What is the Ease of Movement Indicator?

The Ease of Movement (EMV) is an oscillator, which analyzes the relationship between price and trading volume.  The EMV has an uncanny ability to identify price inefficiencies in the absence of market volume.

The EMV is often represented as a curved line, which bounces above and below zero.  Whenever the EMV is above zero, it conveys the price is increasing with relative ease. Conversely, when the EMV is below zero, the security is decreasing unchecked; hence, the indicator is named Ease of Movement. The below image displays the ease of movement indicator in action:

EMV Indicator

It appears chaotic, don’t you think?

Nevertheless, after reading this article, you will garner a clear understanding of how the indicator can assist in your trading endeavors.

How to Trade with the Ease of Movement Indicator?

Opening a Position

The truth is the Ease of Movement indicator is not a standalone trading tool.  One of the most common indicators to combine with the EMV is volume. Since the EMV is derived from volume activity, volume is a valuable tool in validating trading signals.  The below image illustrates how you can confirm a setup prior to trade entry:

EMV Trading Signal

This is a 5-minute chart of Twitter from October 28 and 29, 2015. First, we see a gap down, which results in tremendous down pressure on the EMV below the zero line.  This bearish action acts as a sign of caution for traders looking to enter long positions.

Despite this negative price action, approximately 15 periods later, the EMV crosses above the zero line.

Did you notice that as the price is breaking out, volumes are also increasing? This bullish price action coupled with strong trading volume provides a great opportunity to establish a long position.  If entered a long position in Twitter, we would have enjoyed the spoils of a nice impulsive move higher.

At the end of the bullish move, the EMV begins making lower highs with each subsequent rally and begins to draw closer to the zero line. In addition, volumes continue to drop with each trading period.

Fortunately, for us, once there is a bearish cross of the EMV below zero with increased volume, we use this as an opportunity to exit our long position and get short.

We open our short position and are able to ride the wave back down for another round of healthy gains.

When to Close a Position

Indeed! We know when to enter a trade, but does the EMV provide accurate exit signals

The answer is yes and no.

As previously mentioned, the EMV is not a standalone trading indicator. At the same time, the volumes indicator is only good for confirming signals, but not for telling us when to enter or exit.

What are we to do?

Here we have two options: the first one is to stay with the EMV and volume in order to keep things simple.

Another option is to combine an additional trading indicator for increased accuracy.

Option 1 - Keep it Simple

In every decision making process we should always consider the option to do nothing. This approach would simply call for us to exit positions whenever the EMV breaks the zero line contrary to the primary trend.

Option 2 - Add a Moving Average

The use of moving averages is a classic method for exiting trades

The moment price closes on the opposite side of the Moving Average, the position should be closed. It is very important to note that your risk appetite will dictate the number of periods you use when configuring your moving average (i.e., 5, 10, and 20).

The other positive of using a MA is that it gives us a bonus validation entering and exiting trades. Whenever EMV signals are supported by increased market volume, coupled with a moving average signal, you have what I like to call the triple threat.

See the below image for a trading example of option 2:

EMV with SMA

Above is a 15-minute chart of Facebook from October 8-14, 2015. The green circle represents when we enter the market and the red circle displays our exits.

The first trade signal occurs after the confirmation of a double bottom, price closing above the SMA, increased volume and the EMV moving above 0.  This provides four confirmation points and displays what we like to call market harmony.

We go long on this signal and enjoy a healthy run up over a number of trading periods. With the opening of the markets on October 13, 2015 Facebook has a significant gap down below the SMA.  Therefore, we stick to our strategy exit our long position.

Let’s go through another example on the short side.

EMV Short Trade

This time we have 5-minute chart of Microsoft from October 21 and 22, 2015.

Our first position is short and is based on a drop of the EMV below zero and a close below the SMA.

Note that the volumes at this time are relatively low. Nevertheless, we decide to go short, because we get a bearish confirmation from the price closing below the 30-SMA.

The price action begins a sharp bearish decline with a minor test of the 30-SMA prior to resuming the downtrend in earnest.

It's not until the market shoots sharply higher with volume do we exit our position and go long.

In both of these examples, the Ease of Movement indicator formula, combined with volumes and a Simple Moving Average can provide a trader more clarity into the health of the price trend.

In Conclusion

• The Ease of Movement Indicator is a volume oscillator that incorporates price action.
• A trader can enter a long position when the EMV closes above the zero line and can go short when the EMV closes below the zero line.
• Volume and SMAs are the best friends to the Ease of Movement indicator.
• Avoid EMV signals during periods of low volume.

The post Ease of Movement Indicator (EMV) – The Best Way to Interpret Price Action appeared first on - Tradingsim.

If you are interested in short-term trading such as day trading based on technical analysis, then you would have probably heard about the Williams %R indicator. Pronounced as Percent R, the indicator was invented by famous technical analyst and charting enthusiast Larry Williams.

The Williams %R is essentially a momentum indicator, which gauges if a particular stock is overbought or oversold in order to identify the possibility of a counter move. In this article, we will discuss additional methods you can incorporate the Williams %R indicator in your strategies in order to successfully day trade the market.

Understanding How Williams %R Is Calculated

Like most other technical indicators, you can probably find the Williams %R in your favorite charting package. While you do not need to calculate the raw values by hand, there are many good reasons why you should probably thoroughly understand the Williams %R formula. It is always a good idea to pay attention to how a technical indicator generates its signals as you are about to risk a lot of your hard earned money based on its signals.

Without further ado, here is the formula that you need in order to calculate the Williams %R:

(Highest High_n – Close_{current period}) ÷ (Highest High_n - Lowest Low_n) x -100

In this formula, the highest high would be the highest recorded price of the security for the number of time periods you are calculating the Williams %R. On the other hand, the lowest low would be the lowest price during the same period. The close in the formula represents the closing price of the last bar or time period.

This is why professional traders recommend that you should always wait for the bar to close before considering a signal generated by the Williams %R indicator. During extremely volatile market conditions, the closing price can change quickly and the signal can reverse after you have placed an order.

When you add the Williams %R in your charting package, the indicator settings would usually allow you to set the number of periods. The _n in the formula would the number of bars or time periods that you are calculating the Williams %R.

Although Larry Williams initially calculated it with a 10-day trading period and your charting package probably already set the default period for calculating the Williams %R to 14, you can always customize the Williams %R to fit your day trading strategy.

Relationship between Williams %R and the Stochastic Oscillator

No discussion about the Williams %R would be complete if you do not compare the indicator to the Stochastic Oscillator. Before we discuss further, let us take a quick look at the Stochastic Oscillator formula.

As it has two plotted lines, %K and %D, the formula to calculate these two data points are as follows:

%K = (Close_{Current Period} - Lowest Low_n) ÷ (Highest High_n - Lowest Low_n) * 100

%D = 3-Day Simple Moving Average (SMA) of %K

While there are two variants of the Stochastic Oscillator, the formula above is for the Fast Stochastic Oscillator. As you can see, the Williams %R is the inverse of the Fast Stochastic Oscillator.

The Williams %R indicator represents the level of the closing price by comparing it with the highest price in the number of periods you are calculating. By contrast, the Fast Stochastic Oscillator represents the level of the closing price by comparing it with the lowest price for a number periods.

You may have noticed the Williams %R multiplies the formula by -100 where the Stochastic Oscillator multiplies the formula by 100. Once you multiply the %R value by negative 100, the outcome would be the same as the %K, right?

Figure 1: Comparing Williams %R and (fast) Stochastic Oscillator

However, if you pay attention to the Stochastic Oscillator and Williams %R charts in Figure 1, you will notice that the scaling values are different. The Stochastic is oscillating between 0 and 100, but the Williams %R is oscillating between -100 and 0. Besides this, the %K and %R lines are the same!

Interpreting the Williams %R Indicator

Figure 2: Williams %R Above -20 and -80 Usually Represents Overbought and Oversold Market Conditions

As we mentioned earlier, Larry Williams plotted the %R on a 10-day period and he considered the market to be oversold when the %R reading came below -80. On the other hand, when the 10-day period %R came up above -20, he considered the market overbought.

However, it is important that when the market becomes overbought or oversold, it does not directly imply that you should open a short or long trade, respectively.

During a strong uptrend, the stock can remain overbought for a long period of time where the Williams %R would fluctuate around -20. In contrast, during a strong downtrend, the Williams %R may move around -80 and constantly show an oversold condition. In both cases, you would end up taking a counter trend position and lose money faster than you can count it.

Examples of Trading with the Williams %R Indicator

The Williams %R Indicator can be a very powerful tool if you know how to use the indicator properly. Instead of using the indicator for simply identifying overbought and oversold market conditions, you can develop a trading plan around the -50 line cross.

Example of Taking a Short Position with Williams %R Momentum Strategy

Figure 3: Example of -50 Line Cross Strategy

After becoming overbought and oversold, if the Williams %R crosses the -50 line, it generally indicates a shift in momentum. At this point, you can start to look for opportunities to trade the stock in the direction the %R crossed the -50 line. In the example trade illustrated in figure 3, the %R of MSFT  was overbought, then the stock price started to decline and the %R crossed below the -50 line quickly, before the bulk of the bearish move happened.

Once it crossed below -50 and you waited for the bar to close, you can simply place a sell order.

However, we recommend that you try to combine price action with this Williams %R trading strategy in order to increase the odds of your success. As you can see, the bar that pushed the Williams %R reading below -50 was a bearish outside (BEOB). If you simply placed a sell stop order below the low of this bar, you would have entered the market when the bearish momentum was at its highest. Hence, you could have gotten away with placing a smaller stop loss, which would in turn increase your risk to reward ratio on this particular trade.

You can use this same strategy to take a long position when the %R crosses above -50 from after being oversold for some period of time.

If you have any questions about how to incorporate this Williams %R strategy into your existing trading plan or you have an idea about improve it, please feel free to share it with us in the comments section.

Example of Trading Williams %R Divergence

Figure 4: Trading Williams %R Divergence

If you are familiar with divergence then you can use the Williams %R divergence to confirm if the price of the stock is going to continue trending in the current direction or would it likely reverse directions anytime soon.

Williams %R divergences are very powerful you should pay attention to these when it happens. In figure 4, you can see the AMGN stock price formed a down trend, but the Williams %R highs formed an uptrend in the chart. This kind of divergence suggests a trend continuation. As you can see, after forming a bearish price action bar, the AMGN price shortly resumed the downtrend and you could have easily placed a sell stop below the bearish bar to capture this short swing.

Conclusion

Since Williams %R lines are similar to the Fast Stochastic Oscillator, you can simply use the Stochastic Oscillator. But, remember that the intended trading strategy of the Williams %R is completely different compared to the Stochastic Oscillator.

Like other momentum indicators, Williams %R has its flaws, as it can remain extremely overbought during an uptrend and vice-versa. However, as we showed here, you should not use the Williams %R to blindly take a position in the market based on its overbought and oversold readings.

Instead, if you trade smartly by combining price action and use the Williams %R to confirm the momentum in the market, your chance of ending up with a profitable trade would increase tremendously.

The post Tricks You Can Use to Successfully Day Trade with the Williams %R Indicator appeared first on - Tradingsim.

If you are wondering what is the VWAP, then wait no more. VWAP stands for Volume Weighted Average Price and is used to identify the true average price of a stock by factoring volume into the equation.

Finding the average price based on closing value of a security will not give you an accurate picture of a stock’s health.  

Did the stock close at a high with low volume?  Did the stock move to a new low with light volume?  

These are all critical questions you would want answered as a day trader before pulling the trigger.

This is where VWAP can add more value than your standard moving average indicator because the VWAP reacts to price movements based on the volume of a given period.

In this article, we will explore the seven reasons day traders love using the VWAP indicator.

Reason # 1: VWAP Calculation Factors in Volume

For the record, the VWAP formula is:

∑ Number of Shares Purchased x Price of the Shares ÷ Total Shares Bought During the Period

As you can see, by multiplying the number of shares by the price, then dividing it by the total number of shares, you can easily find out the volume weighted average price of the stock. Since VWAP takes volume into consideration, you can rely on this more than the simple arithmetic mean of the transaction prices in a period.

Theoretically, a single person can purchase 200,000 shares in one transaction at a single price point, but during that same time period, another 200 people can make 200 different transactions at different prices that do not add up to 100,000 shares.

In that situation, if you calculate the average price, it could mislead, as it would disregard volume.

Reason 2 #: VWAP Can Enable Day Traders to Buy Low and Sell High

If your technical trading strategy generates a buy signal, you probably execute the order and leave the outcome to hopes and prayers. However, professional  day traders do not place an order as soon as their system generates a trade signal. Instead, they wait patiently for a more favorable price before pulling the trigger.

Figure 1: Price of AAPL Compared to Its 5-Minute VWAP

If you find the stock price is trading below the VWAP indicator and you buy the stock at market price, you are not paying more than the average price of the stock for that given period.

With VWAP trading, you can stick to a trading strategy where you can always buy low. If you are shorting the stock, you sold at a higher price compared to the average price.

By knowing the Volume Weighted Average Price of the shares, you can easily make an informed decision about whether you are paying more or less for the stock compared to other day traders.

Reason # 3: A VWAP Cross Can Signal a Change in Market Bias

Buying low and selling high is all great; however, if you are a momentum trader, you would look to buy when the price is going up and sell when the price is going down, right?

Figure 2: AAPL Crossing Above VWAP

A VWAP strategy called VWAP cross can help you trade the momentum in the market. Since the VWAP indicator resembles an equilibrium price in the market, when the price crosses above the VWAP line, you can interpret this as a signal that the momentum is going up.

When you find the price is crossing below the VWAP, you can consider this as a signal that the momentum is bearish and act accordingly.

Reason # 4: VWAP Indicator Can Act as Dynamic Support and Resistance

Figure 3: BONT Price Respecting VWAP Resistance

Day traders love the VWAP indicator because more than often the price finds support and resistance around the VWAP. Although this is a self-fulfilling prophecy that other traders and algorithms are buying and selling around the VWAP line, if you combine the VWAP with simple price action, a VWAP strategy can help you find dynamic support and resistance levels in the market.

You should note that the likelihood of a VWAP line becoming a dynamic support and resistance zone becomes higher when the market is trending.

Reason # 5: VWAP Can Help You Confirm Counter Trend Trading Opportunitie

Figure 4: VWAP Confirms the Oversold Signal Generated By the RSI Indicator

Ever wondered if a stock is overbought or oversold and if this is the right time to take a counter trend trade? If you are just looking at the RSI or Stochastics and double guessing if this is a strong trend or the market will turn back, then adding the VWAP indicator on your chart can make your life much easier.

Professional day traders have a rule of thumb when using the VWAP - if the VWAP line is flat lining, but the price has gone up or down impulsively, the price  will likely return to the VWAP line. However, if the VWAP line is starting to gradually go up or down along with the trend, it is probably not a good idea or good time to take a counter trend position.

Reason # 6: VWAP Can Help You Reduce Market Impact

Most day traders do not understand that their actions can impact the market itself because we often trade our personal funds at the retail level. However, if you are a hedge fund manager or in charge of a large enough pension fund, your decision to buy a stock can drive up the stock price.

Just imagine for a second you are day trading and want to buy 5,000 shares of Apple (AAPL). AAPL is a fairly popular stock and traders rarely face any liquidity problems when trading. Hence, you will have no trouble finding a seller willing to let go of his 5,000 AAPL shares at your bid price.

However, if you want to buy 1 million AAPL shares within 5 minutes and place a market order, you will probably buy up all the AAPL stock on sale in the market at your given bid price within a second. Once that happens, your broker will fill the rest of your order at any price imaginable, but probably higher than the current market price.

Congratulations, you have just bid the price up and created a market impact!

Placing a large market order could be counterproductive as you will end up paying a higher price than you originally intended. Hence, when you want to buy large quantities of a stock, you should spread your orders throughout the day.

If you find the stock price is trading below the VWAP, you are paying a lower price compared to the average price, right? This way, a VWAP strategy can act as a guide and help you reduce market impact when you are dividing up your large orders into small pieces.

Reason # 7: VWAP Can Help Beat High Frequency Algorithms

They are watching you - when we say they; we mean the high frequency trading algorithms. Have you ever wondered why the liquidity levels in the stock market have gone up over the last few years?

The high frequency algorithms can be little angels when the liquidity is low, but these angels can turn to devils as they can sense when you are trying to spread out a large buy order to reduce market impact.

For example, if you want to buy 100,000 shares of a small cap company, you can sit in front of your screen and try to buy 1,000 shares per minute for 100 minutes, and waste over one and half hour of your life. But, if you program a VWAP algorithm to do that, it can probably get it done during the same time, wasting none of your time.

There is a slight problem with manually buying the same quantity of stocks over a period. Once the high frequency algorithms find a pattern you are trading a certain number of shares per minute, these will try to artificially drive up the price of the stock just before you place a new order.  

A VWAP algorithm can be programmed to buy a random amount of shares when the price is trading below the VWAP. This way, you can make it harder for the preying high frequency algorithms to identify what you are up to.

If you are a retail trader like myself, you are better off knowing the algorithms are out there, but not trying to defeat them.  Odds are these large hedge funds have teams of programmers working around the clock to find price inefficiencies.  

Don’t concern yourself with this cyberwar stick to your system and let the market tell you when you are wrong.

Conclusion

Once you apply the VWAP in your day trading, you will soon realize that it rarely produces very accurate buy or sell signals.

Well, the VWAP was not developed to be used as an indicator that generates trading signals. Instead, if you use the VWAP indicator in combination with price action or any other technical trading strategy, it can simplify your decision making process to a certain extent.

There are many practical applications of VWAP when you are trading large quantities of shares to ensure you are not paying more than market value over a period of time. 

If you have any question about VWAP, please share it in the comments section below.

The post 7 Reasons Day Traders Love the VWAP appeared first on - Tradingsim.

