| Before we start: | | | | A swing low requires at least three periods (bars on |
| All Traders should have a mantra, as follows: | | | | a bar chart) to be established. A swing low is formed |
| I will educate myself on how the market works. | | | | when a period's low is lower than both the period |
| I will learn how to find and place a trade. | | | | before it and the period after it. A swing high is the |
| I will create a trading plan and trade my plan. | | | | reverse. It is formed when a period's high is higher |
| I will not chase the market with emotions. | | | | than both the period before and after it. You cannot |
| I will decide to be a day trader or an overnight trader | | | | say that a particular bar on a chart is the lowest the |
| (or longer) before I enter the market to help to | | | | stock will go until the stock experiences a period in |
| control my emotions. | | | | which it does not continue to go lower. Therefore, in |
| I will be patient and wait for a market set up. | | | | its simplest definition a swing low is not established |
| I will never trade without a protective stop loss | | | | until a period occurs in which a stock does not make |
| order. | | | | a new low for the move. |
| The market will meet my criteria or I will not | | | | This should establish your entry point to go long. |
| trade.have refined a standard procedure that I use | | | | Exits are somewhat more intuitive, especially once |
| for the process of creating a trading strategy. I | | | | you are in profit. I generally exit when I get a swing |
| always start with the big picture and make | | | | high, when the MACD starts to turn down or when |
| increasingly more detailed decisions about the | | | | the stochastic indicator starts to turn down. I am |
| strategy. | | | | happy to exit with small profits rather than let them |
| I begin with the assessment of what type market | | | | turn into a loss. |
| action I want to trade and what kind of trader I am. | | | | Day trading is part mechanical and part intuitive. You |
| Then I end up with making decisions on exits, and | | | | have to watch all the time, adjust your trailing stop |
| how far away to put my money management stops. | | | | loss and take profits when you can. |
| How can you adapt my strategy making to your | | | | I believe it is one of the toughest ways of trading, |
| personal psychology? | | | | but in a volatile market, can also be one of the most |
| You Must Pick the Market | | | | profitable. |
| The first decision you must make is what type of | | | | Now let us explore how to set a strategy for a |
| market you want to trade. Although this may look | | | | trending market. |
| like an easy decision, in fact, it is a difficult judgment, | | | | Should we use weekly or daily charts? |
| because most new traders only consider the profit | | | | Weekly charts are much more difficult to trade |
| aspect. They simply try to pick the strategy that | | | | because it takes more discipline. To trade weekly |
| they think will make the most money. Focusing on | | | | charts, you must make your decisions on the |
| money will probably lead you to make the wrong | | | | weekends and not make any changes until the next |
| decision. It is the psychological aspect of trading each | | | | weekend. For most traders, this is very difficult to |
| of the markets that is the most important | | | | do. It is very easy to yield to temptation and move |
| consideration. It does not make sense to create a | | | | a stop loss or a money management stop, or want |
| very profitable strategy if you are unable to trade | | | | to keep your profits and exit the market early. |
| psychologically. | | | | Most people don't think of trading weekly charts. My |
| What is Your Trading Time Frame? | | | | experience is that when following trend trading, there |
| You need to decide whether you will day trade or | | | | is a lot of money to be made trading weekly charts, |
| trade on daily or weekly charts. It is very difficult to | | | | simply because so few traders are able to do so. To |
| have a job and trade intra-day. It is not totally | | | | make money in the markets, you have to walk |
| impossible, just very difficult. | | | | where the average traders do not venture. Weekly |
| Most people want to trade part time and still hold | | | | charts are one of those places. However, whether |
| down a day job. If you want to do this, it is better | | | | you us weekly or daily charts, the strategy remains |
| to trade daily or weekly charts. You will only be able | | | | very similar. There is more price detail in the daily |
| to look at the market outside of your working hours | | | | chart, but also more price noise. |
| and your strategy design will have to take this into | | | | What is a Set-Up for a Trade? |
| account. | | | | Let us look at some of the indicators which we could |
| The strategy should not require you to check the | | | | use. For a trending market, trading for the medium or |
| market during the day. I think that there is only a | | | | longer term, I prefer to use Exponential Moving |
| certain amount of money that you can get from the | | | | Averages (EMA) of 150, 50 and 20 periods. I would |
| markets and that depends on the time frame you | | | | like to point out that I rarely enter a trade long if the |
| choose to trade. | | | | price is below the 150 day EMA. |
| Time frame choice is a personal decision, and of | | | | The other guide I use is volume. Volume indicates |
| course there are no right or wrong answers. The | | | | interest by other traders and momentum in the |
| ultimate decision is personal preference influenced by | | | | market. |
| financial your considerations. But you have to make | | | | I am sure that most traders have tested the Moving |
| this decision before you start looking for indicators, | | | | Average Crossover Strategy sometime in their |
