trend trading – – Tradingsim

Pullback opportunities are great for adding to or initiating positions while trading. However, not all pullbacks are created equal. In this post, we’ll show you a handful of ways to qualify a healthy pullback vs. a not so healthy one.

Once you you nail the basics in this tutorial, be sure to check out our other posts for advanced strategies like the 20 moving average pullback strategy.

What Are Pullbacks?

Very simply, a pullback is a temporary pause in a stock that is otherwise trending. The trend can be up or down, it really doesn’t matter, so long as there are a series of higher highs and higher lows being made — or vice versa.

Generally speaking, pullbacks do not occur in range-bound stocks. Despite this, some may consider a retest of a sideways channel a “pullback”.

Here is what you might call a series of pullbacks for an up-trending stock using symbol $CEI as an example:

We’ve circled a handful of the pullbacks just to give you an idea of what they might look like. Granted, this is being done on a 1 minute chart, but their are plenty of other pullbacks not circled that might be considered healthy. It will all depend upon the time frame you are trading on and how long term you expect the trade to last.

Pullbacks in a down trend look very similar, just mirrored. Here is an example with $IRNT

While all of these look great in hindsight, the question is whether or not you can decipher a “healthy pullback” in real time. To that end, in just a moment we’ll discuss a handful of ways to determine the health of a pullback when actively trading.

Before we do, we’d like to show you the difference in what we consider a pullback and range bound stock. Here is an example of what you wouldn’t consider a pullback in ticker $DATS:

The difference should be quite clear. We are not really putting in higher lows and higher highs, or vice versa. In other words, we are not trending.

What is a Healthy Pullback?

In order to know whether or not you want to place a trade into a pullback, it would behoove us to know the difference between a healthy pullback or one liable to fail.

Let’s start by analyzing the bigger picture first.

1. The Big Picture Sets up the Healthy Pullback Intraday

Every big move typically starts with a move based on larger time frame levels on a chart. Yes, even the moves that seem to come out of “no where.”

Even day traders should be aware of how to read key levels on a daily chart. Let’s take the following move in $PALT for example. Notice the daily chart first.

This example of $PALT is a perfect example of a liquidity trap. As shorts try to catch the climactic gap the day prior, their average price is somewhere around the closing vwap for that day. We call that VWAP Boulevard, and it is annotated on the chart using our vwap boulevard drawing tool at around $5.19.

As the stock rallies the day after the big gap, albeit on lower volume, shorts are now in hot water. Essentially, the tide is coming back in, pushing price higher and higher towards their average from the day before. What happens the 3rd day will give us an indication of whether or not we could have solid momentum to push us higher for a breakout here.

The Breakout

Sure enough, the third day is a charm:

Ridiculously, the momentum carried this stock almost 3x higher than the previous day. Most traders wouldn’t expect a move like this. Yet, while this may be an “outlier” type of move, it is these big picture type of trades that reward those who study the dynamics of moves like liquidity traps.

Better yet, these traders know how to spot the momentum and jump on the train on healthy pullbacks.

Here is what the intraday of this $PALT looked like:

Three solid healthy pullbacks in the uptrend

Each of the three major pullbacks in $PALT proved buyable as the stock catapulted off the prior day’s vwap boulevard area of support. Be sure to read that article if you want to better understand why vwap boulevard is so important.

Other Big Picture Ideas that can Precede Big Moves

While we won’t discuss the myriad of opportunities you can find for big moves, here is a quick list of setups you might study:

Breakouts on the daily chart
Pullbacks to the 20 or 50 moving average (looking for a bounce)
Gaps up or down on news/earnings/events
Climactic reversals after parabolic runs

Now let’s discuss the importance of momentum.

2. Momentum and Direction as a Backdrop to Healthy Pullbacks

As we stated above, a healthy pullback tends to work best in trending environments. The theory behind this is that there is upward or downward momentum that is going to continue carrying the stock along the path of least resistance.

The thing you need to do as a trader is to decide how much momentum is behind the move. In other words, if the rocket boosters have been ignited from a sound base, will they carry the stock higher from each consecutive pullback. Not only that, but do you have after burners kicking in the higher it goes.