What is the Klinger Volume Oscillator?

The Klinger Volume Oscillator (KVO or KO) is a volume-based indicator, which assists traders to identify a longer-term view of price trends.  Since the KVO is a leading indicator (oscillator), it is not a great standalone trading tool. For this reason, traders often combine the KVO with other trading indicators in order to achieve higher accuracy when making trade execution decisions.

The Klinger Oscillator consists of two lines, which fluctuate above and below the zero level. The image below shows the KVO indicator in action:

Klinger Oscillator

It resembles a cardiogram, don’t you think?

If you haven’t used the Klinger Volume Indicator before, you would probably consider it pretty chaotic and unorganized because of the strong fluctuation of its most important component – the blue line.

The blue line on the image is the KVO line. This line is a calculation of the difference between the 34-period and 55-period EMAs, which day traders call “volume force” (VF). The green line is a normal 13-period EMA, which averages the fluctuation of the KVO line.

What signals does the KVO indicator gives?

Since the green EMA averages thirteen periods of the KVO, we have many interactions between the two lines, thus creating the most common signal of the Klinger Volume Oscillator Indicator. Whenever the blue KVO line crosses the green 13-period EMA, the KVO indicator signals an eventual move in the direction of the cross.

The other important signal of the Klinger Indicator is the divergence. We get a bearish divergence when price increases and the KVO is negative. Conversely, a bullish divergence occurs when the price is decreasing and the KVO line is positive.

Below you will find an example of a strong bearish divergence between the price of Coca-Cola and the Klinger Volume Oscillator:

Klinger Divergence

As you see, divergences by the KVO work the same way as most other oscillators. While the price of Coca-Cola was increasing, the KVO indicator was decreasing steadily. Shortly after this divergence appeared, Coca-Cola quickly dropped one dollar.

Nevertheless, we should not forget that the Klinger Volume Oscillator is a leading indicator, which makes it inefficient as a standalone indicator.

In this article we will cover three indicators you can combine with the KVO indicator to increase your odds of success.

Which tools can we combine with the Klinger?

• Stochastic Oscillator

The Klinger Oscillator formula could be strengthened with a Stochastic Oscillator. Since the Stochastics Indicator is also an oscillator, we will have two leading signals helping us to eliminate false signals. The rules are simple:

You open a position whenever the KVO line breaks its 13-period SMA but only if the Stochastic Oscillator gives a signal in the same direction (overbought or oversold). You close the position whenever the KVO crosses its EMA in the opposite direction, but only if the Stochastic gives a signal, which is opposite to your position.

An interesting point regarding the Klinger Volume Oscillator is that you are always in the market, because the open and the close signals are identical.  Meaning, whenever you close a position, you should open a counter position.

Note that this is more of a short-term trading strategy and is more effective on smaller-period charts. Since you are going to be in the market most of the time, you will accumulate big volumes, which will result in many losses and many profits. The point is to keep your win ratio slightly higher.

The example below demonstrates how this strategy works:

Klinger with the Stochastic Oscillator

This is a 15-minute chart of Microsoft from September 4-11, 2015, showing 5 positions, which I take according to the strategy described above. We have three long and two short positions, where the only unsuccessful one is the last long. The total profit we get here is about $2.80 per share.

This is again illustrative, but the main point to take away is that you are constantly in the market.  Experience has shown me over the years, that systems requiring traders to always be in the market are hard to maintain, because you will try to start picking the winners from the losers.  This selective process overtime hurts your ability to benefit from the law of averages and ultimately results in a downward sloping equity curve.

• Parabolic SAR

The combination Klinger plus the Parabolic SAR is not very common among day traders. Yet, I find it effective, because of the difference between the two instruments - the KVO is a leading indicator while the Parabolic SAR is a lagging indicator. As we previously stated, leading indicators give many false signals. For this reason, we now add a lagging indicator, which will isolate a big part of the KVO head fakes, thus shedding light on high probability trades. Remember that as a typical lagging indicator, the Parabolic SAR needs a closing price before printing a dot.

What I suggest here is to be in the market whenever the KVO line switches above its 13-period EMA if the Parabolic SAR supports this signal with at least three dots in the same direction. If there aren’t three dots in your direction, do not open a position. We close our position whenever we get three dots in the opposite direction. Let’s see now this strategy performs in a real market scenario:

Klinger and Parabolic SAR

This is a 60-minute chart of Bank of America from the month of October 2015. The example shows how we get 7 signals to take a position in the market, but thanks to the Parabolic SAR, we isolate only three of them where we actually open a position. Therefore, out of three positions, we had 2 successful and 1 unsuccessful trades, resulting in a total profit of $0.90 per share.

The key positive for this trading strategy is that you are not constantly in the market.  As a trader, you need time to take a breathier and digest what is in front of you, in order to avoid trading fatigue.  Like anything in life, if you try to complete a task when you are exhausted, your quality of work will suffer.

• Two Moving Averages and Volume

In this trading strategy, we place two moving averages and volume in addition to our Klinger Indicator. We are going to open positions only when (1) price closes above both moving averages, (2) the KVO line is on the same side of its 13-period EMA and (3) there is a surge in trading volume.

Below you will see an image, which shows how I successfully combined the Klinger with two SMAs and volume:

Klinger - SMAs - Volume

This is a 10-minute chart of IBM showing its price movement from October 22-27, 2015. We have included our Klinger Oscillator, 15-period SMA, 20-period SMA and volume. The first circle on the Klinger Volume Oscillator histogram shows us the moment when the KVO line crosses its 13-period EMA in a bullish direction. This happens during relatively high volumes. At the same time, the price of IBM just switched above the two SMAs, which cross each other in a bullish direction. Long we are! We close our position with the first candle outside the 15-period simple moving average (red).

The next position is unsuccessful. We get pleasant market conditions for a short position, but contrary to our idea, IBM starts gaining and we close shortly thereafter. This is the moment when the volumes start playing their most important role. As you see in the upper blue rectangle, volumes are low. At the same time, the KVO line acts erratically and gives numerous false signals. Since the volumes are low, we do not take these signals under consideration.

We do open a short position when we get the next big volume candle, price closes beneath the two SMAs and the KVO crosses beneath the 13-period EMA. This scenario repeats once again triggering our fourth position.

So, here we opened 4 positions where only one was unsuccessful. The other three positions resulted very positively to our bankroll - with a total profit of $3.4 per share.

Bonus Content - Klinger Oscillator vs. Awesome Oscillator

The Awesome Oscillator looks calm in comparison to the KVO, which appears rather chaotic.  However, the Klinger Oscillator provides a greater number of trading signals because of this dynamic.

Some of the signals are false, but there are secondary tools you can use to validate the trade signals. After all, you will need to use validation tools with the Awesome Oscillator as well. So, why not take advantage of the indicator which provides more signals?

Klinger versus Awesome Oscillator

This is a 10-minute chart of Facebook, showing the price of the security from October 22-26, 2015. The Awesome Oscillator in the lower part of the image shows 8 saucer formations. Notice that all the Saucer places completely match the parameters of the blue bullish trend line and at the same time, its corrections. The trend line is well contained by the saucers until the Awesome Oscillator switches below the zero level and at the same time, the price of Facebook creates a bearish gap.

The Awesome Oscillator is also good for discovering divergences and drawing chart patterns on it – pretty much like the Klinger Volume Oscillator. However, the truth is that these two trading tools are very different. First of all, the KVO is a volume-based oscillator, while the AO is about determining the price’s momentum. Second, the KVO consists of two lines, while the AO is a bar histogram with red and green bars. Third, the movement of the KVO is relatively more fluctuating, because this indicator represents the inconsistent trading mood of the participants in the market in different time frames and market overlaps.

Honestly, out of these two trading instruments, I prefer the Klinger Oscillator more. The reason is the level of detail it displays, makes you prepared for every trade opportunity. I believe that if you combine the Klinger Oscillator with the right technical indicator, you will uncover more trading setups than if you used the Awesome Oscillator.

In Conclusion:

• The Klinger Indicator is a volume-based oscillator.
• It consists of two lines, where one of them is very dynamic.
• Its basic signals are the interaction between the two lines and the divergence.
• The KVO is not a good solo player, because it is a leading indicator.
• The KVO could be successfully combined with:

- Stochastic Oscillator

- Parabolic SAR

- 2 Moving Averages and Volumes

• KVO gives more signals than the Awesome Oscillators.
• Many of these signals are false and should be validated by a secondary tool.
• In this manner, KVO gives higher number of accurate signals too.
• KVO will keep you busy!

The post 3 Trading Indicators to Combine with the Klinger Oscillator appeared first on - Tradingsim.

What is the TRIX indicator?

The TRIX indicator is a momentum oscillator, which assists traders by identifying trending markets and price reversals. The TRIX indicator consists of three major components:

• horizontal zero line.
• the TRIX itself, which oscillates above and below the zero line.
• at the right side of the indicator, you are likely to find a percentage scale, which measures the change in the curved line.

TRIX

How is the TRIX calculated?

The curved line of the TRIX shows the percentage change of a triple smoothed Exponential Moving Average.

For those of you that just scratched your head, let’s try explaining this again.

Imagine a regular price chart - then, add an Exponential Moving Average, which of course calculates the price action. Next, add a second Exponential Moving Average, which is based on the first Exponential Moving Average. Lastly, add a third Exponential Moving Average, which measures the movement of the second Exponential Moving Average.

So, let’s quickly summarize to make sure we have not lost anyone!

The price is measured by the first Exponential Moving Average, the first Exponential Moving Average is measured by the second Exponential Moving Average, and the second exponential Moving Average is measured by the third Exponential Moving Average. Try saying that fast three times.

One, two, TRIX! Surprise! This is where the name of the indicator is derived.

Now, what about the percentage change?

The percentage change is displayed as a line on the TRIX indicator itself and it measures the change in the third Exponential Moving Average, which is called the triple smoothed Exponential Moving Average.

Therefore, if the TRIX curved line has reached 0.1%, it means that the third EMA (the triple smoothed EMA, which measures the second EMA, which measures the first EMA) has recorded an increase of 0.1%.

Still a bit confused. Please continue reading the rest of this article as we hope to clear things up.

What signals does the TRIX indicator provide?

1. The simplest trading signal provided by the TRIX is “when crossing above zero go long and breaking below zero go short!”

2. Another important TRIX signal is the identification of a divergence event. Divergence is a conflicting signal between the overall movement of the indicator and price action.

Divergence can occur on any time frame and are not predictable. When divergence occurs, it is likely followed by price movement in the opposite direction. For example, if the price is making higher highs but the TRIX is making a lower high on each price push, we can assume the stock is in the early stages of rolling over.

3. Lastly, the TRIX indicator sometimes could draw formations, which are well known to the average trader. These are some of the formations you can find on the TRIX with their implications to the markets:

• Head and Shoulders – Bearish
• Inverted Head and Shoulders – Bullish
• Rising Wedge – Bearish
• Falling Wedge – Bullish
• Flag – Bullish
• Inverted Flag – Bearish
• Diamond – Bullish/Bearish
• Triangles – Bullish/Bearish

These well-known chart patterns have the same effect on the TRIX as they would on your standard price chart. These formations should not be taken as standalone signals, but can help support or invalidate a trade setup.

Examples of successful TRIX trading systems

Interaction of the percentage line with the zero level

As we have already stated, the basic signal of the TRIX indicator is the moment the TRIX interacts with the zero level in bullish or bearish fashion.

If you see the curved line breaking the zero level in a bullish direction, the indicator gives us a signal for an eventual bullish price move. If the curved line interrupts the zero level in a bearish direction, we are likely to see a price drop.

Below you will see a 30-minute chart, which displays the price movement of Facebook in October:

TRIX - Simple Trade Signal

In the green circle, you will see the moment when the TRIX curved line breaks the zero level in a bullish direction and switches from the lower side to the upper side of the indicator. This is the moment where we would suggest opening a long position. As you see, after this moment, the price of Facebook starts a nice and steady bullish move, which results in a healthy profit.

Divergence between TRIX and the chart

We all know that the divergences between a chart and its indicators often signals an upcoming change in the current price action.

Below you will see a 60-minute chart of Bank of America for September and October 2015:

TRIX - Divergence

We see that the TRIX indicator and the price of Bank of America are experiencing a bullish divergence. This is why we expect Bank of America’s price to increase soon.

Then we see the TRIX indicator move into positive territory.

This is our go long signal we have been waiting for patiently. We open a position and in the next 7 candles record a healthy increase over a couple of days.

Discovering formations on the TRIX indicator

Again, chart patterns can form on the TRIX indicator itself.

Below, you will see the 60-minute chart of Apple during the months of September and October 2015.

An inverted head and shoulders pattern forms on the TRIX, where the blue straight line is its neckline.

TRIX - Chart Patterns

In the green circle, you will see the moment where the TRIX percentage line breaks the blue neckline in a bullish direction. At the same moment, the TRIX line breaks the zero level to the upside. This is an interesting case where we get two bullish signals at once.

This is a great opportunity to get long the stock in preparation for an advance.

After a slight drop, the price starts an impulsive move higher.

What is missing?

Now that we are familiar with the TRIX indicator, recognize its formations and can interpret these signals, what are we missing?

How are we going to implement a profitable TRIX trading strategy, when we still do not know when to exit our position?

Well, let us explore this point in greater detail.

For illustrative purposes, we have decided to demonstrate how the TRIX would work with a 50-period Simple Moving Average. Below you will see a 60-minute chart of LinkedIn for the month of September 2015:

TRIX - Trade Signal Confirmation

The first green circle on the TRIX marks a moment where the curved line of the indicator crosses the zero line.

At the same time, the price of LinkedIn switches above its 50-period Simple Moving Average. Since we see bullish signals on both fronts, we go long.

Suddenly, the TRIX indicator starts moving in a bearish direction, while the price of LinkedIn is still increasing.

This has all of the characteristics of a bearish divergence and we prepare ourselves for a potential change in price action.

LinkedIn eventually breaks the 50-period Simple Moving Average to the downside. This is our “run for the hills” signal.

Therefore, we close our position and collect our healthy profits.

Now, the TRIX breaks the zero level line in a bearish fashion, which happens after the price has switched below its 50-period Simple Moving Average and we get short.

Fortunately, the price goes in our favor and begins to drop as expected.

In Conclusion

• The TRIX indicator consists of a curved line, which fluctuates in positive and negative territory.
• The curved line measures the percentage change in a triple-smoothed EMA.
• If the TRIX goes above zero, this is a long signal. If the TRIX goes below zero, this is a short signal.
• The TRIX can help identify bullish and bearish divergences.
• The movement of the TRIX indicator can develop into well-known chart formations.
• The TRIX indicator should be combined with other technical indicators to confirm entry and exit points.

The post TRIX – Standard Momentum Oscillator or Something More? appeared first on - Tradingsim.

The True Strength Index (TSI) is a technical indicator that was developed by William Blau in the early 1990’s. While there are many applications for the True Strength Index, professional traders use the TSI indicator to gauge the strength of a trend.  The TSI is better suited for trade management instead and not providing entry signals.

In a nutshell, the true strength indicator is a momentum indicator.  However, since the true strength index calculation applies exponential moving averages as a smoothing factor, the TSI can provide an early indication of whether the prevailing trend will continue or reverse.

Armed with this information, you can easily decide if you should keep holding on to your winning trades or take profits.

How to Interpret the True Strength Index?

Before we show you the practical applications of the true strength index, let us first take a look at how to interpret the indicator.

Primarily, the True Strength Index oscillates between 100 and -100. When the index line crosses above the zero line this is a sign that the market bias has turned bullish. By contrast, when you see the TSI cross below the zero line, this is a sign the price action has turned bearish.

Please keep in mind if you change the periods in the true strength index settings, the indicator will respond to price action accordingly. For example, if you calculate the True strength index for 50 periods, you will effectively reduce its sensitivity compared to when calculating for 15 periods.

Now that you know how to interpret the True Strength Index, would you like to know exactly how you could apply and incorporate this indicator in your day trading strategy?

Please keep reading to see how.

# 1 – Hold On to Your Winning Trades When the True Strength Index Crosses the Zero Line

Figure 1: True Strength Index 0 Line Cross Suggests Change in the Momentum

The quality of the price action bar we identified in Figure 1 isn’t great. Nevertheless, since this is just an example, let’s assume you took a long position when AAPL made a higher high at $108.50.

Once you are long the trade, you might wonder if you should keep the position open or close it with a small profit. If this was a strong candlestick, you may have enough conviction to hold onto the position.

Even professional traders often get enticed to close a winning trade with a small profit, especially, when the quality of the entry was not so great.

In these kind of situations, you can one of two things:

• Close the trade with a small profit
• Move your stop loss to break even and hope for the best

However, if you had the True Strength Index on your chart, you could have seen that the index line was gradually going up. So, you would probably lean towards not closing the position, right? Good decision.

As you can see on the example chart, as soon as the True Strength Index crossed above the zero line, the price began moving in an impulsive fashion.

If you had a short position in the market, you can use the same technique to hold on to your short trades as well. Meaning, if you see the True Strength Index crossing below the zero line, keep your fingers off the trigger! Agreed?

# 2 - Watch Out for the True Strength Index Trend Lines

Figure 2: True Strength Index Trend Line Break Can Signify Change in Market Bias

While it is always a good idea to wait for the True Strength Index to cross above or below the zero line, there are alternative methods for identifying trade signals.

If you look closely in Figure 2, you can see that the peaks and troughs of the True Strength Index match with the actual price peaks and troughs, but the trendlines often act as a leading indicator of an impending change in the trend. Hence, you can easily anticipate a change in the market bias once the TSI breaks above or below the existing trend lines.

In Figure 2, you can see that when the True Strength Index broke the downtrend line, the momentum changed. However, when the True Strength Index broke below the uptrend line, it turned out to be a false signal. Are you wondering if you should take these kind of trend line breakout signals seriously?

