader. What may work one day may change the next. However, the 10 steps and specific trading strategies will help traders make better choices.
TradingSim’s charts and articles can help beginning or experienced traders develop the best trading strategies to navigate the volatile stock market. With a methodical framework that makes room for flexibility, traders could find a trading strategy that works best for them.