Volume is King

When making this determination, volume is king. Think of it like the effort that creates the result you want. But you must understand that not all volume is the same. It’s not as simple as green and red on the chart and assuming that means good volume and bad volume. The quality of the effort and the ensuing result of the price are what you want to pay close attention to.

For example, you could have a stock rocketing higher, but the amount of selling pressure going into that could be so severe that the stock stalls and falls back to earth.

In order to envision this, let’s look at a few examples of sound pullbacks vs. pullbacks that have failed due to a lack of volume. For each, we’ll analyze the volume and price to see whether we had the momentum we needed for the pullback opportunities.

Healthy Pullback Example:

Pay close attention to the volume annotations in the chart above. To start with, we have a huge igniting bar off the open that sends us into a halt. This then expands on volume as price moves upward. As shorts try to average up here hoping that the stock will fail in the morning, it simply pulls back and holds the area of “large volume” that came in after the halt around 9:45am.

This is what we call volume expansion and contraction. On a healthy pullback, you want to see the significant areas of support holding, and this is based on the volume of those areas. Likewise, you want the pullback volume to contract, or diminish. This indicates supply is drying up.

Because we are viewing this early in the trading day, it is a fresh base, and the first pullback of the day. This is important. We’ll see later that the more mature the trend becomes, the more likely pullbacks are to fail.

Sympathy Moves

As you can see, given the “big picture” on the daily of $PALT, the momentum was really strong. On a similar note, there was another stock that had been running in recent days that was similar to $PALT. This ticker was $DATS. Both tickers are symbols for chat platforms. Here was $DATS on this day:

It can often help with the big picture if you have a sympathy play going on at the same time. You can find these with similar stocks in the same industry or with thematic similarities.

Unhealthy Pullback Example 1:

Let’s rewind $DATS on the simulator just a few weeks prior to the example given above. Notice how we are consolidating after a prior run. We’ve drawn a few lines on the chart to indicate a “range bound” area that the chart is trading within.

Although we haven’t annotated it on the chart, look very closely at how the volume has been diminishing each day after the large red reversal candle on the daily. We consider that “overhead supply” in that candle. In order to overcome that supply, we’ll need a big effort in volume.

On the intraday chart on top, that volume never comes. The volume on the left side of the chart is much greater than on the day we are trading. Hence, we don’t get the rocketing momentum we need for a solid trend. On the same token, we don’t get a continued selloff either.

Unhealthy Pullback Example 2:

Unlike trying to find a pullback within a trading range, you may also find unhealthy pullbacks at climactic tops. Let’s use the example from $PALT again. Only this time, we’ll look at the top.

Don’t fall prey to fomo. There comes a time when a stock has to stop going up. Supply eventually wins. Along those lines, this example shows you what to look for when a strong stock is starting to stall.

We’ve tried to give you a visual measure here of each “thrust” higher from the pullbacks. As the price rises, gravity takes effect and begins to stall the upward momentum. While there are three fantastic pullbacks on the way up, it is at these high levels that you want to be cautious buying yet again.

In another article, we discuss how to judge the backside of a trade. We suggest you have a read if you want to learn more about using moving averages or other trend indicators to help find the top.

3. Using Multiple Time Frames and Moving Averages to Find Healthy Pullbacks

If you don’t want to rely completely on the volume and price action, you may find that popular moving averages like the 20ma or 50ma provide good support along the way.

To that end, let’s overlay a few of these using the 1, 3, and 5 minute charts of $PALT:

Moving averages help find healthy pullbacks

From the top left and going clockwise, we have a 1 minute chart, 3 minute, and 5 minute. The 1 minute has a 50 simple moving average overlayed. The 3 minute chart has a purple 20 simple moving average. And lastly, we have the 5-minute chart with a blue 10sma.

Notice how each one of these corresponds with the pullbacks. While this isn’t an exact science, moving averages can often help you discover when and where to expect pullbacks to find support.

4. When to Add or Re-enter on a Healthy Pullback

Now that we have the basics covered. Let’s try to put it all together with a chart of where we might find specific entry criteria for taking a position in a pullback.

Here are a few things to look for:

Look for a potential support area using prior high volume bars
Watch for volume to dry up into an area of support like a moving average
Look for confirmation on the higher time frames.
Add as volume expands away from the support area

Let’s look at the above chart with all of our data now:

What you see in the 1, 3, and 5 minute charts above are entry signals based on the concept of VDU and Pocket Pivots. What you’re essentially waiting for are the areas of support to line up with lack of supply in the price action and volume.