Well, do not use the trend line breaks as an entry signal because it is not meant to be used this way! Instead, consider keeping your winning trades open as long as the True Strength Index trend line is making higher highs and higher lows.

# 3 – Use True Strength Index Divergences

Figure 3: True Strength Index Divergence Can Indicate Impending Change in Trend

You can also use the True Strength Index divergence to identify if the trend is going to change anytime soon.

When you see a True Strength Index divergence like the one in the PRGO chart (figure 3) above, do not simply close your positions. That would be suicidal! Remember that during strong trends, the True Strength Index tends to generate a lot of false divergence that do not play out very well.

Instead, when you see a divergence forming in the True Strength Index, meaning the price is making higher highs and the True Strength Index is not crossing above its previous peak, keep your position open, but move your stop loss close to the market price to book some profits in the process.

This way, if the divergence does play out and the trend reverse, you will at least get out with some gains. If the trend continues, you will be more than happy that you allowed the winning trade to run. Do you remember that trading cliché: cut your losses short and let your winners run?

# 4 – Use True Strength Index Support and Resistance Levels

Figure 4: True Strength Index Horizontal Support and Resistance Can Also Indicate in Momentum

Just like trend lines, you can also draw horizontal support and resistance lines on the True Strength Index. If you find that the True Strength Index line breaks above a major resistance or below a major support level, respectively, then you can immediately close your open positions. On the other hand, if you see that the True Strength Index is fluctuating around its support and resistance levels, it may be a good idea to hold on to your winning trades.

# 5 – Watching True Strength Index Overbought and Oversold Levels

Before we discuss how to use the True Strength Index levels to identify overbought or oversold levels, let us make one thing clear that if you are trading highly volatile stocks like tech companies, the True Strength Index range has to be higher. In contrast, if you are trading blue chip companies that have low volatility, then you can use a lower True Strength Index range to identify if the stock price is overbought or oversold.

One way you can decide about the True Strength Index range would be using the stock’s beta. If the stock’s beta is above 1, use a higher True Strength Index range like +70 and -70. On the other hand, if the stock’s beta is below or around 1, you can probably stick to a +50 and -50 range. You can easily change the levels you want to see on your chart in Tradingsim using the true strength indicator settings.

Figure 5: MSFT Overbought and Oversold Levels Should Be +50 and -50, Respectivley

If you check on Google Finance, you would find that MSFT has a beta of 1 (as of November 24, 2015). Although MSFT is a tech stock, this is an established company. Hence, based on the beta alone, you can consider this stock to be overbought and oversold when the True strength index crosses above or below the +50 and -50 levels, respectively.

Conclusion

One of the great features of the True strength index is that unlike other oscillators, you can use it for identifying both the trend direction and the trend strength. Isn’t it much easier to keep an eye on a single indicator like the True Strength Index instead of using combinations of multiple indicators like scholastics and directional movement index?

Just keep in mind that if you need to change the true strength indicator settings for each trading instrument based on the stock’s volatility. Otherwise, you will end up getting a lot of false signals, which will do more harm than good. Nonetheless, True Strength Index could prove to be one of the best technical indicators that can help you improve your trading by keeping you in winning trades.

The post 5 Ways the True Strength Index Keeps you in Winning Trades appeared first on - Tradingsim.

What is the Relative Vigor Index?

The Relative Vigor Index (RVI or RVGI) is a technical indicator, which anticipates changes in market trends.  Many day traders consider the RVI a "first cousin" of the Stochastic Oscillator due to the similarities in their formulas (both use the open, close, high and low of each candlestick).

Since the Relative Vigor Index indicator is an oscillator, the indicator bounces above and below zero  – producing both positive and negative values. The below image displays the two lines which make up the RVI indicator:

Relative Vigor Index

The Relative Vigor Index formula is as follows: RVI = (Close – Open) / (High – Low) for each period.

You may be thinking, “But wait! How do I calculate these two lines?”

• Green Line

The green line is a standard simple moving average of the Relative Vigor Index calculation. Although you can adjust the green line, the default value is 10-periods.

• Red line

The red line is a 4-period volume weighted moving average.  The red line is the "trigger line", because it provides trade signals when it crosses above or below the green line.

Types of RVI Trade Signals

• Overbought/Oversold market

A low value indicates an oversold market and a high value signals an overbought one.

• Crossovers

Entry and exit signals are triggered when the short moving average crosses the long moving average.

• Divergence

Divergences between price action and RVI often lead counter trend moves.

• Chart Patterns

The RVI can plot formations such as double bottoms, double tops, head and shoulders, etc.

The picture below, illustrates a double bottom formation of the RVI indicator:

RVI Double Bottom

This is a 10-minute chart of Facebook from October 27-29, 2015, where the Relative Vigor Index develops into a clear double bottom signal. After creating the "W" bottom, Facebook's price took off!

Like every other indicator, the RVI can produce a number of false signals. Therefore, I strongly suggest you combine the Relative Vigor Index with additional trading tools to identify head fakes.

To address the risk of false signals, we will now cover 5 day trading strategies using the RVI indicator.

5 Trading Strategies using the RVI:

1 - Relative Vigor Index and the Stochastic Oscillator

RVI and Stochastics Strategy

Above is a 10-minute chart of Bank of America from November 15-17, 2015. The two green circles indicate when the RVI and the Stochastic start registering an oversold condition. We go long the moment the green line of the Relative Vigor Index tool breaks the red line signaling a new bullish trend. After we go long, we get a price increase of 50 cents, which equals about 4% of the total price per share.

2 - Relative Vigor Index and the Relative Strength Index (RSI)

Relative Vigor Index and RSI Strategy

Above is a 10-minute chart of Yahoo from September 7-8, 2015.

In the first setup, we hope to take a long position once the RSI registers an oversold condition and the RVI has a bullish cross.  We go long at 3 pm on the 7th and are able to make a $1.20 per share by the next trading day.

In the second setup, we are on the short side of the trade. The RSI is in overbought territory and after several periods, the RVI begins to display an overbought reading as well. Once the Stochastic and RVI cross to the downside, we open a short position.  After a few periods, the price decreases ~$1.16 leaving us with a nice trading profit.

3 - Relative Vigor Index and Two Moving Averages

The moving averages can be of any length, as long as it matches your trading style.

In our case, we will combine the RVI with the 9-period and 16-period SMAs. After receiving a trade signal from the Relative Vigor index, you only enter a new position after a cross of the two SMAs in the direction of your desired position. Conversely, you exit your position once there is an SMA cross, which goes in the opposite direction of your trade.

Relative Vigor Index and Two Moving Averages Strategy

Above is a 10-minute chart of IBM from November 2-3, 2015. IBM produces an oversold signal in the first green circle.

Despite a long signal from the RVI, we wait for a bullish cross from the SMAs. This happens after 30-minutes and we decide to take a long position. Therefore, we buy IBM and hold until the two SMAs cross in the opposite direction.

4 - Relative Vigor Index and the Moving Average Convergence Divergence (MACD)

Relative Vigor Index and MACD Strategy

Above is a 10-minute chart of Twitter from November 17-18, 2015. Similar to the previous strategies, we wait for both the RVI and MACD to confirm a trade before opening a position.  In this example, we were able to open a long position, which net us 75 cents per share!

5 - Relative Vigor Index and Bollinger Bands

Finally, we are going to expose another trading strategy, which consists of combining the Relative Vigor Indicator with Bollinger Bands. As you probably know, the Bollinger Bands indicator consists of a simple moving average (20-period SMA by default) and two bands – upper and lower. The upper band is two standard deviations above the SMA and the lower band is two standard deviations below the SMA (default values). Therefore, the two bands form a corridor, which is split on two halves by the 20-period SMA.

In this trading strategy, we need two signals in order to enter the market. The first one comes from the RVI indicator being overbought or oversold. After we receive such a signal, we need the price to cross the SMA of the Bollinger Bands in the direction of the RVI signal. Whenever we get the cross, we open a position accordingly. We will exit our position, when we get the price to cross the Bollinger Bands’ SMA in the opposite direction.

Relative Vigor Index and Bollinger Bands Strategy

The image above shows the 10-minute chart of Apple for October 13-14, 2015. In this image, we see that the two signals we need from this trading strategy come at once. The RVI shows overbought market and its lines cross in a bearish direction. At the same time, the price breaks the 20-period SMA of the Bollinger Bands in a bearish direction, which is our short trigger. We go short and the price begins to ride the lower bands, which is great for our short position. Twenty-two hours later, we see the price of Apple breaking the 20-period SMA of the Bollinger Bands in a bullish direction. This is where we close our position and take our profits of $1.37 per share.

Please note while this example is of an overnight position, we at Tradingsim do not believe in holding positions overnight, as we are day traders.  If you are a swing trader, then of course the above example would fit within your trading time frame.

Comparing the 5 Strategies

Strategies using the Stochastics and RSI will provide similar trading signals as both are oscillators.  It's better to focus your attention towards on-chart indicators, as these interact directly with the price action.

To this point, while the MACD is not an oscillator, it stifles the effectiveness of the RVI indicator.  By the time the MACD provides a trade signal, the buying opportunity is gone.

The Bollinger Band strategy will produce many signals as stocks will often cross above and below the 20-period moving average.   As a trader, avoiding over doing it is always a great idea.

Therefore, out of the 5 strategies, I would have to say the RVI with two moving averages is the best for day trading.

The moving averages allow you to assess the price action while the RVI gives you an indication of oversold and overbought conditions. This way you need actual price action to confirm the signal from the RVI oscillator.

Conclusion

• The RVI is a leading indicator.
• The RVI consists of two lines, which interact with each other and fluctuate around a zero level.
• The RVI gives signals for overbought and oversold conditions.
• The RVI creates divergences and chart patterns.
• An additional trading indicator should always confirm RVI signals.
• You should combine the RVI with other indicators:
  • Stochastic Oscillator
  • Relative Strength Index (RSI)
  • Two Moving Averages (Recommended)
  • Moving Average Convergence Divergence (MACD)
  • Bollinger Bands.

The post 5 Trading Strategies Using the Relative Vigor Index appeared first on - Tradingsim.

If you are a fan of trading with moving averages and unfamiliar with the alligator indicator, get ready for a pleasant surprise.   In this article, we are going to do a head-to-head comparison of the Alligator indicator with the triple EMA (TEMA) to see which one comes out on top.

What is the Alligator indicator?

The Alligator indicator is an on-chart trading tool created by famous trader and author Bill Williams.

The Alligator is used to confirm ongoing trends and their primary direction. In addition to identifying existing trends, seasoned traders also use the alligator indicator to enter counter trend moves.

The Alligator consists of three moving averages. Note these moving averages are not just SMAs or EMAs; the secret behind the Alligator is a bit more complex. Thus, keep reading!

What is behind the Alligator?

The Alligator indicator has three lines – green, red, and blue. The green line tracks closest to the price action, the red line is the middle average and the blue line is the furthest from the price action.

Look at the below image for a working example:

Alligator Indicator

Composition of Three Lines

• Green – this is line represents the Alligator’s lips. It is a 5-period smoothed moving average, displaced 3 periods to the right.
• Red – this line represents the Alligator’s teeth. It is an 8-period smoothed moving average, displaced 5 periods to the right.
• Blue – this line represents the Alligator’s jaws. It is a 13-period smoothed moving average, displaced 8 periods to the right.

The above is the default Bill Williams Alligator settings, which of course can be configured to meet any trading style.

What signals are provided by the Alligator?

The Bill Williams Alligator has three stages:

The Alligator is sleeping

The signs of a sleeping Alligator are when the three lines are close to each other. This of course translates to low volatility and trading should be avoided during these lull periods.

The Alligator is waking up

Usually, this is the time when the lips of the Alligator (green line) cross the teeth (red line) and the jaws (blue line). If the lips cross the other two lines in an upwards fashion, we have an awakening bullish Alligator. If the lips cross the other lines in a downward fashion, we have an awakening bearish Alligator.

The Alligator is eating

This is when we should also be eating – not burgers, but profits!

The Alligator could start eating after waking up. The signal for a hungry Alligator is after the completion of the waking up stage, a candle closes below or above the three lines. This is when we should go long or short respectively.

The image below illustrates the three stages of the Alligator:

Alligator Stages

This is a 15-minute chart of Facebook from Oct 1-6, 2015.

In the blue rectangle, the Alligator is sleeping and we should not open any positions.

The pink circles show us when the Alligator is attempting to wake up. In these moments, we should prepare ourselves for a long position.

When the distance between the lines begins to expand and we see a bullish candle closing above the Alligator teeth and jaws, we go long.

Now that we have covered the Alligator indicator, let’s take a look at the TEMA.

What is the Triple EMA (TEMA)?

The triple exponential moving average, also known as the TEMA, is a single line configuration on the chart. It smoothes the price of the equity three times using an EMA formula and then calculates the change in the EMAs based on the result for the previous day (n-1). Traders use the TEMA to enter and manage trades during strong trending markets.  Conversely, the TEMA is not a great tool when the market is ranging, since it provides many fake signals.

What forms the TEMA?

The TEMA line can easily be mistaken for one of the many moving average indicators.  Don’t believe me, check out the below image:

Triple Exponential Moving Average

You may be thinking: “Hey, isn’t this a 10 or 15-period SMA?” Wrong!

This is a 15-minute chart of Intel from Sep 24-29, 2015. As you can see, the TEMA bounces above and beneath the price action. The thing that may not be apparent on the chart is the TEMA reduces lag usually created by the other moving averages.

Clear as mud right?  I hope the next image will help clarify things a bit.

30-Period TEMA

I have added a 30-period EMA in addition to the 30-period TEMA.

Notice that the lag of the TEMA is significantly less when compared to that of the standard EMA.  The reason for this can be found within the formula of the TEMA.

TEMA Formula

TEMA = (3 * EMA – 3 * EMA (EMA)) + EMA (EMA (EMA))

In life, more complexity does not always lead to better results, but in the case of the TEMA versus the EMA, this may be the outlier.

Smoothing of the TEMA Indicator

The larger the period of the TEMA, the more smoothing.

This of course also leads to further lagging in the trading signals.  Thus, be careful when configuring the TEMA as the volatility and the time frame should also be taken into consideration. The tighter your TEMA, the more fake signals you will encounter on the chart.

How to trade with the TEMA?

In terms of signals, the TEMA acts the same way as a standard moving average. When the price breaks the TEMA upwards, a long signal is generated. When the price breaks the TEMA in a bearish direction, a short signal is generated.

In addition, the TEMA can be combined with an extra moving average in order to validate signals.

TEMA Trading Signals

Above is a 15-minutes chart of Bank of America from Sep 26-29, 2015. Here I used a 20-period TEMA configuration.

Below are the trade signals generated with the TEMA:

• 5 entry signals – four long and one short
• 3 fake signals – all of them long
• 2 winning signals – one long and one short
• Profit from winning positions = $1.02 per share
• Losses = $0.09 (9 cents) per share
• Result = profit of $0.97 per share

This is the time you should remember when I said that the TEMA strives to identify rapid market movements, but at the same time fails during ranging markets.

Thus, the TEMA setup should be carefully chosen according to market volatility, the chart range, and the trader’s style.

Alligator vs. TEMA

Now that we have covered both indicators, let’s compare the two:

• The Alligator indicator displays three lines, while the TEMA has only one line. Thus, the Alligator provides more trading signals than the TEMA.
• Since the Alligator has more components than the TEMA it is better suited as a standalone indicator.
• The Alligator indicator trading system is likely to give you less fake signals compared to the TEMA. The reason for this is when a stock is range bound; the Alligator is sleeping, which clearly says, “STAY AWAY”. At the same time, the TEMA does not give us a signal when the market is ranging, because it is a single line configuration.
• The Alligator lags more than the TEMA. As previously stated, the TEMA’s purpose is to isolate the lagging as much as possible. Thus, TEMA gives earlier entry signals than the Alligator. This makes the TEMA riskier than the Alligator, since it increases the amount of false signals. Yet, if used carefully, the TEMA could result in catching the beginning phases of a new trend.
• The TEMA gives lower number of winning signals, but these signals lead to positions with higher gains per share. The Alligator gives higher number of successful signals, but these signals will often put us in positions, which catch less than half of the trend.

Let’s now play a regular trading scenario with the Alligator and the TEMA separately in order to compare the results:

Too Many TEMA Trading Signals

Wow! What chaos! The truth is that this is what you are going to get when trading with the TEMA.

This is a 15-minutes chart of JP Morgan & Chase for the period of Sep 21-29, 2015. We applied a 20-period TEMA to the chart and we get the following results:

• 24 entry signals – 14 short and 10 long
• 18 fake signals – 10 short and 8 long
• 6 good signals – 4 short and 2 long
• Profit from winning positions = $4.47 per share
• Losses = $3.35 per share
• Result = profit of $1.12 per share

Now we are going to use the same chart, but will only apply the Alligator indicator:

Alligator Trading Signals

Much clearer than the previous example, don’t you think? Let’s now summarize the information from this picture:

• 5 entry signals – 4 short and 1 long
• 2 fake signals – both are short
• 3 good signals – 2 short and 1 long
• Profit from winning positions = $2.02 per share
• Losses = $0.45 (45 cents) per share
• Result = profit of $1.57 per share

The Alligator or the TEMA, that is the question!

I believe the results speak for themselves.

With the Alligator, we have achieved better results with 20% of the effort. What we did not show in the above example are the commission savings you would have racked up by using the Alligator indicator.

Of course, one trading example is not enough data to declare victory; however, reducing the noise, less commissions and the fact the Alligator can stand on its own is more than enough reasons to rank it above the TEMA.

In Conclusion:

• The Alligator indicator consists of three moving averages - the lips, the teeth and the jaws of the Alligator.
• The Alligator gives three signals:
• Sleeping Alligator – this is when we shouldn’t be in the market
• Awakening Alligator – this is when we should get ready to hop in the market
• Eating Alligator – this is when we should be in the market
• The TEMA shows a single curved line, which is formed by a triple smoothed exponential moving average formula.
• The purpose of the TEMA is to hop into emerging trends and reducing the lag of trading signals.
• The TEMA gives us two signals:
• Go long when the price closes above the TEMA.
• Go short when the price closes beneath the TEMA.
• The TEMA generates many fake signals, because it consists of only one line. Again, the TEMA is more sensitive to the movement of the price compared to other MAs.
• The TEMA gives more fake signals than the Alligator.
• The Alligator produces less trading signals.
• The Alligator gives better results as a single on chart tool.

The post Alligator Indicator versus the Triple EMA appeared first on - Tradingsim.

Are you an indicator trader? If yes, then you will enjoy reading about one of the most widely used trading tools – the moving average convergence divergence (MACD). Today, we will cover 5 trading strategies using the indicator and how you can implement these methodologies within your own trading systems.

What is the MACD?

The MACD calculation is a lagging indicator, used to follow trends. It consists of two exponential moving averages and a histogram as shown in the image below:

The default MACD values are 12,26,9.

It is important to mention that many traders confuse the two lines of the MACD with simple moving averages.

The slower line of the MACD is calculated by placing a 12-period EMA on the price and then smoothing the result by another 26-period EMA. The second line is calculated by smoothing the first line by a 9-period EMA. Thus, the second line is faster and hence is the “signal” line.

The last component of the indicator is the histogram, which displays the difference between the two MAs of the indicator. Thus, the histogram gives a positive value when the fast line crosses above the slow line and negative when the fast crosses below the long.

MACD Indicator

What signals are provided by the MACD?

1. Moving Average cross

The most important signal of the MACD is when the faster MA breaks the slower one. This gives us a signal that a trend might be emerging in the direction of the cross. Thus, traders often use this signal to enter new trades.

2. Divergence

MACD also gives divergence signals. For example, if you see the price increasing and the MACD recording lower tops or bottoms, then you have a bearish divergence. Conversely, you have a bullish divergence when the price drops and the moving average convergence divergence produces higher tops or bottoms.

3. Distance between MAs (overbought/oversold)

Since the MACD has no limit, many traders do not think of using the tool as an overbought/oversold indicator.

To identify when a stock has entered an overbought/oversold territory, look for a large distance between the fast and slow lines of the MACD.  The easiest way to identify this divergence is by looking at the height of the histograms on the chart.

This divergence often leads to sharp rallies counter to the primary trend.  These signals are visible on the chart as the cross made by the fast line will look like a teacup formation on the indicator.

5 Trading Strategies Using the MACD:

#1 - MACD + Relative Vigor Index

The basic idea behind combining these two tools is to match crossovers. In other words, if one of the indicators has a cross, we wait for a cross in the same direction by the other one. If this happens, we buy or sell the equity and hold our position until the MACD gives us signal to close the position. The below image illustrates this strategy:

MACD + Relative Vigor Index

This is the 60-minute chart of Citigroup from Dec 4-18, 2015. It shows two short and one long positions, which are opened after a crossover from the MACD and the RVI. These crossovers are highlighted with the green circles. Please note that the red circles on the MACD highlight where the position should have been closed. From these three positions, we gained a profit of $3.86 per share.

#2 - MACD + Money Flow Index

In this strategy, we will combine the crossover of the MACD with overbought/oversold signals produced by the money flow index (MFI). When the MFI gives us a signal for an overbought stock, we will wait for a bearish cross of the MACD lines. If this happens, we go short. It acts the same way in the opposite direction – oversold MFI reading and a bullish cross of the MACD lines generates a long signal.

We stay with our position until the signal line of the MACD breaks the slower MA in the opposite direction. The below image illustrates this strategy:

MACD + MFI

This is the 10-minute chart of Bank of America from Oct 14-16, 2015. The first green circle highlights the moment when the MFI is signaling that BAC is oversold. 30 minutes later, the MACD has a bullish signal and we open our long position at the green circle highlighted on the MACD.

We hold our position until the MACD lines cross in a bearish direction as shown in the red circle on the MACD. This position brought us gains equal to $0.60 (60 cents) per share for about 6 hours of work.

#3 - MACD + TEMA

Here we will use the MACD indicator formula with the 50-period Triple Exponential Moving Average Index. We attempt to match an MACD crossover with a break of the price through the TEMA.

We will exit our positions whenever we receive contrary signals from both indicators. Although TEMA produces many signals, we use the moving average convergence divergence to filter these down to the ones with the highest probability of success. The image below gives an example of a successful MACD + TEMA signal:

MACD + TEMA

This is the 10-minute chart of Twitter from Oct 30 – Nov 3, 2015. In the first green circle we have the moment when the price switches above the 50-period TEMA. The second green circle shows when the bullish TEMA signal is confirmed by the MACD. This is when we open our long position. The price goes up and in about 5 hours we get our first closing signal from the MACD. 20 minutes later, the price of Twitter breaks the 50-period TEMA in a bearish direction and we close our long position. This trade brought us a total profit of $0.75 (75 cents) per share.

#4 - MACD + TRIX indicator

This time, we are going to match crossovers of the MACD formula and when the TRIX indicator crosses the zero level. When we match these two signals, we will enter the market and await the stock price to start trending.

This strategy gives us two options for exiting the market, which we will now highlight:

• Exiting the market when the MACD makes a cross in the opposite direction

This is the tighter and more secure exit strategy. We exit the market right after the MACD signal line breaks the slower MA in the opposite direction.

• Exiting the market after the MACD makes a cross, followed by the TRIX breaking the zero line

This is the looser exit strategy. It is riskier, because in case of a change in the equity’s direction, we will be in the market until the zero line of the TRIX is broken. Since the TRIX is a lagging indicator, it might take a while until this happens.

At the end of the day, your trading style will determine which option best meets your requirements. Now look at this example, where I show the two cases:

MACD + TRIX

This is the 30-minute chart of eBay from Oct 28 – Nov 10, 2015. The first green circle shows our first long signal, which comes from the MACD. The second green circle highlights when the TRIX breaks zero and we enter a long position.

The two red circles show the contrary signals from each indicator. Note that in the first case, the moving average convergence divergence gives us the option for an early exit, while in the second case, the TRIX keeps us in our position. Using the first exit strategy, we generate a profit of $0.50 (50 cents), while the alternative approach brought us $0.75 (75 cents) per share.

#5 - MACD + Awesome Oscillator

This MACD indicator strategy includes the assistance of the well-known Awesome Oscillator (AO). We will both enter and exit the market only when we receive a signal from the MACD, confirmed by a signal from the AO.

The challenging part of this strategy is that very often we will receive only one signal for entry or exit, but not a confirming signal. Have a look at the example below:

MACD + Awesome Oscillator

This is the 60-minute chart of Boeing from Jun 29 – Jul 22, 2015. The two green circles give us the signals we need to open a long position. After going long, the awesome oscillator suddenly gives us a contrary signal.

Yet, the moving average convergence divergence does not produce a bearish crossover, so we stay with our long position. The first red circle highlights when the MACD has a bearish signal.  The second red circle highlights the bearish signal generated by the AO and we close our long position.

Note that during our long position, the moving average convergence divergence gives us bearish signals a few times. Yet, we hold the long position since the AO is pretty strong. This long position brought us a profit of $6.18 per share.

Recommendations

I prefer combining my MACD indicator with the Relative Vigor Index or with the Awesome Oscillator. The reason is that the RVI and the AO do not diverge from the MACD much and they follow its move.

In other words, the RVI and the AO are less likely to confuse you and at the same time, provide the necessary confirmation to enter, hold or exit a position.

The TEMA also falls in this category, but I believe the TEMA could get you out of the market too early and you could miss extra profits.

I find the MACD + TRIX indicator strategy too risky. Yet, it could be suitable for looser trading styles. Lastly, the Money Flow index + MACD generates many fake signals, which we clearly want to avoid.

Conclusion

• Moving Average Convergence Divergence (MACD) is a lagging indicator
• MACD is used to find new trends and to signal the end of a trend
• MACD consists of three components:
  • Faster Moving Average (Signal Line)
  • Slower Moving Average
  • MACD Histogram
• The moving average convergence divergence provides three basic signals:
  • Moving Average Crossover
  • Divergence
  • Overbought/Oversold Signals
• MACD combines well with the following indicators:
  • Relative Vigor Index (RVI)
  • Money Flow Index (MF)
  • Triple Exponential Moving Average (TEMA)
  • TRIX
  • Awesome Oscillator (AO)
• The indicators best suited for the MACD indicator are the RVI and AO.
• External Link - create the MACD formula in excel.  This one is for all you book worms that need to see exactly how the indicator works.

The post 5 Trading Strategies Using the MACD appeared first on - Tradingsim.

Coppock Curve

Edwin Sedge Coppock, an economist by profession developed the Coppock Curve in 1965, which is a momentum indicator to identify long-term buying opportunities in the S&P 500 and Dow Industrials.

Coppock used monthly data to find buying opportunities but did not use the indicator much for sell signals.

Now let’s take a look on how the Coppock Curve is calculated?

Coppock Curve = 10-period weighted moving average of the 14-period RoC + 11-period RoC

RoC stands for Rate-of-Change which is the momentum oscillator and oscillates above and below the zero line. The default setting for the Coppock is 11 and 14 periods.

The Coppock Curve is a smoothed momentum oscillator and can be used on any timeframe while investors can choose based on their desired trading/investing style and time horizon. Coppock Curve is similar to the most widely used indicator- MACD

The weekly charts produce many more signals than the monthly chart. Likewise, an intraday chart would form more signals than the weekly or monthly charts.

Apart from choosing the timeframes, parameters can also be adjusted based on the trader’s choice. Traders can choose whether they want to go for a faster or a slower Coppock Curve indicator. A shorter RoC setting would make the Coppock Curve more sensitive and faster, which would be best for Intraday traders. Meanwhile, a longer setting would make the Coppock Curve less sensitive and slower which could be a favorable indicator for swing traders.

How to identify signals using Coppock Curve

If the Coppock Curve crosses zero and enters into positive territory than a buy signal is generated.

If the Coppock Curve falls below zero and enters into negative territory than a sell signal is generated.

Below is the one day Amazon chart since 2014 (till July 6^th, 2016). The buy signals in the below chart are highlighted with the blue line while the red line indicates the sell signal.

As you can see, long-term traders would have a number of opportunities to enter the bullish trends for Amazon.

Coppock Curve

Coppock Curve could also be used to trade ETFs.

Below is the image of the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) 3-minute chart from July 1^st 2016. As you can see in the beginning of the chart, a buy signal was generated during the initial trading hour, as the Coppock Curve crossed above the zero line. Accordingly, we opened a long position at $107.61.

After about an hour or so, you can see that the Coppock Curve began heading towards zero. Simultaneously, you see that the PowerShares QQQ Trust ETF is consolidating. After the Coppock Curve fell below zero, immediately we exited the position at $108.2.

Coppock Curve Long Position

Now, since the founder of the curve used longer time frames to identify buying opportunities, let’s now shift our focus over to daily charts.

Below we have a chart of Goldman Sachs from the period of March 15^th, 2016 till June 30^th, 2016.

On the last day of March, the Coppock Curve is showing a positive trend, as the curve is above zero and generated a positive signal.

Accordingly, we initiate a long position on March 31^st at $156.02. As you see in the below chart, the Coppock Curve has maintained a positive trend for the initial week. On May 10^th 2016, the Coppock Curve fell below zero and gave a sell signal. We cover our long position at over $160.

However, if you combine the Coppock Curve along with the Hull MA, we could have booked our profits in a better range, as the indicator started giving a bearish trend well before the Coppock Curve’s sell signal. If we had followed the Hull MA indicator, then we could have booked profits near $163. However, this depends on the trader’s preference.

Coppock Curve Long Trade Signal

Divergence with the Coppock Curve

Another way of trading the Coppock Curve is identifying divergences with the indicator and the current price action.

A bullish divergence occurs when the market makes a higher high, but the Coppock curve is unable to exceed its previous high.

Below, you can see the 5-minute chart of Alcoa from May 2^nd to May 30^th, 2016. On the extreme left hand side of the chart, you can see that we have highlighted the new highs of the price, while the Coppock curve is making lower tops.

However, the Coppock curve immediately raised above zero while prices also increased, confirming the bullish divergence. However, bullish divergence is not a definite indicator of the trend, which is why traders should avoid taking positions solely based on divergences with the Coppock Curve.

Coppock Curve Divergence

Similarly, a bearish divergence occurs when prices decline from lower bottoms, but the indicator makes a higher bottom. From the above image you can see that the highlighted elliptical part for the same Alcoa chart has formed lower bottoms, but the Coppock curve made a higher bottom indicating a bearish divergence. You can see how the stock has fallen after that, as highlighted by a red trend line in the chart.

Again, we do not recommend making trading decisions solely based on divergences between the Coppock Curve and the price action.

Challenges of using the Coppock curve on intraday charts

The Coppock curve is generally better at catching market bottoms (i.e long term opportunities) as compared to short opportunities as the founder has mainly developed this indicator to identify buying opportunities.

But, the major drawback of the indicator is giving false signals and forcing investors to short or exit their position. The signal could again give a buy signal within a shorter timeframe.  This might create confusion for traders in quick succession.

Below is the three-minute chart for Microsoft on June 29^th, 2016, which is the perfect example of this scenario.

Here you can see that the Coppock curve has been heading downwards as highlighted with the blue trend line. For the same period, you see a range bound or in fact a slightly bullish trend from the Microsoft chart.

After some time, the Coppock curve fell below zero but you don’t see any downtrend in the price activity. After the false signal, the Coppock curve began rallying upwards through the zero line.  As you can see, Microsoft’s price rallied the remainder of the day.

False Coppock Curve Signals

Trading Coppock Curve with the Hull MA

Hence, to avoid these shortcomings in the indicator, let’s combine the Coppock Curve with the Hull MA.

Below is the three-minute chart for Alphabet Inc. (NASDAQ:GOOGL) from June 30^th 2016.

During the second half of the trade, you can see that the Coppock Curve generated a bullish signal by trending above zero and this trend is supported by the Hull MA. Accordingly, we take a position near $698. Both the Hull MA and Coppock Curve maintained their bullish trend till the close of the day at which point we exited the position at $704.34.

Another thing to note in the below chart is that you see a very flat direction from the Hull MA curve during the mid-session of the trading, while the Coppock Curve has been rising above zero and then subsequently falling below zero after some time. Intraday traders can avoid such false signals by taking support from the second indicator of their choice.

Coppock Curve and Hull MA

Trading Coppock Curve with KST

Now let’s combine the Coppock Curve with the Know Sure thing indicator (KST).

We take a look at the three-minute chart of BlackRock, Inc. (NYSE:BLK) from June 30^th, 2016.

In the below image, you can see the bullish crossover in the Know Sure Thing indicator. Consequently, the Coppock Curve generated a buy signal by passing above zero. We take a position at $336.41. After trading more than two hours, we get the first sell signal from the Know Sure Thing indicator. By then the Coppock Curve started trending downwards. Traders could exit their long position here at over $339.

Coppock Curve and KST

Trading Coppock Curve with the MACD

Let’s now combine the Coppock Curve along with the most commonly used trading indicator - MACD to identify any trading opportunities for intraday traders. We take the Goldman Sachs Group Inc. (NYSE:GS) three-minute chart for June 30^th, 2016 and add the Coppock Curve and MACD.

Now, if you see the below chart, we get the first buying opportunity from the MACD crossover at around 11 am.

This trend is also supported by strong volumes.

Consequently, the Coppock Curve crosses above zero strongly confirming the bullish trend.

Accordingly, we take a long position at $146.11. After trading more than two hours, we receive misleading signals from the MACD.

However, the Coppock Curve is still maintaining a strong bullish momentum and maintaining above zero. We book our profit near $148.04 after the Coppock curve falls below zero. By then, the MACD has given the bearish indicator. Intraday traders could exit their position when they see the first signal from the MACD. But this choice depends on their preferred indicators, trading style and investment horizon.

Coppock Curve and MACD

On the other hand, to avoid the confusion in the sell signals (as this is where the Coppock Curve lags), we can use the third indicator to confirm the sell trend based on the trader’s preference.

Conclusion

• The Coppock Curve was developed by Edwin Sedge Coppock in 1965 to identify long-term buying opportunities in the S&P 500 and Dow Industrials.
• A buy signal is generated when the Coppock Curve crosses zero and enters into positive territory, while a sell signal is generated when the Coppock Curve falls below zero and enters into negative territory.
• The Coppock Curve could also be traded based on divergences, but we think it’s not a good idea for intraday traders as this could lead to many false signals.
• The Copper Curve also comes with its own shortcomings and gives a relative weak sell or short position signals as compared to the buy or long positions signal.
• The Coppock Curve could be used by intraday traders to identify the bullish trends. The indicator could also be traded along with Hull MA, Know Sure Thing Indicator and MACD.

The post How to use the Coppock Curve with other Indicators appeared first on - Tradingsim.

The moving average is one of the most widely used indicators in all of trading. There are different types of moving averages based on calculation method and duration (periods).

Today we will discuss one of the most popular of all moving averages – the 200-day moving average. We will describe its structure and 5 tips for using the 200-day moving average when trading.

Ready to dive in?

Exactly How does the Moving Average Work?

The moving average smoothes the price action of a stock or financial instrument by taking the mean or average price movement over a given number of periods.

This way, instead of tracking every price movement like a tick chart or highs and lows of a candlestick; the moving average simply calculates its value based on the closing price.

This of course distills the price action down to one point for a period, thus providing a simple lens into the price action.

In theory, this provides you the trader, a straight forward, simplistic view of where the price has been and is likely to go in the short-term.

You can customize your moving average by changing the periods. For example, if you want to measure the price movements over a shorter duration, you will likely want to go with 10 periods or less.