VDU simply stands for Volume Dry Up. And Pocket Pivots are just expansion pivots away from this area of diminishing supply as demand returns and shorts cover.

You might even consider them descending wedges or flag patterns. And, technically, they are. However, the VDU and Pocket Pivots are a great way to signal your entries.

How to Practice Your Own Pullback Strategy

Just as we have mentioned above, our suggestion is to start in the simulator and find the days on your charts with the largest candles. At some point, those stocks had to have momentum.

Start with the daily chart and ask yourself, “why did this move the way it did?” Was it a news related event? Perhaps it a technical break out or break down? Was it a gap and go? Whatever the reason you come up with, note that, and see if you can find common patterns that lead to big moves.

Once you have your playbook of daily chart patterns, dial into the intraday action. How much volume is necessary to overcome any downward force of supply? Maybe you need to keep an eye on the Relative Volume (RVOL) for that day? Or, perhaps volume forecasting would help? What about oversold/overbought conditions?

As you can see, there are a lot of ways to find good criteria for strongly trending stocks. It’s your job to find a big move, and catch the meat of it.

Study your best simulated examples for at least 20 trades to determine whether or not you have a high probability of success before trading with real money.

Here’s to good fills!

Trend Trading Overview

Trend trading is the practice of riding a security during a strong move up or down.^[1] Now, what one person calls a trend can vary from trader to trader.

For example, a penny stock trader may expect a massive move higher of 20% or more intraday before considering a stock in an uptrend.

Conversely, a low volatility trader may need minor price expansion before declaring a new trend in play.

Whatever the time frame or strategy, the goal with trend trading is to identify the trend and find a way to jump on board with least amount of risk. To that end, in this post will discuss a few of these strategies and reveal how you can scan for trending stocks.

First, let’s talk about to discover the trend.

Trend Trading Indicators

When trading, the less subjectivity you have about the markets the better. Therefore, you can use technical indicators to gauge market trends.

Trend lines

Trend lines are a great way to clearly define the market trend. This can still prove to be somewhat subjective as you are required to identify the start and endpoints for the lines. But for all intents and purposes, with a little practice you should be able to identify the prevailing points of support and resistance for a clear trend.

For bullish trends, you want to connect the low points and high points to develop an up channel. ^[2] After all, an uptrend is only confirmed once you have a series of higher lows and higher highs.

As the stock is on its upward trajectory, the stock should not breach the prior low on its way up.

Bullish Trend Lines — Bullish Trendlines

Likewise, for a bearish trend you’ll simply reverse your low and high points.

Notice that this is the exact same stock, just on the backside of the intraday trade. Trends can really help uncover which side of the trade you’re on. And the great thing about trend lines is that the more you draw with them, the more you train your eye to anticipate the direction of a stock.

This can help with setting targets and reversals as your trading develops.

Trend Channels

To take it a step further, you can use the trend channels drawing tool. These channels create a clean parallel line. However, these channels will not allow you to create wedge patterns or diamond formations.

Often, trend channels work best for more natural price action in larger cap stocks: bigger, more liquid companies.

Slope of the Line

The other point to note is that you need to identify a minimum slope of the line, which will trigger a trend for you.

A strong trend will usually have a slope north of 50 degrees to generate the level of an impulse move higher.

This is completely subjective. Nonetheless, if you are trend trading, the move should be strong enough for you to care.

Moving Averages

Moving averages are another great indicator you can use to measure the strength of a trend.

On the bigger time frame, you can take the simple approach of waiting to see if the stock is above or below its 200-day moving average. However, another approach is to look for a strong trend where the averages do not intersect on the way up. This spread of the averages shows you that the stock is trending hard for all periods (short and long).

To that point, we’ve created a scanning filter in the TradingSim application that, when checked, will eliminate stocks on a daily chart whose 20, 50, and 200 moving averages are stacked on top of each other. In other words, the 20 is above the 50, and the 50 is above the 200.

This tells us that the shorter time frames are above the longer time frames, revealing the uptrend. Of course, reverse this and you get a downtrend.

Here is what that scan filter looks like:

When one of these is checked, it will filter the results to only those stocks trending bullishly or bearishly.