If you are more concerned with the longer term view, you will want to go 50 periods or greater.

Let’s now review an example of how the simple moving average is calculated in the below table:

This table gives an example of 25 periods.

You could use these periods to calculate the simple moving averages for the 5-period SMA, 10-period SMA, 15-period SMA and the 20-period SMA.

The 5-period SMA needs 5 periods to begin printing a value. Therefore, the first 4 entries in the 5-Period SMA column are empty.

The 10-period SMA needs 10 periods to begin printing a value. Therefore, the first 9 entries in the 10-Period SMA column are empty. It works the same way for the 15 and 20-period SMAs.

When you visualize the data, you see 5 lines on the chart: the price action, 5, 10, 15, and 20-period SMAs.

Price and Moving Averages

The thick line illustrates the actual closing price values.

The other lines are the moving averages. Note that each of these starts with a delay because it needs preliminary values in order to start the calculation.

The 20-period simple moving average (pink) is barely visible in the right of the chart. After all, this SMA needs 20 periods in order to start printing values This means, that periods from 1 to 25 contain only six 20-period SMA values. These are the values from the periods (1-20), (2-21), (3-22), (4-23), (5-24), and (6-25).

Since there is a minimum number of price periods required to calculate the moving average, the indicator clearly falls in the lagging indicator column.

Hence the greater number of periods, the greater the lag.

All clear so far?

200-Day Simple Moving Average

The 200-day simple moving average is one of the most important tools when trading.

The simple reason, all traders and I mean all are aware of the number of periods and actively watch this average on the price chart.

Since there are so many eyes on the 200-day SMA, many traders will place their orders around this key level.

Some traders will look for the 200-day to act as resistance, while others will use the average as a buying opportunity with the assumption major support will keep the stock up.

For this reason, the price action tends to conform to the SMA 200 moving average quite nicely.

The 200-day SMA refers to 200 periods on the daily chart. This takes 200 trading days into consideration – which is a ton of trading days.

Remember, there is only about 251 trading days in a year, so the 200-day SMA is a big deal.

This is how a 200-day moving average looks on the chart:

200-Day Simple Moving Average

The blue line is the 200-day simple moving average. See that the line acts as a support at some points and conversely can trigger significant selling when breached to the downside.

One rule of thumb is when price breaks the average, it tends to continue moving in the direction of the breakout with vigor.

Signals of the 200-Day SMA

There are two basic signals in relation to the 200-day moving average:

1) If the price is above the 200-day SMA this is a bullish signal.

2) If the price is below the 200-day SMA this is a bearish signal.

Now, before you go running off and shouting how you are an expert, this is just the fisher price level of understanding.

Let’s dig a little further.

200-Day SMA Buy Signals

Bullish Breakout: When the price action breaks the 200-day SMA upwards it gives a strong long signal.

Support Bounce: When the price action meets the 200-day SMA as a support and bounces upwards, it creates a strong buy signal.

200-Day SMA Sell Signals

Bearish Breakout: When the price action breaks the 200-day SMA downwards, it creates a strong short signal.

Resistance Bounce: When the price action meets the 200-day SMA as a resistance and bounces downwards, it gives a very strong short signal.

It is important to mention that the 200-day SMA usually foretells long-term price moves. This makes it a very attractive technical tool for long-term investors.

5 Tips for Using a 200-Day Moving Average

1) Make sure the price action respects the 200-day moving average

Before you do anything with the 200-day moving average, you first need to see if the traders controlling the stock care.

In any stock, there are the traders which are controlling the price movement.  Therefore, you need to see if these traders are looking at the 200-day SMA or if they are looking at some other chart formation or indicator to make their trading decisions.

So, again, is the price action respecting the 200-day?  If yes, great, move on to tip #2.

If not, find out what your pool of traders is tracking and get on board.

2) Use the Volume Indicator when trading the 200-day SMA

Volumes are crucial when trading with the 200-day moving average. If volumes are high, then the stock is likely to be more volatile and more certain in its breakout.

If the price meets the 200-day moving average with low volume, then the average is more likely to suppress the price action or provide support on a pullback.

Just to be clear, high or low volume are neither negative nor positive.  It all depends on which way you are trading the market in order to determine if the volume action proves to be a friend or foe.

3) Trade Breakouts through the 200-day moving average only if volumes are high

200-Day Simple Moving Average Breakout

In the image above, you see that a small bounce appears during low volumes. The 200-day SMA acts as support, but a significant move is not created due to the absence of volumes. The real move appears when the price breaks the SMA during high trading volumes.

After the high volume break lower, a significant price move ensues.

4) Bounces give a higher Win-Loss ratio

While breakouts feel great when you are on the right side of the trade, remember the market only trends impulsively about 20% of the time.

So, if you want to make consistent profits, you will also need to understand how to trade the other 80% of the times.

Therefore, when you see the 200-day moving average, but ready to pull the trigger on bounce trades off the 200-day.

The beauty of playing the 200-day is that you can place tight stops on the other side of the trade as the price action begins to congest around the 200-day moving average.

The ability to place this tight stop loss is the reason the win-loss ratio is so high with the bounce patterns.

5) Exercise Patience with 200-Day Moving Average Breakouts

You should be cautious when trading breakouts with the 200-day SMA.

Let me quantify patience. If you see the price breaking the 200-day moving average, wait to see if it is able to close above the average.  In trading, you don’t get a medal for being the first person to jump into a trade.

Let the bulls or bears prove they are in control, then enter the trade on the next candlestick if the price continues in the same direction.

Patience when trading 200-day moving average

On this image you see the difference between valid and a fake breakout with the 200-day SMA.

Notice how a valid breakout appears during high volumes.

After the breakout, the price has the momentum to continue much higher.

200 SMA Trading Example

200-Day SMA Trading Example

Above is the stock chart of JP Morgan Chase & Co. from February through June. The blue line is the 200-day SMA.

The 200-day moving average chart starts with a bullish breakout through the blue line with high volume.

The price then creates a top above the breakout zone and ultimately pulls back to the 200-day SMA. On this pullback, you notice that the volume is drying up.

This is a sign to you that any bearish activity is being used by the major players to accumulate more of the stock.

We open a long trade and place a stop loss below the low prior to the break of the 200-day moving average.

The volumes then decrease and the price action returns to the 200-SMA for another test. The price bounces quietly from the line with relatively low volume.

Suddenly, the price breaks a pink flag upwards during with high trading volume.

JPM then begins a strong impulsive move higher, which lasts for three months. We exit the trade the moment the price breaks the blue bullish trend line downwards.

This one trade would have net over 10% in profit with a low beta Dow stock.

Not bad if you ask me!

Conclusion

1. Moving averages are arguably the most popular indicator in all of technical analysis.
2. One of the most important moving averages is the 200-day SMA.
3. There are many eyes looking at the 200-day SMA, which makes it a significant psychological level.
4. The two basic trading rules for the 200 SMA are:

• When the price is above, you should be long.
• When the price is below, you should be short.

5. There are two groups of 200-day SMA signals;

• 200-day SMA buy signals
  1. Bullish Breakout
  2. Support Bounce
• 200-day SMA sell signals
  1. Bearish Breakout
  2. Resistance Bounce

6. Our 5 Tips for Using the 200-day moving average:

• Make sure the price action respects the 200-day moving average
• Use the Volume Indicator when trading the 200-day SMA
• Trade breakouts through the 200-day moving average only if volumes are high
• Bounces give a higher win-loss ratio
• Exercise Patience with 200-day moving average breakouts

The post 5 Tips for How to Trade with the 200-Day Simple Moving Average appeared first on - Tradingsim.

Reading the tape is one of the essential indicators when active trading.  Many traders know about the hundreds of indicators readily available on most trading platforms, but very few have an idea of how to read and interpret the tape.  Interpret is really the best way of describing how you need to approach your relationship with the time and sales window.  Unlike other indicactors which have oversold or overbought levels, reading the tape is specific to each situation.  This goes beyond how a stock trades, but how a stock is trading on a given day and at a given price level (e.g. 10, 25, 100).  In this article we will cover the basics of the time and sales window and tape reading (speed of the tape, size of orders, etc.).  The tape is most important when validating breakouts and supply versus demand at critical price points.  Once you have given this a thorough read, I highly advise you review the following related articles:  (1) Psychological Support and Resistance Levels, (2) Day Trading Time Zones, and (3) Day Trading Breakouts.  In each of the aforementioned articles, you will see how the tape provides validation to the price action, which will prevent the dreaded scenario we've all faced of being caught in the "trap".  Lastly, regarding tape reading, it truly requires the "gift of touch".  For those unfamiliar with this term, it basically means you do or use something so much, you begin to gain a sixth sense of when things are about to happen.  Once you are ready to start practicing using the tape, you are going to need to log some quality hours with our Trading Simulator to hone the skill of reading the tape.

What is the Time and Sales Window?

From my experience in day trading over the last few years, my most valuable tool became the time and sales window, aka. the "Tape". The time and sales window basically shows the trader detailed information regarding the order flow for a particular security. The time and sales window provides details on each of the trades that have gone through for that security, such as: Time of Trade, Price, Size of order, and condition of order. Depending on the trading platform, you will have other data points available to you.

After mastering the message of the tape, you will be able to accurately decide when to enter and exit a trade.

How to Use the Time and Sales Window

I am a very big believer that there are two truths in trading stocks. One is price and the other is volume. Tape reading involves both; and if used correctly, dramatically increases the odds of your trading working out. It does so due to the fact that your goal with tape reading is to follow the money.

While some professional traders may not like to admit it, trading stocks is an odds game. Your job as a trader is to put trades on with the highest odds of winning. Trading with the tape requires trading with patience. You cannot go out and buy or short a stock because you see the tape speeding up a bit. You need to be aware of support and resistance levels and also combine the message of the tape with price pattern formations.

Tape reading can be very fast and confusing at times and requires quite a bit of practice in order to get used to understanding the true meaning behind what you are seeing. Remember, every stock is a different story and tends to trade differently. It is wise to review the way in which the "tape" trades for a couple of minutes before entering a trade. Reading the tape requires you to train your eyes to scan for changes in character. I want to discuss a few of these key changes that you should take note of:

Size of Orders

Lets start with size. The size of the orders coming through will help you decide if there is conviction behind the price action you are seeing. When putting on a trade, you typically want to see a flurry of buy or sell orders which have greater than 300 to 400 shares in size. There is no hard and fast rule about this; it is more of a visual cue that your eye gets trained to recognize. Many times, I will see great technical setups in stocks that trade low volume. I stay away from these setups as the message of the tape is not as clear and this lowers my odds of a winning trade.

Order Speed

The speed of the orders is another key component to the message that the tape is giving you. Typically, when stocks breakout through support or resistance levels, not only will the size of the orders go higher but you will see the tape start to speed up. This gives you an indication that there is an interest in this stock at this level and that the interest is larger than a couple small traders buying or selling.

Order Condition

Order condition refers to which side of the bid/ask spread the trade was executed on. When we go long a stock, we want to see many orders being executed at ASK. Conversely, when we go short, we want to see orders being filled at BID. This gives us a clue as how desperate traders are to get into our out of this stock.

Speaking from Experience...

Above, I have reviewed a few basic principles of tape reading but I want to discuss some of lessons I have learned throughout my years of trading that I think you will find helpful when analyzing the tape.

Which stocks are best to trade?

I have received this question many times. The answer to this question for me is simple, I only trade the most volatile stocks of the day. These stocks are the ones which will provide you with strong volume and large interest from the public. They also provide strong and fast moves which you can make larger profits from. Remember, we need to see speed in the tape and that requires a stock with public interest.

Does the tape work better during specific times of the day?

In my experience, the answer to this question is YES. I typically only trade the first 2 hours of the day. This is when the most volatility is present in the market and also when most of the trending moves are made. Typically, lunchtime produces a choppy market and has a different group of traders who are buying or selling for different reasons than the first hour. I am not ruling out trading after lunchtime, however, my results have been less than stellar when I attempted to do so.

Tape Reading with Level 2

The level 2 window provides the trader with an edge. It will show you the sizes of the orders in the market makers book. While the market makers can play games with the level 2 in order to fool traders, in general you want to see high bid sizes and low ask sizes when you go long. On the flip side, you want to see low bid sizes and high ask sizes when you go short or sell out of a stock. Again, its not foolproof but it adds to the odds of your trading winning.

Exiting a trade

This is probably the most difficult part of the trade for most traders. Tape reading helps me get out of the trade by looking for imbalances. When I see a stock moving sharply in one direction, I will immediately look to the tape to offer clues as to when the brake pads will be applied. Again, this skill will take practice to develop. If your short a stock, keep an eye out for the bid side getting heavy and the bid/ask spread widening. This could be a tell tale sign that the juice has been used up.

Bid/Ask Spread at Key Levels

Make sure that stock does not have large bid/ask spreads as it approaches your entry points. You will not have much time to place you trade and if you are trading a volatile stock, you most likely will have to execute the orders at market. Large spreads tell me two things; first, your risk increases significantly when the spread increases. Why? Because most times you will have trouble getting out of a stock with a large spread using limit orders and this can turn a small loss into a big one quite quickly. Secondly, it tells me that there is not that much interest in the stock. If there was, the spreads would narrow and both sides would come as close as possible.

Extremely High Volume Stocks

There is trading high volume and then there is trading extremely high volume. I try and stay away from stocks that trade, for example, 30 or 40 million shares as the message of their tapes can be a bit confusing at times if your a beginner. You may see 14 orders come through at bid with large sizes but that may not mean as much as if the stock was trading less volume. Remember to always keep everything in context. If your stock trades gigantic volume, you should expect a different kind of tape action.

Make price prove the point

Up to this point, we have discussed order size, speed, and condition. While these are all key components of the tape, you must let price prove the point. For example, if you are looking to short a stock at $54 and there is strong order flow selling at bid at that level, my experience has shown me to wait for that level to break. If it does not, you may be involved in a trap that was made to get the weak traders out and then take the stock in the opposite direction.

Don't let your ego get in your way

One of the biggest mistakes that I see many traders making is that they get attached to their positions. In an effort to appease their ego's, they tend to take a trade and stick with it until they are right. Remember, day trading is an extremely fast game and if you do not react with speed, you will be left in the dust. When you make a decision based on that tape action and the stock does not go in your favor relatively quickly, odds are that you are in a bad trade.

Focus

It is extremely important to have utmost focus when you are trading and trying to listen to the message that tape is giving you. Try and stay in a zone and filter out the extra noise. If you are going to put a trade on, be in that trade and nothing else. This will help you feel when it is right to stay in the stock and when its time to get out.

Conclusion

Tape reading is a very important skill to have as a short term trader and can keep you out of many bad trades. Remember, don't be an action junkie, psyching yourself up for every trade. If you do this, you will find a reason to put on bad trades in the heat of the moment. Discipline is key and it takes time to develop. For any new traders looking to try this out, please practice, practice, practice before you put your hard earned money at work. Mastering the art of tape reading will take time, but when you do, you will be rewarded.

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Most day traders have a love or hate relationship with tick charts. Meaning, either you cannot trade without the tick data, or you absolutely despise the use of tick data as it can complicate making trading decisions. You would think there are some gray areas, but not really.

You see, tick charts display a certain number of trades before printing a new bar chart. In a way, you can find the price and volume of every print from the historical tick data of a stock or trading instrument. Hence, unlike other charts which are based on time, tick charts are solely based on trading activity.

Day traders who favor tick trading find it easier to just look at the tick by tick data in order to make quick trading decisions. If you do not have the time to wait for a 5-minute bar to close and need to make your decision to buy or sell, the stock tick data can be a great help. This is because, you would find a wealth of information about the details of the trading activity from the stock tick data or futures tick data.

However, if your trading strategy is purely based on technical indicators, you would find that tick data can create complications. In this discussion, we will explain to you how tick data can be a real nightmare for day traders, and why.

#1 - There are Too Many Time Frame Options

Look, if you are watching a 5-minute chart, you can be pretty sure that by the end of every five minutes, a new bar or candlestick will form on your day trading chart. But, guess what, you really cannot predict how many ticks there would be during that same 5-minute time frame.

Before April 2001, there was a standard measurement of a “tick.” Whenever the price of a stock moved 1/16^th of a dollar, you could call it a tick. Therefore, if you were watching tick charts, price moved $0.0625 at a time.

But, as major stock exchanges around the world moved to decimal pricing, that definition of a tick became obsolete. Now, a 5-minute chart can contain as many ticks as possible. This is because tick charts are formed based on the number of ticks, not time.

Comparing EDGE vs. MSFT Tick 1-Minute Chart

If you are fond of trading highly popular stocks likes Apple (AAPL) or Google (GOOG), you may find 10,000 ticks in a 5-minute chart during earnings calls. On the contrary, unpopular penny stocks may not have a single transaction during lunch hours, and you may have to wait a long time for a single tick bar to appear!

Also, there is no standard time frame to watch the tick data. A lot of brokers show tick data on the 1-minute chart. But, as you do not know which stock would have how many ticks during a single time frame, it is really not possible to compare the tick charts like bars with fixed time frames.

You may say that tick charts based on the number of ticks is a good way to go about it. In fact, you would find that a lot of day traders often watch tick charts based on Fibonacci numbers. But, how would you decide on which tick charts to watch?

Sure, the most popular one is 233 ticks, but that’s just another example of a self-filling prophecy, isn’t it? There are simply too many possibilities as you can use any number of tick count to formulate your tick chart.

#2 - The Action Can be Too Fast (or Too Slow!)

As we just discussed that there are hardly any standardized time frame to watch the tick charts and the ticks can come 10,000 per second or absolutely zero – there are no hard and fast rules in the tick universe.

So, during important news releases or market opening, the tick charts can move really, really fast. There are enthusiastic people in this world who have invested millions in high frequency trading and mainframe computers to interpret the tick data.