You may be thinking, “why is this important?”

Well, the great thing about trending stocks is that they can offer short term traders great opportunities with pullback buys. If you’re not familiar with this strategy, be sure to check out our post on the 20 Moving Average Pullback.

Example of an Up-trending Stock

To illustrate the results from the scanning filter, here is just one stock that was populated from that list.

From the chart above, you can see that the purple 20 moving average is trending nicely above the red 50 moving average. And, down below, the 200 moving average is pointing upward as well.

All three are in alignment giving us the indication that the trend is strong.

Example of a Non-trending Stock

Now that you know what a strong uptrend looks like, notice the difference between GOOGL and this XNCR trend.

Plenty of chop, right?

The above chart has two moving averages the 10 and 20 EMA. You can see the level of backtesting the 10 has with the 20, which is a clear sign the stock is not trending hard.

Example of a Down-trending Stock

ABIO has a clear sell off after reaching climactic highs around $18. From there the stock never recovered.

The above chart is a clear example of when a stock is trending really hard. Notice how the averages do not cross at all. To add more validity to the trend, the averages are also far apart all the way down.

Just to level-set your expectations, these sort of trends are hard to find. You certainly don’t want to be on the wrong side of this trade. And, unfortunately, some selloffs never pullback for low risk entries.

Momentum Oscillators

Another indicator you can use to analyze the markets are momentum oscillators. These indicators have no upward or lower bound which allows the oscillator to run with the stock. ^[3]

The TRIX indicator is a momentum oscillator that moves above and below a zero line. In the next chart, we will cover a stock that is in a strong downtrend.

As this stock continue its downward momentum, notice that the TRIX is practically living below zero.

That being said, the TRIX does not react quickly because it smoothes out three exponential moving averages, so it’s a great indicator for measuring trends.

Notice how as the stock moved lower the TRIX respects the zero line. This does not mean there aren’t moments when the TRIX breaks zero by a hair or two.

Remember, in the market rarely does the price action fit nicely into a box dictated by technical analysis books.

More Trend Trading Examples

For our first example, we have a stock in a clear downtrend. You can see how the stock is making lower lows and lower highs.

Next up, we have a strong bullish uptrend with higher highs and higher lows.

Hopefully examples are helping you to see the difference. How about one more:

Can you see how the above chart lacks any trend? This is what we would call a choppy market or a security that lacks a clear trend. Most of these stocks are range bound.

Where Trend Trading Fails

Trend trading is like any other strategy in the markets. There will never be a 100% success rate. Often times a bullish trend will fail when a stock has reached a climax top, overthrows its channel, or supply becomes too heavy.

Conversely, a down trend will end when a stock has a climactic selloff, or demand comes in to support the stock.

The key is to study the trends to find consistencies in the volume and price action. ^[4]

Not Honoring Your Stops

When you are trading a stock that is trending, it feels great. You don’t have to do much and the money just flows into your account. However, if you jump into a trending stock at the time it reverses, you can find yourself in a pickle.

This is because being late to the party can lead to a nasty reversal as the stock could drop back down to its origination point.

So, you have to use your stops or the trending move will become your worst nightmare.

If you find yourself buying at a top of a strong trend, do not add to the position as it violates each swing low on the way back down. This is called averaging down, and it can be devastating.

In the above chart example, we’re pointing out what happens if you were to buy support in a channel of a strong uptrend that fails.

As you can see, if you did not place a stop below the low of the test, things got ugly fast and in a hurry.

Strategies to Join a Trend

Now that you know what not to do, let’s look at a few strategies to help you join the trend.

The Moving Average Pullback

Many times during a strong trend, stocks will pullback to an important moving average like the 20 or the 50 moving average. These pullbacks can provide a great opportunity to join the trend if it continues higher, all while keeping your risk low.

Because institutions love to buy at lower prices, often stocks will find support at this levels.

Let’s use our GOOGL example from above and see how buying at the 50 moving average would have been a great decision.

We were given three great opportunities to buy the pullback in GOOGL at the 50 moving average, noted by the arrows on the chart. Each one of these buys would have been a great opportunity to profit.

You could have placed a stop loss just below each consolidation if the trade didn’t work out for a small risk.

Mean Regression Trend Trading

If you don’t like using the moving averages, sometimes a channel works better. Taking the moving averages off the chart of GOOGL, we’ll add a channel this time.

Notice how the buys correspond with the channel lows, and the sells correspond with an overthrow of the channel highs.

This can be a great and easy way to manage short-term positions. Basically, you’re buying the dips at support, and selling the rips at the highs.

How Can Tradingsim Help with Trend Trading?

If you are looking to practice trading trending stocks, it will come down to your entries, stops and the method of choice. Whether it’s moving averages, channels or oscillators, you’ll need to master each method in order to develop an edge.

This is where you can use Tradingsim to practice with over 11,000 stocks and 1,000 ETFs. Be sure to drop us a line and let us know how your edge is developing!

External References

Peterson, Nathan. The Trend Is Your Friend: A Guide to Trading Trends. schwab.com
Perfect Stock Alert. (2011). Bull Price Channel Chart Pattern. YouTube.com
Oscillators. Wikipedia.com
Etiology Of Human Errors In Trading. (2016). seekingalpha.com

The Darvas Box was a fascinating trading discovery in the mid 1900s. Eponymously named, Nicolas Darvas was able to devise a system to trade the markets from anywhere in the world with only a magazine and telegrams.

A truly captivating story, and one that is recounted in his book How I Made $2,000,000 in the Stock Market, it is a worthwhile read for any trader.

Despite the use of his system as a swing trader, the Darvas Box indicator can be used in today’s markets on any timeframe. And to that end, we’ll discuss the strategy, rules, and best practices for the Darvas Box in this post.

Who is Nicolas Darvas?

Nicolas Darvas was a professional dancer that traveled the world with his sister in their own dance company during the 1950s. At one point, after receiving shares of a stock as a gift, he became obsessed with the markets and put countless hours into the study of market movements and internal mechanics.

It’s really fascinating to think that he was able to teach himself how to trade the markets just by reading books and newspapers. In fact, his favorite two were The Battle for Investment Survival by Gerald M. Loeb and Tape Reading and Market Tactics by Humphrey Bancroft Neill. He also took Barron’s magazine publication and regularly searched for up-and-coming companies.

How I Made $2,000,000 in the Stock Market by Nicolas Darvas — Nicolas Darvas studying the markets

It was this intuition on up-and-coming companies that benefitted Darvas greatly. He was a master of “social arbitrage,” before that was even a term. Yet, his strategy for entering the market was so simple that he could enter orders from anywhere in the world his dancing profession took him.

All he had to have was access to a telegram service. From there, he’d wire his orders to his broker.

To learn more about Nicolas Darvas check out his Wikipedia page.

What is a Darvas Box?

The Darvas box is a trend following system. A trend following system is one that does not try to anticipate a market move. Another way of saying this is that the system is reactive versus predictive.

Darvas would only enter stocks that were in confirmed uptrends and breaking out of consolidation patterns to make new highs. His boxes helped him visualize this while he was on the road dancing for a living.

Essentially, if a stock on his watchlist was bouncing around inside a “price box” of say $35 and $40, then he knew if it broke to $40.50, it was time to buy.

Likewise, if the stock retreated back into the box, it hit his stop loss orders. He wanted to make sure the uptrend was confirmed with higher prices.

Darvas Box Rules

Darvas’s rules were fairly simple, as stated in his book How I Made $2,000,000 in the Stock Market. You can find his book on any digital platform. Again, it’s a quick and fascinating read and worth your time.

Okay, back to the rules.

A stock is making a new 52-week high
After the high is set, there are three consecutive days that do not exceed the high
The new high becomes the top of the box and the breakout point leading to the new high becomes the low of the box
Buy the break of the box once it exceeds the high by a few points
Sell the low of the box if it is breached
Add to your position as it moves into each new box

This sounds like a lot, but it’s honestly straightforward. You have 7 steps which prescribe how to find the stock and also provides entry and exit criteria.

How to Draw a Darvas Box

Keep in mind that Darvas did not have a computer. They hadn’t been invented. He had to rely soley on data from newspapers and needed to manually track his trades after the market close later that day or even the next morning when he could get his hand on a newspaper.

In fact, he recounts that the worst trading he ever did was when he was “close” to the action in New York. Something about the proximity to Wall Street and the instant availability of information made him overtrade and over think. For that reason, he went back to his “detached” style of trading while on the road and found success again.