But, as a human being, you would often find the speed of the tick charts to be overwhelmingly fast to make any sense of it.

Most Unpopular Stocks Have a Very Low Number of Transactions on Traditional Time Frames

On the other hand, if you are trading unpopular stocks, you may have to wait a long time to find a complete bar on the tick charts that contains the number of ticks you have selected, which would not help you to make any trading decisions during slow moving market times.

#3 - What Good is Downloading Tick Data if You Cannot Use It?

Many beginner traders think that keeping an eye on the tick charts can give them an edge in day trading. Guess what? If you cannot interpret the real-time data, because at times, it is too fast, what good would it do for improving your trading results?

We are not saying that tick data is worthless, just that for day traders who make trading decisions based on technical analysis, it can often do more harm than good.

Instead of religiously watching tick charts, simply watching the volume indicator can give you the real-time information you need. Moreover, since volume can go up or down relative to the time frame you are watching, you can actually use it to make an informed trading decision.

#4 - Tick Data is Expensive - Don't Kid Yourself

If your broker offers free tick data, you are in luck. But, before you schedule an hour to watch it tonight, let us be the bearer of bad news. Nothing in this world is free and the free lunches you get in life often cost you more some other way.

The free tick data provided by many brokers often contains errors, if not missing parts that can prove costly if you use it to formulate your trading strategy. On the other hand, quality tick data can be really expensive.

Tick Data Costs

If you do a quick Google search, you would find that it costs around $3,000 to buy historical tick data for the NASDAQ 100 package that contains only 169 symbols. The complete package containing S&P 500, ETF, and DJA, etc. can even put a $100,000 hole in your wallet. Trust us, you would be much better off buying that Tesla Model S you always wanted with that money.

#5 - Technical Indicators Do Not Respond the Same Way

Technical Indicators Stop Working

Do you know that almost all popular technical analysis indicators are based on the concept of Open, High, Low, and Close or OHLC bars? You would also find it interesting that unless you are looking at a fixed time frame, the OHLC data would not make any sense at all.

For example, the opening price of a 1 minute chart and 5 minute chart would be different, right? What if there were not open or closing price of the bar for the last 2 bars? How do you think your moving average indicator would behave in a situation like that? If you are using tick charts, that’s a real issue.

Regardless of how advanced technology is used to measure tick data, the most popular indicators for day trading would never work the same way on tick charts as these work on a bar or candlestick based chart that shows the OHLC price data on standard time frames like 5-minute or 15-minute charts.

You may want to argue that tick trading has some application in “naked” technical analysis. However, if you do not have a standard time frame to figure out if the price “closed” above the resistance, how would really know if the resistance was broken? Moreover, it will not make much sense if other traders were not seeing that same breakout, as the whole concept of momentum trading depends on being in sync with the market.

Conclusion

High frequency trading that utilizes super-fast computers to analyze real-time data has some practical application for using tick data. However, as a day trader working from your basement on a Core i5 workstation with a fiber optic connection, watching tick charts will hardly help to improve your trading. Instead, it will complicate things to a certain extent.

Moreover, the combined cost of buying quality tick data from reputed sources, the additional investment it requires to buy adequate computer hardware that can handle tick data, and the time commitment you would require to put everything together may not offer the return you would initially expect.

If you mostly trade based on popular technical indicators along with some basic chart patterns, you are much better off back testing solutions that offer a comprehensive package for replaying various standard time frames instead of analyzing expensive tick data in real-time.

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Level II Quotes

The Level II quote window provides the data for pending orders in the market. It displays the size of the best bid and offers with their respective depths. Day traders use level II to gauge the direction of the stock market over the short-term. This article will discuss the working parts of the level II screen based on the tools provided from the tradestation brokerage firm. While level II windows will look differently depending on the broker, the functionality is virtually the same and it provides more information about the trading activity than Level 1.

Level II Window Structure

The level II window structure is comprised of four key components: (1) security information, (2) bid ask window, (3) depth chart, and (4) bid ask orders.

Security Information

The first element of the level II window is the general market information for the security. This information will include the symbol name, direction of the bid tick, last price, and net change. As the bid for the security changes, the arrow will shift up and down and from red to green. The last price is the last recorded price for the security. Finally, the net change represents the total dollar amount change for the security from the previous day's close.

Stock Ticker

Bid Ask Window

The bid ask data contains the current bid ask prices for the security. This data has four columns: (1) price, (2) depth, (3) size, and (4) spread). The price in the bid ask window displays the current bid by the asking price. The depth represents the number of orders at the given price. So, if you have 3 * 1 then there are 3 buy offers for every 1 sell. The size shows you the actual size for the bid and ask orders. So, if you have 1000 * 100, that means there are traders attempting to buy a 1000 shares at the given price, while there is only 100 shares at the sale price. The spread represents the difference between the bid and ask. The tighter the spread, the better. Day traders should look to trade stocks with high volume and close spreads.

Bid Ask Spread

Depth Chart

The depth chart is the visual representation of the orders and their respective size. The color of the graph in the depth chart, will match the color of the bid ask data. If you are day trading attempting to go long, you will want to see the size and speed of the bars on the left side of the depth chart to be larger than the bars on the right. This implies that there are more buyers in the market.

Depth Chart

Bid Ask Orders

The bid ask orders displays all of the pending buy and sell orders in the market. There are four components of the window: (1) ID, (2) order type, (3) size and (4) time. The ID represents the ECN that the order is routed through. The order type will be either the bid or ask depending on which window you are watching. The size is the size of the order. The time represents the time that the order was placed. The bid ask window is the consolidated version of all the bid ask orders. Traders will look at all the bid ask orders in the level II window, to gauge the momentum and to see how many orders are at a particular level.

Bid Ask Window

Example of Level II Window

Level II Quotes

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When you are just starting to take baby steps in trading, usually the first thing you are concerned about is what are the best day trading indicators and chart configuration you should use. Wouldn’t you agree?

Well, you should modify the question slightly and try to find what day trading indicators are best for you.

As you would probably agree that we are all different, have a different psychological make up, and have different expectations from day trading. Because of that diversity, we all should try to find the best indicators for day trading that suit our own personality and how we trade, instead of simply mimicking another successful day traders and their trading set ups. Otherwise, we will end up losing money in the market faster than how the New York Mets lost their games in 1962!

Let’s have a quick discussion about how you can find the best indicators for day trading and pick a day trading charting software that will help make your life a bit easier during the trading day.

In order to build or develop your charts for technical analysis, you need to mainly decide about three components: (1) the right time frame, (2) the right on-chart indicators, and (3) a set of the right off-chart indicators.

Picking the Right Chart Time Frame

Do you think all indicators are created equal? No, but more importantly, not all indicators work the same way on all time frames. For example, lagging indicators like moving averages work best when there is less volatility. You would benefit highly from using a long period moving average on a daily chart compared to using the same configuration in a 5-minute chart of your favorite day trading chart software.

However, we do not want to impose any hard rules and convey the wrong message that there is any best time frame to day trade. You may have a higher patience threshold and prefer to use 15-minute charts, and I might have a lower patience threshold and prefer the 5-minute time frame.

While there are no hard-and-fast rules about which time frame you should use in day trading, you should consider a few things to make up your mind about picking the best time frame for yourself.

The first you should make up your mind when starting day trading is this: how much time would you devote to trading during the day? If you have a day job, you probably do not have much time to begin with and would likely spend only a few hours in front of the screen. On the other hand, if you are self-employed or run a small business, you will probably have a lot of free time to trade during the day.

So, the rule of thumb is that you should use a lower time frame when you would spend less time day trading. Similarly, you should use a higher time frame when you would be keeping an eye on the market throughout the trading day.

This is because when you are spending only a few hours in day trading, a 15-minute chart will only generate a few handfuls of bars and your day trading charting software, with all its advanced technical indicators, will have a hard time generating a proper signal with the limited data.

Figure 1: Comparison of a Bullish Move of Apple Inc. on 5-Minute and 15-Minute Chart Time Frame

Instead, if you use a smaller time frame like the 5-minute chart, your day trading charting software will have the opportunity to analyze a lot of price data from enough bars and would be able to tell you which way the market is moving during that short period of time.

Moreover, when you are trading 8 hours a day and looking at lower time frames, you will have to analyze a lot of potential trading setups. As the number of trades goes up, as a human being, wouldn’t you feel tired of making so many decisions in a single day? The more you would trade, it is more likely that you will end up making more mistakes and give back the profits to the market.

If you are still not convinced, let me give you another reason to stick to the rule of thumb we just discussed. Your broker makes their profit by charging you commissions and from spreads. If you make 100 trades during the day and only end up making a few cents of profits on each of them, you are effectively paying a fortune to  your broker in fees.

Do not end up working for your broker, take the time to analyze a trade properly, keep the number of trades low, and be a day trader – not  a scalper.

Using On-Chart Indicators for Technical Analysis

If you add a ton of different indicators, it may look terrific or ugly, depending on the colors – of course, but you will probably find it difficult to interpret all the different data at once. You do know that all technical indicators are based on calculating the price data, right?

Hence, taking a “less is more” approach would not only help you declutter your chart, but also make it much easier for you to interpret the on-chart indicators on your chart.

Figure 2: Apple Inc. 5-Minute Chart with Volume, 10 Period SMA, and ATR Indicators

Personally, I strongly recommend that you keep the Volume indicator on your chart at all times. The volume is a secular on-chart indicator, it does not tell you which way the price would go. But, it will tell you if there are ample transactions in the market and whether the bigger players are involved when the price approaches a key breakout level.

In addition to the Volume indicator, I always keep the 10-period simple moving average (SMA) indicator on the chart. The 10-period moving average is one of the most popular indicators among day traders. It is fast enough to give an early indication and direction of a significant price move, but not too slow like the 20-period moving average that I would leave a large chunk of the profits on the table when the trend ends, or worse, reverses.

Besides these two EMAs, you would also find the Average True Range (ATR) indicator sitting at the bottom of my day trading charts. Because the ATR value gives you the accurate representation of the volatility based on the actual price of the stock and forces you to assess each stock on a case-by-case basis. Would you really think the volatility of Microsoft and Tesla would be the same if they had the same ATR reading?

You can also use a few other derivative indicators to know about the important support & resistance levels. For example, I have a plug-in which automatically plots the pivot points used by floor traders, and I draw the Fibonacci levels of important price swings manually.

Using Off-Chart Indicators in Day Trading

While you would find the on-chart indicators to be essential for technical analysis, at the end of the day, charts and indicators are just sugar coated versions of the order flows that makes up the overall supply & demand in the market.

If you were a retailer, selling fruits, would you prefer to buy your stock from the wholesalers or the farmers themselves? Where would you get the best price? Of course, from the farmers.

In this analogy, if you would get the wholesale information about the market from technical indicators, you would get the best data from the Level II quotes. These quotes are the actual pending orders that other traders have placed with their brokers.

Figure 3: Apple Inc. Level II Data

When traders place market orders to match these pending orders, these get filled. So, if you know that there are a lot of large pending buy orders below the current market price compared to sell orders, you can easily figure it out that if the support levels on your chart would hold the price or it would break below! Interesting right? You can explore about Level II here.

Figure 4: Apple Inc. Time & Sales Window on TradingSim.com

When it comes to day trading, I also heavily depend on another off-chart indicator – the Time & Sales data. Tradingsim offers this data in the “Time & Sales Window,” which represents the traditional “Tape.” By combining the volume and tape data, you easily get a “feel” of the market. Watching the detailed information regarding the order flow on the “Time and Sales Window” and depth of the pending orders in the Level II window of a particular stock can really take your day trading skills to a new level.

Conclusion

Success in day trading often boils down to the personality of the trader compared to how advanced the trading system he or she is using. That’s why, we always suggest that you keep things as simple as possible and focus on a few important indicators.

If you want, you can use a multi-screen trading setup and keep Tick Data, the spread between the S&P futures and the cash market, support & resistance, and Fibonacci levels of major stock indices like the S&P 500, etc. in a separate monitor.

However, always remember that the more information you have on the screen, the more time and energy it would require to analyze and process them. If you follow the advice given here and successfully match the right time frame, on-chart technical indicators, and tie the system with off-chart indicators, you would have a much better chance of becoming a successful day trader.

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Trade Volume Index Definition

The trade volume index (TVI) detects whether a security is being bought or sold based on tick data.  The TVI provides a trader more insight into the amount of buying and selling for a security.  It tracks the total volume that occurs at the bid and ask.  So, if the trade volume index is rising, meaning more people are buying at the ask and the price of the stock is rising, one can assume the uptrend has legs.  Conversely, if the trade volume index is falling and the stock is dropping like a rock, then a stronger downtrend is in play.

Who is using the Trade Volume Index

The trade volume index is used primarily by day trading professionals.  This is because active traders are most concerned with how stocks perform at key levels and have to make swift decisions.  Long-term investors are less concerned with intraday data and focus their attention on how a stock closes at the end of the day.

How to use the Trade Volume Index

The TVI shows its predictive power when assessing a stock that is flat lining at a particular level.  How many times have you been watching a stock at a particular level and wonder whether it has the juice to get through a certain level.  The trade volume index will peel back the onion and show you what traders are doing.  For example, if you want to buy a stock on a break of $100, and it has been flat lining for 2 hours, you may hesitate on pulling the trigger due to the flatness in the market before the breakout.  However, if you see that the TVI has been rising over this 2-hour period, it is a sign that traders are accumulating the stock at the ask price, thus increasing the odds that the stock will have legs when it clears resistance.

How to Calculate the TVI

The trade volume index is calculated by using the following formula

MTV = Minimum Tick Value

Change = Price minus the extreme price since direction changed

If Change is greater than MTV, then Direction = Accumulate

If Change is less than MTV, then Direction = Distribute

If Change is less than or equal to MTV and Change is greater than or equal to MTV, then Direction = Last Direction

Lastly, we must calculate the TVI, which is simple once you know the Direction.

If Direction is Accumulate, then TVI = previous TVI + Volume

If Direction is Distribute, then TVI = previous TVI - Volume

The post Trade Volume Index (TVI) – Technical Indicator appeared first on - Tradingsim.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377…do these numbers look familiar to you? Not really, right?

If not, then you definitely need to read the following material. These numbers are the root of one of the most important techniques for determining psychological levels in life and in trading.

Behold the mighty Fibonacci ratios!

Origin of the Fibonacci Sequence

Hundreds of years ago, an Italian mathematician named Fibonacci described a very important correlation between numbers and nature. He introduced an interesting number sequence starting from zero and one (0, 1).

Have a look below, as we build a Fibonacci sequence:

0, 1

Now we perform the following calculation, where we add to the last number to the previous number in the sequence:

0 + 1 = 1

The result we get here (one) is the next number in the sequence. Thus, we now have the following:

0, 1, 1

Now we add the last number in the sequence to the previous number as shown below:

1 + 1 = 2

Then we add 2 to our sequence:

0, 1, 1, 2

We repeat the process of adding the last number in the sequence to the previous number:

1 + 2 = 3

…and the next one:

0, 1, 1, 2, 3

……and the next one:

0, 1, 1, 2, 3, 5

……….and the next one:

0, 1, 1, 2, 3, 5, 8

………….and the next one:

0, 1, 1, 2, 3, 5, 8, 13

We repeat this process as many times as we want!

Now you know how I derived the numbers in the beginning of the article - 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377.

Key Fibonacci Ratios

But what is so interesting about these numbers? As you probably guess, the fun part begins now!

So, Fibonacci discovered the following: every number of this infinite sequence is approximately 61.8% of the next number in the sequence. If you do not believe me, let’s dive into the math for ourselves!

55 / 89 = 0.6179775280898876 = 61.8%

Wow! Let’s double check!

233 / 377 = 0.6180371352785146 = 61.8%

Do you believe me now? No? Ok then:

144 / 233 = 0.6180257510729614 = 61.8%

I think this is persuasive enough!

However, this is not the only thing, which Fibonacci introduced. He also found out that every number in this sequence is approximately 38.2% of the number after the next one in the sequence:

13 / 34 = 0.3823529411764706 = 38.2%

21 / 55 = 0.3818181818181818 = 38.2%

55 / 144 = 0.3819444444444444 = 38.2%

144 / 377 = 0.3819628647214854 = 38.2%

And also, we have another ratio! Every number in the Fibonacci sequence is 23.6% of the number after the next two numbers in the sequence:

55 / 233 = 0.2360515021459227 = 23.6%

Note that these percentages can be retrieved from each number pair, which is part of the Fibonacci sequence, continuing to eternity.

Fibonacci Ratios Everywhere

So, this is how the famous 61.8%, 38.2% and 23.6% Fibonacci levels appear. Later, traders added another level as an addition to the Fibonacci levels.

This is the 76.4% level which is 100 – 23.6. But, what is so important about these percentages?  The truth is that these ratios are all over the place in nature. Look at this shell for example:

Fibonacci Sea Shell

The volume of each part of the shell matches exactly the Fibonacci numbers sequence. Thus, each part of this shell is 61.8% of the next. It works the same way with this aloe flower:

Aloe Flower

The relationship here is the same as with the shell. If we separate the aloe flower into even particles, following the natural curve of the flower, we will get the same 61.8% result.

This ratio is not only found in animals and flowers. This ratio is literally everywhere around us. It is in the whirlpool in the sink, in the tornados when looked at through satellite in space or in a water spiral.

The Fibonacci ratio is constantly right in front of us and we are subliminally used to it. Thus, the human eye considers objects based on the Fibonacci ratio as beautiful and attractive.

It works the same way even with human faces! Faces with parameters (eyes to mouth distance, eyes to nose distance, ears to eyes distance) closer to 61.8% are beautiful and attractive to the human eye.

In this manner, big corporations like Apple or Toyota have built their logos based on the Fibonacci ratio. After all, we should not forget that these are two of the most attractive and engaging logos in the world.