Thankfully for us, we live in a time where computers do all of the heavy lifting for us. On that token, the Darvas Box indicator is prevalent on many charting systems.

Within Tradingsim, it is one of our standard indicators which you can select from our list of studies. Below is an example of a Darvas Box on an intraday chart of SOS

Notice how the blue box identifies a new high, the consolidation, and the subsequent breakout levels.

Darvas Box Settings

Darvas used three bars consolidating under the first high bar to construct the box. However, you can now configure the boxes to your liking with a few clicks of the mouse.

Here’s an example of how you might change these settings inside TradingSim:

You may be wondering, “why do we need these settings and offsetting levels?”

Many traders have a tough time surrendering to any method without adapting to the original technique.

For example, Darvas clearly says buy the new 52-week high, so the look-back period is honestly irrelevant. Do what feels right to you, but we would recommend you stick as close as possible to Darvas’s original intent to see what part of the strategy works for your trading style.

Where Darvas Works the Best

Without a doubt, the Darvas box strategy works best in strong bull markets. The market simply goes higher and you just keep buying the strength. If you are swing trading and you can catch the right symbol, profits can get out of hand quickly.

The hard part though is finding, buying, and managing these homerun trades.

Example of Darvas Box Working

Below is a weekly chart of Microsoft, which is a large stock that often mirrors the movement of the Nasdaq or S&P 500. There were at least three clear long entries in the bull market from 2016-2019. You would have added to your position at both the second and third breakout zones, perhaps more.

There is also a spot on the chart which says “no entry.” This is because the breakout was not convincing and Darvas requires the price to leave the box by a few points. Darvas avoided placing trades when a security was only able to slightly tick over the most recent high.

Do you see how by adding to your position and letting your profits run, you are able to reap significant rewards?

Now let’s review the hard part of the system, which requires tremendous discipline — the ability to not only pick the right stock but to also understand when market conditions are ripe.

Risks of Trading the Darvas Box

The Darvas box can put you in a tight spot under the following scenarios:

Buying breakouts into stocks that are near 52-week lows
Buying breakouts during bear markets
Scaling too heavily when adding to your position
Using the Darvas Box within sideways markets
Ignoring Your Stop Levels

Ignoring Your Stop Level

There aren’t many examples on the web discussing the issue of not honoring your stop levels when trading Darvas boxes. But because we like to be thorough, here is a fine example of what could happen when you neglect your stop.

Not honoring your stop can be disastrous!

Let’s say you were able to ride VCNX up and you also were adding to your position as the stock went in your direction. Then the inevitable happens, the stock breaks major support.

By not honoring the stop, you actually could end up in a catastrophic situation. Remember, you are trading stocks that are trending strongly, so when things go wrong, they can go horribly wrong.

Sideways Markets Hurt Darvas Traders

Sideways markets can drain you dry using the Darvas box method. This is because you will find yourself buying the breakout and then consequently selling the breakdown at the bottom of the box.

In the above stock of ROKU, the first breakout felt like the start of a new trend. Well, each signal thereafter would have taken you on a 2-3 day grind of wasted time and high commissions.

The market only trends about 20% of the time. Be sure to determine when the market is in a strong bull trend. More importantly, the sector you are trading should also be outperforming.

Can you Day Trade with Darvas Boxes

Darvas boxes can work on any timeframe. So, yes, you can day trade with the Darvas Box. However, you will need to define your “look back” period. This will allow you to collect trade data, so you can begin to assess the right configuration.

For example, Darvas stuck to new 52-week highs with three consecutive bars below the high to establish a new box.

You will need to define similar parameters for yourself that work. We suggest playing with the indicator settings and figuring out what works for your style. By default, the look back period for intraday 100 bars. You may also want to turn off the green “ghost boxes” to declutter your charts.

How Can Tradingsim Help?

All of the above examples were taken directly from Tradingsim. You can use Tradingsim to practice your strategies using the Darvas box. You can also test Darvas’s original strategy using daily and weekly bars.

If you are more interested in day trading with Darvas boxes, you can test out the system with a number of intraday timeframes as well.

Best of luck!

Averaging down is the popular way to describe buying more of a position as a stock goes down. It’s akin to seeing something you think is valuable in a supermarket getting marked down over and over again. And because you believe it is undervalued, you buy more of it as the price plummets.

But is the averaging down trading strategy profitable over the long-term? How about when day trading? What are the pitfalls?

In this post, we will cover the basics of the averaging down trading strategy and why this approach can be dangerous for your portfolio. We’ll also look at why “averaging up” on a short position can be even more dangerous. Lastly, we’ll give an example of when averaging down might work.

What is Averaging Down?

Averaging down is the process of adding to a position as it goes counter to your initial transaction. You can also “average up” in a position when you are trying to short it. In other words, you sell more shares short as the price rises — moving your average price up as you go.

In theory, this makes sense because it will allow you to obtain the same asset at a better price. Therefore, you can average down or up on the entry price and, in turn, increase the profits when you close out the position.

That being said, there is one major flaw in this strategy. You have no clue which trades will go in your favor and which will continue to slide against you.

A Competing Theory

Opponents of this strategy point to the old adage of cutting your losers and letting your winners run. This sounds easy enough, but why is this so hard to do?

The answer to that question is rooted in the fundamental human nature to hope. Just like other parts of our ordinary lives, we tend to want to hang on to things too long, hoping they’ll change for the better.

For this reason, when we see a stock is no longer going in our favor, instead of taking the loss, we do what we think is the “smart” thing and add to the position. It’s all based upon our ego and not wanting to be wrong.

Yet while change may inevitably come, all too often that hope may take us on a ride far longer and more costly than we ever imagined.

"My philosophy is that all stocks are bad. There are no good stocks unless they go up in price. If they go down instead, you have to cut your losses fast. Letting losses run is the most serious mistake made by most investors." -William J. O'Neil

If you can accept a loss for what it is, then trading becomes one of the most straightforward business operations you could ever undertake. But instead of treating our trades like a business decision, we get stuck in the emotional attachment of holding on.

Investors use phrases like averaging down to justify their risky actions of not only holding onto a losing position but adding to them.

To understand the psychology of it all, let’s step back from the trading game for a second and look at the concept another way.

Would You Average Down with any Other Business?

To simplify the concept of averaging down, let’s say you owned a small housewares shop. In this shop, you sell all types of products.

But you recently added a new style of toaster that is going to change how people eat their breakfast.

Placing the toaster in your front window with banners and ribbons, you think the toasters will fly off the shelf. You believe in the product.

However, to your surprise, you were only able to sell one toaster in an entire week.

You look over your inventory sheet, and you realize that you have 499 toasters left to sell, so you begin to worry a little and place a phone call to the supplier.

Somehow Things Get Worse

The supplier empathizes with your concerns.

To help you out, they offer an additional 20% discount to improve your margins. This time, you know that things will be better because you can average down on the price you paid for the toaster.

Perhaps the only reason the toaster is not selling is due to the sale price.

With that in mind, you take the supplier up on their offer. You now own 1,000 toasters. 2/3 of your inventory are priced at the discounted rate — a better average price.

You mark the price down slightly, but to your surprise, there is no additional interest. You are still unable to sell any toasters.

What would you do at this point? Would you average down again?

Take a look at what this activity would look like on a stock chart. Imagine if these shares of Citigroup were toasters:

As you can see, trading is just like any other business. So, why expose your trading account to this risky behavior?

2008 Mortgage Crisis – Example of Averaging Down

For those of you that can remember the bear market in 2008, it was nothing short of brutal. The market fell off a cliff and just kept going.

As an investor, you may have decided to buy the Dow Jones as it was tanking. This is what it would have looked like:

As we all know, the Dow is now trading back over 30,000. However, it has taken 13 years to get there. Why not let others clamor for the bottom in pricing, while you pick up the pieces once they’re exhausted?

Only Average Down from a Position of Strength

This may sound a bit contradictory at first? Let’s explain.

A position of strength means you are buying into the dips of a strong trend.

You can get a better feel for the concept through chart illustrations. Let’s examine a few.

Comparing the two charts below, which stock would you want to average down on?

You are probably thinking, well you can’t average down in the first one because it’s at highs and showing real strength.

Well, that’s precisely what we want to see.

You just need to go to a lower time frame, like 5 minutes for example, to find an opportunity where you can average down in the stock. The $23 level was finding support on the daily chart, so we zoom into the 5min chart and place our “dip buys” there.