These ratios can also be found in human behavior and psychology.

Example: Scientists say that the average person needs a bit more than 9 hours of sleep in order to be energetic and to lead a healthy life!

So, let’s take 9 hours and 10 minutes as an average time, which humans spend sleeping every day. This means that in the other 14 hours and 50 minutes we are awake. 14h:50m = 14.83 expressed as a decimal.

Let’s now see what percentage of the day we are awake:

14.83 / 24 = 0.6179166666666667 = 61.8%

Indeed!

Another example of Fibonacci ratios in people’s behavior is when we go out clubbing with cash in our pocket. It is proven that people get depressed when they spend more than 61.8% of what they have in their wallet.

You will say “But how does all of this apply to trading?” Relax! We are almost there!

It is the same in trading!

Fibonacci Ratios in Trading

Once an impulsive move terminates, the price of the equity is expected to decrease 38.2% and eventually 61.8%. Since it is in people’s nature to “freak out” when stocks retrace, investors tend to change their attitude when the price moves 38.2% or 61.8% in the opposite direction.

Thus, Fibonacci Retracement is a common practice to seek support and resistance in case of trend reversal. Every equity trader always double-checks his decisions with the Fibonacci trading system in order to confirm psychological levels.

Fibonacci ratios, when applied to trading stocks, correlate two trends; let's refer to them as primary and secondary.  The primary trend refers to a trending move in one direction while the secondary trend will refer to counter trend moves in the opposite direction.  The three most common fibonacci retracement levels are 38.2%, 50%, and 61.8% of the primary trend and most basic stock charting applications will use these as standard levels.  These fibonacci retracement levels act almost as magnets once the counter trend rally takes place.  These are very common, however, there are a few other fibonacci levels that can provide resistance.  These are the 75%, 78.6%, 87.5%, and 88.7% retracement levels.  The common rule of thumb is that when the 50% retracement level is taken out, the four levels I just mentioned become magnets to attract price.  Price action must be analyzed at those levels to understand if the countertrend move will cease or whether it will continue to fully retrace the primary move.

Fibonacci retracement levels are used by many floor traders and therefore become very relevant to your fibonacci trading activities.  These levels are so widely used now by traders, including systematic trading, that they almost become a self-fulfilling prophecy.   Some advanced traders will take it a step further and add fibonacci arcs and fibonacci fans to their trading arsenal, in search of an edge.

Defining the Primary Trend

Let's start with the characteristics of the primary trend of which we would want to play the countertrend.  I found that fibonacci retracement levels are most accurate after the primary trend has been a sharp move in price accompanied by heavy volume at the end of that move.  These types of moves typically exist in the story stocks of the day or the appear on the list of highest percentage gainers or losers list which complements my trading style as these are the only stocks that I will trade.

I am asked many times how to define the starting and ending points in order to calculate the length of the primary trend.  I see many traders make the mistake of using the highest point and lowest point of a trending move to define the starting and ending point of the primary trend.  While this may work in some cases, it is best to look for double tops or double bottoms when locating your starting and ending points.  This may or may not coincide with the highs or lows of the move.

How to Use Fibonacci Levels

I do not use fibonacci levels as a primary trading technique, however, I found that it greatly improves my odds of generating a winning trade when fibonacci retracement levels start correlating with price objectives using other patterns, such as candlestick charting formations for example.  I use fibonacci levels in two ways:

1)  After identifying the primary trend, use price reversal pattern recognition (through candlesticks or any other trading technique that you employ) to coincide with a fibonacci retracement level to confirm that the countertrend move has ceased.  I then look for the stock to test the recent lows and double bottom or break through that level.  That is where I employ the usage of tape reading to determine whether I should play the double top/bottom or whether I should play a breakout in the direction of the primary trend.

2)  Many times, a stock will spike down on high volume and that will signal capitulation and put a floor in the market.  Usually, an automatic rally will ensue and fail when the dip buyers lose their buying pressure.  Oddly enough, this coincides with fibonacci retracement levels (usually 38.2% or 50%).  Once that rally kicks in, a retest of the recent lows will be attempted and a trading range can be created between the lows that were put in with spike volume and the highs of the automatic rally.  This trading range carries on for a bit of time before a breakout up through the range occurs.  This breakout can be bought with good tape action and then the tape action must be hawked as well as keeping an eye on fibonacci levels which could act as resistance.  If I see buying pressure fizzling out at one of the key fibonacci levels mentioned above, I get out of the trade immediately.

As you can see, fibonacci trading is a secondary part of my game but a pivotal one.  You can really hit the sweet spot in trading if you can combine a few key trading elements together and design your own trading system where you put the odds in your favor.  The bottom line, you probably shouldn't leave fibonacci retracement levels out of that mix.

Congratulations! You are now familiar with Fibonacci retracement levels!

Yet, that’s not all folks! Let’s now go through some other tools which include Fibonacci trading techniques.

Fibonacci Speed Resistance Arcs

Fibonacci Arcs are used to analyze the speed and strength of reversals or corrective movements. In order to install arcs on your chart you should first discover a trend.

Then you measure the bottom and the top of the trend with the arcs tool. The arcs appear as half circles under your trend, which are the levels of the arcs distance from the top of the trend with 23.6%, 38.2%, 50.0%, and 61.8% respectively.

Each of the Fibonacci arcs is a psychological level where the price might find support or resistance.

Look at the image below, which shows Fibonacci arcs in action:

This is the 30-minute chart of Apple for the period Oct 26 – Nov 3, 2015.

I have placed Fibonacci arcs on a bullish trend of Apple. The arc we are interested in is portrays 38.2% distance from the highest point of the trend.

As you see, when the price starts a reversal, it goes all the way to the 38.2% arc, where it finds support. This is the moment where we should go long.

I recommend placing a stop right below the bottom created on the arc in case the price does not break the highest point of the trend.  As you see, Apple starts an increase with a strong hesitation around the trend’s high.

Then the price breaks in a bullish direction and we enjoy a winning long position. This trade had us in a long position during a price increase of $3.19 per share.

Fibonacci Time Zones

Fibonacci time zones tool is an interesting instrument, which refers not to price movement, but to time volume. In other words, the time zones based on Fibonacci suggest when a price movement could occur. The tool does this by underlining specific time frames based on Fibonacci levels. The example below will show you how the Fibonacci time zones work:

This is the 60-minute chart of Apple for the period Jul 22 – Aug 10, 2015. The trend we have indicated is the place where we stretch the Fibonacci time zones. This is actually our zero period.

Then the other periods are automatically adjusted. Notice that in this case, Apple’s price undertakes a move based on the Fibonacci numbers (0, 1, 2, 3, 5, 8) expressed in time frames.

Do you remember when we said that Fibonacci ratios also refer to human psychology? Exactly! This also applies to time.

When investors hold a stock for a “Fibonacci” period of time, they tend to change their attitude after this period elapses.

Two Simple Fibonacci Trading Strategies

Next we are going to cover a few Fibonacci trading strategies you can incorporate into your existing trading methodologies.  This is meant to be a fun process, so use what makes sense for your investment approach.

Fibonacci Retracement + MACD

This Fibonacci trading strategy includes the assistance of the well-known MACD. Here we will try to match the moments when the price interacts with important Fibonacci levels in conjunction with MACD crosses.

When we discover this correlation between Fibonacci retracement and MACD, we open a position in the respective direction.

We hold the stock until we receive a contrary crossover from the MACD. The image below will give you a clearer picture of how this Fibonacci strategy works:

Fibonacci MACD

This is the 60-minute chart of Yahoo for the period Sep 25 – Nov 3, 2015. The indicated trend is the place where we adjust our Fibonacci retracement.

The two green circles on the chart highlight the moments when the price bounces from the 23.6% and 38.2% Fibonacci levels.

At the same time, the green circles on the MACD show the confirmation we need in these exact moments.

Thus, we go long every time we match a price bounce with a bullish MACD crossover.

The red circles show the close signals we receive from the MACD.

We open two long positions with Yahoo and we generate a profit of $5.12 per share. This is definitely an attractive gain for a period of about 10 trading days.

Fibonacci Retracement + Stochastic Oscillator + Bill Williams Alligator

In this Fibonacci trading system, we will try to match bounces of the price with overbought/oversold signals of the stochastic. When we get these two signals, we will open positions.

If the price starts trending in our favor, we stay in the market as long as the alligator is “eating” and its lines are far from each other. When the alligator lines overlap, the alligator falls asleep and we exit our position. The next image will show you this Fibonacci trading strategy:

Fibonacci Alligator

This is the 30-minute chart of TD Bank for the period Sep 29 – Oct 14, 2015. As you see, we place our Fibonacci retracement levels on the existing trend on the left side of the image.

The price drops to the 61.8% Fibonacci level and starts hesitating in the green circle. Meanwhile, the stochastic gives an oversold signal as shown in the other green circle.

This is exactly what we need when the price hits 61.8% and we go long! A few hours later, the price starts moving in our favor. At the same time, the alligator begins eating!

Isn’t that lovely?

We hold our position until the alligator stops eating. This happens in the red circle on the chart and we exit our long position. This trade brought us a total profit of $2.22 per share.

Conclusion

• The Fibonacci sequence starts from 0; 1; and every number thereafter is built by the sum of the previous two.
• Every number in the Fibonacci sequence is 61.8% of the next number.
• Every number in the Fibonacci sequence is 38.2% of the number after the next in the sequence.
• Every number in the Fibonacci sequence is 23.6% of the number after the next two numbers in the sequence.
• Additional level on the Fibonacci tools can be found at 76.4%, which is simply 100 -23.6.
• Fibonacci levels are critical in equity trading, because they represent a trader’s behavior and psychological reaction to price changes.
• The most common Fibonacci trading instrument is the Fibonacci retracement, which is a crucial part of the equity’s technical analysis.
• Other Fibonacci trading tools are the Fibonacci speed resistance arcs and Fibonacci time zones
• Successful Fibonacci trading strategies are:
• Fibonacci Retracement + MACD
• Fibonacci Retracement + Stochastic + Alligator
• Fibonacci ratios are the highest form of understanding trading psychology in equity markets!

Photo Credit

Aloe Flower
Shell 

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So, what is the simple moving average?  Once you begin to peel back the onion, the simple moving average is anything but simple.   This article will cover a host of topics; to name a few, we will discuss the simple moving average formula, popular moving averages (5, 10, 200), some real-life moving average examples and how a few crossover strategies.  There are a few additional resources I would like to point out before you proceed with the article; (1) Trading Simulator (you will need to practice what you have learned) and (2) additional moving average articles to get a broader understanding of the averages (Displaced Moving Average, Exponential Moving Average, Triple Exponential Moving Average).

Simple Moving Average Formula

The simple moving average (SMA) is the most basic of the moving averages used for trading. The simple moving average formula is calculated by taking the average closing price of a stock over the last "x" periods.

Let's take a look at a simple moving average example with MSFT.  The last five closing prices for MSFT are:

28.93+28.48+28.44+28.91+28.48 = 143.24

To calculate the simple moving average formula you divide the total of the closing prices and divide it by the number of periods.

5-day SMA = 143.24/5 = 28.65

Popular Simple Moving Averages

In theory there are an infinite number of simple moving averages.  If you are thinking you will come up with some weird 46 SMA to beat the market let me stop you now.  It is important to use the most common SMAs as these are the ones the majority of traders will be using on a daily basis.  While I do not advocate you following everyone else, it is important to know what other traders are looking at for clues.  Below are the most common SMAs used in the market:

5 - SMA - For the hyper trader.  This short of an SMA will constantly give you signals.  The best use of a 5-SMA is as a trade trigger in conjunction with a longer SMA period.

5 Period SMA

10-SMA - popular with the short-term traders.  Great swing traders and day traders.

10 SMA

20-SMA - the last stop on the bus for short-term traders.  Beyond 20-SMA you are basically looking at primary trends.

20-SMA

50-SMA - use the trader to gauge mid-term trends.

50 period simple moving average

200-SMA - welcome to the world of long-term trend followers.  Most investors will look for a cross above or below this average to represent if the stock is in a bullish or bearish trend.

200 period simple moving average

Basic Rules for Trading with the SMA

Most traders will tell you to trade simple moving average crossovers of and the profits will fall from the heavens. Well, unfortunately this is not accurate. Often time's stocks will tick over or under moving averages to only continue in the primary direction. This will leave you on the wrong side of the market and down on your positions. Below are a few ways to make money trading the SMA.

Going with the Primary Trend

1. Look for stocks that are breaking out up or down strongly
2. Apply the following SMAs 5,10,20,40,200 to see which setting is containing price the best
3. Once you have identified the correct SMA, wait for the price to test the SMA successfully and look for price confirmation that the stock is resuming the direction of the primary trend
4. Enter the trade on the next bar

Fade the Primary Trend Using Two Simple Moving Averages

1. Locate stocks that are breaking out up or down strongly
2. Select two simple moving averages to apply to the chart (ex. 5 and 10)
3. Make sure the price has not been touching the 5 SMA or 10 SMA excessively in the last 10 bars
4. Wait for the price to close above or below both moving averages in the counter direction of the primary trend on the same bar
5. Enter the trade on the next bar

Real-Life Example going with the primary trend using the SMA

The simple moving average is probably one of the most basic forms of technical analysis.  Even hard core fundamental guys will have a thing or two to say about the indicator.  A trader has to be careful, since there are unlimited number of averages you can use and then you throw the multiple time frames in the mix and you really have a messy chart. Below is a play-by-play for using a moving average on an intraday chart.  In the below example we will cover staying on the right side of the trend after putting on a long position.

The below chart is from TIBCO (TIBX) on June 24, 2011.

Simple Moving Average Example

Notice how the stock had a breakout on the open and closed near the high of the candlestick.  A breakout trader would use this as an opportunity to jump on the train and place their stop below the low of the opening candle.  At this point you can use the moving average to gauge the strength of the current trend.  In this chart example we are using the 10-period simple moving average.

Simple Moving Average - When to Sell

Now looking at the chart above, how do you think you would have known to sell at the $26.40 level using the simple moving average?  Let me help you out here.  You would have had no clue.  Far to many traders have tried to use the simple moving average to predict the exact sell and buy points on a chart.  A trader might be able to pull this off using multiple averages for triggers, but one average alone will not be enough.  So save yourself the time and headache and use the averages to determine the strength of the move.

Now take another look at the chart.  Do you see how the chart is starting to rollover as the average is starting to flatten out.  A breakout trader would want to stay away from this type of activity, since the money in this example grows as the stock increases in price.  Now again, if you were to sell on the cross down through the average, this may work some of the time, but over time you will end up losing money after you factor in commissions.  If you don't believe me, try simply buying and selling based on how the price chart crosses up or under a simple moving average.  Remember, if it was that easy, every trader in the world would be making money hand over fist.

Flat Simple Moving Average

Let's take another look at the simple moving average and the primary trend.  I like to call this the holy grail setup.  This is the setup you will see in books and seminars.  Simply buy on the breakout and sell when the stock crosses down beneath the price action.  The below is an intraday chart of Sina Corporation (SINA) from June 24, 2011.  Look at how the price chart stays cleanly above the 20-period simple moving average.

Simple Moving Average - Perfect Example

Isn't that a beautiful chart?  You buy on the open at $80 and sell on the close at $92.  A quick 15% profit in one day and you didn't have to lift a finger.  The brain is a funny thing.  I remember seeing a chart like this when I first started out in trading and then I would buy the setup that matched the morning activity.  I would look for the same type of volume and price action, only to later be smacked in the face by reality when my play did not trend as well.  This is the true challenge with trading, what works well on one chart, will not work well on the other.  Remember, the 20-SMA worked well in this example, but you can not build a money making system off one play.

Real-Life Example going against the primary trend using the SMA

Another way to trade using the simple moving average is to go counter to the trend.  One of the more higher probability plays is to counter gap moves.  There have been a number of studies regarding gaps.  Depending on the period in the stock market (60s flat line, late 90s boom, or volatility of the 2000s) its a safe assumption that gaps will fill 50% of the time.  Another validation a trader can use when going counter is a close under or over the simple moving average.  In the example below, FSLR had a solid gap of ~4%.  After the gap the stock trended up strongly.

FSLR Short

You have to be very careful with counter approaches.  If you are on the wrong side of the trade, you and others with your position will be the fuel for the next leg up. Let's fast forward a few hours on the chart.

FSLR Short Trend

Whenever you go short and the stock does little to recover and/or the volatility dries up, you are in a good spot.  Notice how FSLR continued lower throughout the day; unable to put up a fight.  Now let's jump forward one day to July 1, 2011 and guess what happened?  You got it, the gap filled.

FSLR Gap Filled

Simple Moving Average Crossover Strategy

The moving averages by themselves will give you a great roadmap for trading the markets.  But what about moving average crossovers as a trigger for entering and closing trades.  Let me take a clear stance on this one and say I'm not a fan for this strategy.  First the moving average by itself is a lagging indicator, now you layer in the idea that you have to wait for a lagging indicator to cross another lagging indicator is just too much delay for me.  If you look around the web one of the most popular simple moving averages to use with a crossover strategy is the 50 and 200 day.  When the 50 simple moving average crosses above the 200 simple moving average it generates a golden cross.  Conversely, when the 50 simple moving average crosses beneath the 200 simple moving average it creates a death cross.  I only mention this so you are aware of the setup, which maybe applicable for long-term investing.  Since Tradingsim focuses on day trading let me at least run through some basic crossover strategies.

Moving Average Crossovers and Day Trading

Two Simple Moving Average Crossover

Early on in my trading career and when I say early I mean the first few months, I had the bright of idea of using a moving average strategy to bring me new found wealth.  I settled on the 5 and 10 period SMAs and simply bought as the 5 crossed above the 10 and sold short when the 5 crossed below the 10.  I thought I was really advanced when I decided to not just use this system blindly, but to run this analysis on stocks that had the best results.  As you can imagine over the long haul I began to lose money.  I am getting off topic, I think I already made it clear I'm not a fan of moving average crossovers.  So, let's talk through using two simple averages.  The first thing to know is you want to pick two moving averages the are somehow related to each other.  For example, 10 is half of 20.  Or the 50 and 200 are the most popular moving averages for longer term investors.  The second thing is coming to understand the trigger for trading with moving average crossovers.  A buy or sell signal is triggered once the smaller moving average crosses above or below the larger moving average.

Buying on a Cross Up

In the below charting example of Apple from 4/9/2013 Apple the 10 period SMA crossed above the 20 period SMA.  You will notice that the stock had a nice intraday run from $424 up to $428.50

Isn't that just a beautiful chart?  The 10 period SMA is the red line and the blue is the 20 period.  In this example you would have bought once the red line closed above the blue which would have given you an entry point slightly above $424.

Selling a Cross Down

Let's take a look when a sell action is triggered.    In this example a sell action was triggered when the stock gapped down on 4/15/2013.

Now in both of these examples you will notice how the stock conveniently went in the desired direction with very little friction.  Well this is the furthest thing from reality.  If you look at moving average crossovers on any symbol you will notice more false and sideways signals than high return ones.  This is because most of the time stocks on the surface move in a random pattern.  Remember people, it is the job of the big money players to fake you out at every turn in order to separate you from your money.  With the rise of hedge funds and automated trading systems, for every clean crossover play I find, I can probably show you another dozen or more that don't play out well.  This again is why I do not recommend the crossover strategy as a true means for making money day trading the markets.

Summary

If you haven't already figured it out, the simple moving average is not an indicator you can use as a standalone trigger.  Now, that doesn't mean that the indicator can't be a great tool for monitoring the direction of a trend or helping you determine when the market is getting tired after an impulsive move.  Think if the SMA as a very basic compass.  If you want detailed coordinates you will need other tools, but you at least have an idea of where you are headed.

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Slow Stochastic Definition

The slow stochastic indicator is a price oscillator that compares a security's closing price over "n" range. The most commonly used range for the slow stochastic indicator is 14. The slow stochastic formula is calculated as follows:

Slow Stochastic Formula

To calculate the slow stochastic, replace "n" with the range your are monitoring. If you plan on using 14, you will want to find the highest and lowest values over the last 14 trading bars. The slow stochastic can be calculated on any time frame.

While I have provided the equation for calculating the slow stochastics so you can see "under the hood", I strongly advise you to just use the indicator as provided by your trading platform.  Please do not pop out excel and start cranking through slow stochastics calculations using raw market data.

Misconceptions of Slow Stochastics

Divergence in Slow Stochastics and Price Trend

Traders will often cite when a stock makes a higher high, but the stochastics does not exceed its previous swing high, that the trend is in jeopardy. This couldn't be the furthest thing from the truth. The slow stochastics indicator ranges from 0 - 100. So, as a stock rallies, how can the stochastics continue to make higher highs if it hits 98.85? Unlike price which has no boundaries, the slow stochastics is an oscillator, so it will never truly mimic a security's price action. All that matters is that the stochastics continues in the direction of the primary trend.

Oversold and Overbought Levels

Traders will often exit long trades when the slow stochastics crosses over 80 or will buy when the slow stochastics crosses under 20. The problem with this trading methodology is that if a stock is over 80, it should not be looked upon as overbought, but rather as trending strongly. Also, if the slow stochastic is below 20, this is a sign of weakness and without any other form of support present, the stock will likely continue lower.

How to trade the slow stochastics profitably

Below are 4 trading strategies you can use when trading the slow stochastics.  The strategies increase in complexity as we progress through each example.  Please approach each strategy with an open mind as this will challenge the conventional thinking of how to use the slow stochastics indicator.

Strategy #1 - Identify stochastics with smooth slopes

Stochastics that have smooth slopes, which move from overbought to oversold implies that the move down was sharp and without much reaction, thus strengthening the odds of a counter move up.

Slow Stochastics Buy

While this is the simplest of slow stochastics strategies, it has its flaws.  For starters, sharp moves up or down can start consolidation patterns prior to continuing the trend.  If you were to simply place buy and sell signals because the of smooth slow stochastic slopes, you are headed down a rough road.

Still not a believer, let's review a few charts.

AMZN Drifting Lower

Weak Slow Stochastics Buy Signal

After you get a few of these under you belt, take my word you will realize that you need more than a slow stochastics move where the fast line never crosses the slow line on the way down.  While this strategy is the simplest, it doesn't mean easy profits.  You will need to step it up a little on the analysis side of the house, if you want to make long sustainable profits.

Strategy #2 - Follow the Sloppy Stochastics

Far to often new traders will buy oversold slow stochastic readings blindly. Remember, the slow stochastic is an oscillator and like any other oscillator, it can trend sideways for an extended period of time.

You will see the slow stochastics just sitting beneath the 20 line and you will say to yourself, this has been going on for too long.  Trust me, you say you won't, but you will.  This is the downside of indicators, it will give the impression that price action has to change course; however, all of us seasoned traders knows the market will do whatever it wants.

Let's walk through a few working examples to get this point across.

Flat Slow Stochastics

Choppy Slow Stochastics

In each of the above charts of Facebook and Apple you can see how the slow stochastics just began to flat line.  Mixed with emotions of needing to jump the market and the need to put on a trade, it's very easy to see how a trader can end up making a poor trading decision.  In both instances, the rally never materialized and in addition to losing money, you are also losing time sitting in the position.

So, where does this leave us?  The simple answer is that you can take a position in the direction of the primary trend.  For example, as you see the slow stochastics in Apple begin to stay under 20, use this as an opportunity to take a short position to ride Apple all the way down.

Going in the direction of the sloppy slow stochastics will feel very strange at first.  This emotion will be the normal  human reaction that states something has to give and things can't keep going lower.  At this exact moment, you need to fight the need to go counter to the trend and realize that the money is in the least path of resistance.

Strategy #2 has a higher difficulty level then trading smooth slopes; however, it still lacks the context of the full technical picture of a security.

Strategy #3 - Combine the Slow Stochastics with Trendlines

As we just mentioned earlier in the article, the slow stochastics can provide a number of false signals.  The best way I have determined to over come this flaw is to combine the slow stochastics with trendlines to identify proper entry and exit points.

Slow Stochastics Buy Signal

The above image is a 5-minute chart of Apple.  You can see how as Apple goes through its corrective move lower, it hits a support trendline twice and bounces higher.  You will also notice the slow stochastics had a number of moves below 20 that either resulted in lower prices or sideways action.  This is why as a trader you cannot blindly buy a stock just because the slow stochastics is under pressure.

If you use the confluence of the stock hitting support in conjuction with a bottoming slow stochastic, then you are likely entering the trade at the right point.  It may look like magic, but it's really not that complicated.

The mechanics of the situation are such that the trend traders are buying as Apple hits support, at the same time the stochastics traders are buying the oversold reading.  The key to this game is buying and selling right before everyone else does.  If you have a way of identifying when multiple players will be taking the same action for various reasons, you my friend are ahead of the curve.,

This same approach for identifying buying opportunities works exactly the same on the sell side.

Slow Stochastics Sell Signal

The next chart is of Google and as you can see the stock was trending higher nicely.  As the stock hit resistance for the third time, Google also had a slow stochastics reading of over 80.  Just as I mentioned earlier about the false buy signals, look at the number of false sell signals.

Beyond missing out on trading profits, allowing the indicator to whipsaw you like this would also rack up pretty hefty trading commissions.

Now, I do not want to leave you with the impression that you can simply buy or sell a stock when (1) it is hitting a trendline and (2) going over 20 or above 80.  Trading is not that simple.  You can however utilize the slow stochastics to validate the health of a trend relative to previous peaks by seeing if the stock was able to make a higher or lower slow stochastics reading.  This way you can size up a recent high relative to its predecessor to determine if its really time to sell or if the stock still has room to go, regardless if a trendline is staring you in the face.

Strategy #4 - Pull the Trigger After the Slow Stochastics Crosses a Certain Threshold

Anyone on the web can figure out after reading the first 3 Google results that traders should be when the slow stochastics crosses above 20 and sell when the slow stochastics crosses below 80.

So, if everyone can read this on the web, why do you think this approach will make you money?

Another approach is to allow the slow stochastics to cross above a certain threshold to confirm that the counter move has in fact begun.  This level could be 50, 61.8, 78.6, etc.  The downside to this approach of course is that the move is likely to have a few points behind it before you enter the trade.  On the flip side, this will prevent you from getting caught in a stock that is flat lining.

OAS Slow Stochastics

To illustrate this example, I will be using 61.8 as the trigger for entering any new long positions.  This is of course a play on the 61.8% fibonacci level found throughout the market.

In the above chart we see that the stock OAS crosses above 61.8 on the slow stochastics which confirms the move up.  From this point, OAS has an ~4 percent up move before finally topping out.

The key with using a higher slow stochastic reading prior to entering a buy signal is to use this method for fading morning gaps down.  The reason this approach works well is it allows for you to validate the initial gap down is weakening and you can take a long position.  If you were to go in the direction of a strong up trend and wait until 61.8 was crossed, you would likely be buying at the peak.

This approach also works well in the late afternoon trading session.  Those that follow the Tradingsim blog know that I personally do not trade in the afternoon; however, strategy #4 was built for late day setups.

Later in the day, the market has less volume and well experience a number of false breakouts relative to the first hour of trading.  To this point, as a day trader, you will need a method for assessing which breakouts or moves are valid.

As always, a real-life example is worth a thousand words.

Slow Stochastics Late Day Breakout

Notice how in the CLF example the stock had an expected retracement after the morning pop.  Once CLF cleared 61.8 the stock went on a nice run up until 2:30 pm.  By waiting on the slow stochastics to confirm the breakout in conjunction with the trendline break,  you are allowing both the price action and technicals to confirm the start of a new uptrend.

In Summary

The slow stochastics is a great indicator for identifying the primary trend.  If you take it a step further and combine some basic technical analysis methods such as trendlines, you will be able to uncover some hidden trading opportunities in the market.

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Bollinger Bands Explained

Odds are you have landed on this page in search of bollinger band trading strategies, secrets, best bands to use or my favorite - the art of the bollinger band squeeze.  Before you skip down to the section titled bollinger band trading strategies which covers all these topics and more; let me impart two additional resources on the site that are of value to you: (1) Trading Simulator (you will need to practice what you have learned) and (2) Indicators Category (confirming your bollinger band strategy with another indicator is always a plus).

Bollinger Band Indicator

Bollinger bands are a very powerful technical indicator created by John Bollinger.  Some traders will swear that solely trading a bollinger bands strategy is the key to their winning systems.  Bollinger bands are drawn within and surrounding the price structure of a stock. It provides relative boundaries of highs and lows. The crux of the bollinger band indicator is based on a moving average that defines the intermediate term trend of the stock based on the trading timeframe you are viewing it on. This trend indicator is known as the middle band. Most stock charting applications use a 20 period moving average for the default bollinger bands settings. The upper and lower bands are then a measure of volatility to the upside and downside. They are calculated as two standard deviations from the middle band.

Bollinger Bands Calculation:

Upper Band = Middle band + 2 standard deviations

Middle Band = 20 period moving average (most charting packages use the simple moving average)
Lower Band = Middle band - 2 standard deviations.

The below chart shows the upper and lower bands for bollinger bands.

Bollinger Bands

Bollinger Band Trading Strategies

Many of you have heard of traditional patterns of technical analysis such as double tops, double bottoms, ascending triangles, symmetrical triangles, head and shoulders top or bottom, etc. The bollinger bands indicator can add that extra bit of firepower to your analysis. They can help you understand certain characteristics of a stock such as the high or low of the day, whether or not the stock is trending, or even if it is volatile or not. On occasion when trading with bollinger bands, you will see the bands coiling very tightly which indicates the stock is trading in a narrow range. This is the trigger to watch for a price breakout or breakdown. Many times, large rallies begin from low volatility ranges. When this happens, it is referred to as "building cause". This is the calm before the storm.

#1 - Double Bottoms and Bollinger Bands

A common bollinger band strategy involves a double bottom setup. The initial bottom of this formation tends to have strong volume and a sharp price pullback that closes outside of the lower Bollinger band. These types of moves typically lead to what is called an "automatic rally". The high of the automatic rally tends to serve as the first level of resistance in the base building process that occurs before the stock moves higher. After the rally commences, the price attempts to retest the most recent lows that have been set in order to test the vigor of the buying pressure that came in at that bottom. Many bollinger band technicians look for this retest bar to be inside the lower band. This indicates that the downward pressure in the stock has subsided and that there is a shift now from sellers to buyers. Also pay close attention to the volume, you need to see it drop off dramatically.

Below is an example of the double bottom outside of the lower band which generates an automatic rally.  The setup in question was for FSLR from June 30, 2011.  The stock hit a new low with a 40% drop in traffic from the last swing low.  To top things off, the candlestick struggled to close outside of the bands.  This led to a sharp 12% rally over the next two days.

Bollinger Bands Double Bottom

#2 - Reversals with Bollinger Bands

Another simple yet effective trading method is fading stocks when they go outside of the bands.  Now, take that one step further and apply a little candlestick analysis to this strategy.  For example, instead of shorting a stock as it gaps up through its upper band limit, wait to see how that stock performs.  If the stock gaps up and then closes near its low and is still completely outside of the bollinger bands, this is often a good indicator that the stock will correct on the near-term.  You can then take a short position with three target exit areas: (1) upper band, (2) middle band or (3) lower band.  In the below chart example, the Direxion Daily Small Cap Bull 3x Shares (TNA) from June 29, 2011 had a nice gap in the morning outside of the bands, but closed 1 penny off the low.  As you can see in the chart, the candlestick looked terrible.  The stock quickly rolled and took an almost 2% dive in under 30 minutes, proving very profitable for any day trader.

Bollinger Band Reversal

#3 - Riding the Bands

The single biggest mistake that many bollinger band novices' make is that they sell the stock when the price touches the upper band or conversely buy when it touches the lower band. Bollinger himself stated that a touch of the upper band or lower band itself does not constitute a bollinger band signals of buy or sell. Not only have I seen, but I have also traded this bollinger band strategy as a continuation trade. Using other technical indicators and chart pattern recognition, you can actually trade in the direction of a stock that is closing above or below the upper and lower band.

Take a look at the example below and notice the tightening of the bollinger bands right before the breakout and to my point above, a price penetration of the bands cannot alone be considered a reason to short a stock or sell it. Notice how the volume exploded on that breakout and the price began to trend outside of the bands. These can be extremely profitable setups.

BSC Bollinger Band Example

I want to touch on the middle band again. The middle band is set as a 20 period simple moving average as a default in many charting applications. Every stock is different and some will respect the 20 period and some will not. In some cases, you will need to modify the simple moving average to a number that the stock respects. This is curve fitting but we want to put the odds in our favor. You can use this line to represent areas of support on pullbacks when the stock is riding the bands. You could even add an additional position in the stock using this technique.

Conversely, the failure for the stock to continue to accelerate outside of the bollinger bands indicates a weakening in strength of the stock. This would be a good time to think about scaling out of a position or getting out entirely. Additionally, we should look for higher highs and higher lows as we ride the Bollinger bands.

#4 - Bollinger Band Squeeze

Another bollinger bands trading strategy is to gauge the initiation of an upcoming squeeze. He created an indicator known as the Band width. This bollinger band width formula is simply (Upper Bollinger Band Value - Lower Bollinger Band Value) / Middle Bollinger Band Value (Simple moving average). The idea, using daily charts, is that when the indicator reaches its lowest level in 6 months, you can expect the volatility to increase. This goes back to the tightening of the bands that I mentioned above. This type of squeezing action of the bollinger band indicator foreshadows a big move. You can use additional indicators such as volume expanding, or did the accumulation distribution indicator turn up, or does the price range narrow on down days? These additional indications add more evidence of a potential bollinger band squeeze.

We need to have an edge though when trading a bollinger band squeeze, because these types of setups can head-fake the best of us. Notice above in the BSC chart how the bollinger price expanded on the opening of 9/26. It immediately reversed and all the breakout traders were head faked. You don't have to squeeze every penny out of a trade. Wait for some confirmation of the breakout and then go with it. If you are right, it will go much further in your direction. Notice how the price and volume broke when approaching the head fake highs (yellow line).

To the point of waiting for confirmation, let's take a look of how to use the power of a bollinger band squeeze to our advantage.  Below is a 5-minute chart of Research in Motion Limited (RIMM) from June 17, 2011.  Notice how leading up to the morning gap the bands were extremely tight.

Tight Bollinger Bands

Now some traders can take the basic trading approach of shorting the stock on the open with the assumption that the amount of energy developed during the tightness of the bands will carry the stock much lower.  Another approach is to wait for confirmation of this belief.  So, the way to handle this sort of setup is to (1) wait for the candlestick to come back inside of the bollinger bands and (2) make sure there are a few inside bars that do not break the low of the first bar and (3) short on the break of the low of the first candlestick.  Based on reading these three requirements you can imagine this does not happen very often in the market, but when it does it's something else.  The below chart depicts this approach.

Bollinger Bands Gap Down Strategy

Now let's take a look at the same sort of setup, but on the long side.  Below is a snap shot of Google from April 26, 2011.  Notice how GOOG gapped up over the upper band on the open, had a small retracement back inside of the bands, then later exceeded the high of the first candlestick.  These sort of setups can really prove powerful if they end up riding the bands.

Bollinger Bands Gap Up Strategy

Conclusion

These are a few of the great methods for trading bollinger bands. I am not one to use many indicators on my charts due to the cluttered feeling I get. I keep price, volume, and bollinger bands on the chart. Keep it simple. If you feel the need to add additional indicators to confirm your analysis, make sure to test it out thoroughly in advance to putting any trades on.

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