Averaging Down on 5 Minute Chart — Average Down on 5 Minute Chart

Remember, this stock was at multi-month highs on a daily chart. So, buying into this stock would be buying right as it is breaking out on an intraday and daily basis.

We call these constructive pullbacks. They are different from reversals and capitulations. Ideally, they occur in a young, strong uptrend, where we expect more highs.

This is how you buy from a position of strength.

To reiterate: averaging down can be very risky. But, if you are going to do it, you have to buy into a stock that is trending strongly.

Closing Trades You’ve Averaged Into

There are two choices you have when deciding how to close out your trades. Please review each approach in detail and think back to your trades to see which one will work best for you.

Close Out the Position in Pieces

If you fid yourself in the position of having averaged down on a trade, it may make sense to close the position out in pieces.

For example, if you had four buys into a falling stock, you would have the same four sells to exit the trade.

Now, this is where it gets a bit tricky.

If you are up on the position and you want to scale out as things go in your favor, this makes total sense. You are never going to go broke taking money out of the market as things go your way.

Scaling Out after averaging down — Scaling Out

In the above chart example, you can see three entries and three sells. This scenario would be the best you can hope for with this approach.

Averaging down would have allowed you to gain a better average share price, while you are then later able to scale out of the position at much higher prices.

Again, this is assuming the entries were from a constructive overall pullback.

Two Things Required to Close Out in Pieces

There are two pieces to this puzzle you need in your favor.

Firstly, as you average down, you need the stock to hold up and not continue lower. In other words, a constructive pullback into an area of support like we mentioned earlier.

Secondly, the rally not only turns a profit for you but rallies strongly enough that you can sell out in equal pieces.

This even more challenging of a concept when you factor in day trading, as the morning high set within the first hour of trading is often the high for the entire day.

Again, this can be a risky trade if the stock doesn’t bounce. Imagine the example below:

In this event, how do you scale out of a losing position? Assuming you didn’t sell at the bottom.

This is where paralysis could set in and as stated earlier, you now take a massive loss as you are carrying a large position after averaging down and you are completely vulnerable.

Close Entire Position

If you are closing your entire position, you are doing so for one of two reasons: (1) you have hit your target price or (2) you are getting crushed, and your stop loss was triggered.

Hit Your Target Price

Buying from a position of strength means being in a stock that is going in your favor soon after your entry. This is ideal.

As we mentioned earlier, this typically occurs in a strong uptrend, or right after a constructive pause in that trend.

GERN up trend nice and easy — Nice and Easy

In these slow and steady stocks, it is easier to sit tight until your target is reached.

The benefit of holding your entire position until you reach your target is reaping all the profits at the highest price. The downside is you are completely exposed until your goal is reached.

Stop Loss Exit

This one typically hurts the most for amateur traders. But for experienced traders, it doesn’t hurt as badly.

Why?

Disciplined traders only put on trades when all their criteria are met. This doesn’t mean they have a 100% chance of success in the trade. It just means they have a high probability of success.

So when their stop losses are hit. They don’t take it personally. They chalk it up to the 15% of trades they know they’ll lose.

On the other hand, the amateur trader is averaging down during this process. And depending on how you averaged down will determine how much pain you are feeling as the stock goes against you.

However, like the professional trader, if you have a set amount you use on every trade and you scale in, then while you will take a loss, it may still be manageable.

Now, if you use a set amount per trade, but have gone beyond your standard per trade amount and have doubled or tripled your exposure when averaging down – you are in trouble.

Regardless of the amount of pain due to the loss, closing out the position at your predetermined stop is the right decision.

In Summary

Ultimately, averaging down or up is your decision as a trader. As we have recommended, if you are going to average down, do it from a position of strength.

Better yet, we encourage you to track your results over a minimum of 20 trades or more in a simulated environment.

See if averaging down has helped improve your bottom line before you put real money to risk.

Good luck!

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.

Famous investor Bruce Kovner, chairman of CAM Capital, noted that stop-loss orders are the best way to minimize risk.

“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.

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.

Market analyst Paul Rosenberg noted that traders often make two errors when trading.

“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 can use TradingSim’s guidance to become a better day trader.

Determine a day trading goal.

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.

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 — 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

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.

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