| as the choice of indicators is influenced by the time | | | | trading career. The average trader will look at this |
| frame selection. | | | | strategy and believe that the only thing to test is if |
| However remember the old saying: "if you 'buy and | | | | the two or more moving averages cross over. |
| hold' then eventually everything will be fine. | | | | New traders will experiment with many different |
| Remember the expression touted - "It's time in the | | | | lengths for the averages. As I said before, I prefer |
| market, not timing the market." | | | | to use Exponential Moving Averages (EMA) of 150, |
| My guess is that more active investment | | | | 50 and 20 periods. |
| management will be the key for anyone wanting to | | | | When they don't find any that work to their |
| make a better-than-inflation return from shares over | | | | satisfaction, they discard the moving average |
| the next five years. | | | | strategy concept entirely and move on to something |
| What I am trying to point out is that short term or | | | | else. They keep looking for that Holy Grail indicator |
| day trading in this type of market is better than buy | | | | that they hope can instantly make them successful. |
| and hold. But it must fit in with your time availability. | | | | We have all been there and have all discarded many |
| The Types of Market | | | | great ideas. The discarding of an idea, more often |
| There are three types of market action: trending, | | | | than not, is a mistake. I believe that for the most |
| directionless and volatile. I think a directionless market | | | | part, any indicator can be made into a profitable |
| is very hard to trade, thus I will not discuss the | | | | strategy. Yes, I said any indicator. When we discard |
| directionless market here. I would suggest trading | | | | the moving averages, it is usually a mistake because |
| either a trending market or a volatility market. | | | | the moving averages by themselves only represent |
| You can choose a trend strategy, knowing that you | | | | one half of the strategy development process. |
| are going to have to trade through periods of | | | | The second half of a strategy, the half that most |
| corrections during the directionless phase, or you | | | | traders ignore completely, is what I call the "Entry |
| choose a volatility strategy that will give you | | | | Point." I will talk about exactly what these two terms |
| extended periods of doing nothing while you wait for | | | | mean and how using them. Together they can turn |
| the next trade. Which one is for you? | | | | something as simple as a moving average crossover |
| We will look at a volatile market and a trending | | | | into a promising new trading technique. |
| market and build our strategy accordingly. | | | | To develop and execute a successful strategy, we |
| What is a Volatile Market? | | | | need a set-up and an entry signal. The set-up is the |
| A volatile market is characterized by sharp jumps in | | | | set of conditions that are necessary prior to |
| price, up or down. This type of market action | | | | considering taking a position in the market. It consists |
| involves a quick and unexpected change in volatility. | | | | of the indicator or group of indicators that tell us to |
| One measure of volatility might be the difference or | | | | get readyto enter the fray. Set-ups don't get you in |
| spread between two moving averages - the spread | | | | the market; they simply make you aware that a |
| increases with volatility. Price action, such as gap | | | | trade could be possible. |
| openings or an increase in the daily range, can also be | | | | Here are some examples of a trend following set-up: |
| considered an indication of an increase in volatility. | | | | A fast moving EMA crossing over a slow moving |
| Each of these two types of markets (Trending and | | | | EMA. |
| Volatile) are tradable, but with markedly different | | | | Price moving close to or outside a channel, e.g. |
| trading strategies. Let's take a look at each type of | | | | Bollinger or Standard deviation channel. |
| market behavior and the strategies that are | | | | Prices reaching the upper or lower line of a moving |
| appropriate to that type of market. | | | | average envelope. |
| Strategy: Volatile market | | | | Sudden increase in volume. |
| Trades generated by this type of strategy are | | | | There are countless other indicators and conditions |
| usually short-term, and when trading this type of | | | | that could be used as set-ups. In the final analysis, |
| strategy, you will be out of the market a significant | | | | you are limited only by your creativity. |
| amount of time. | | | | Once we have defined our set-up rules, we can then |
| Volatility strategies generate a high percentage of | | | | establish our Entry rules. |
| winning trades, although these trades usually | | | | Creating Entry Rules |
| generate small profits per trade. The Foreign | | | | By trading only set-ups, you lose the added accuracy |
| Exchange (Forex) market is a typical market that I | | | | and increased profitability of a strategy that uses |
| would class as volatile. Trend following strategies | | | | both set-up and entry. If trading set-ups by |
| don't work well in the Forex market. | | | | themselves worked and was profitable, trading would |
| Today's market volatility is unprecedented, but so is | | | | be easy and all traders would be rich. |
| the market opportunity if you have the right trading | | | | An entry is the signal by which the trader purchases |
| methodology. With CFD Trading you don't have to | | | | the contract in the market. It is the technique that a |
| worry about whether the market goes up, down or | | | | trader should use to take a market position once the |
| sideways as long as it stays within your boundaries. | | | | rules for the setup have been met. |
| The record volatility has created great value for CFD | | | | Entry selection is dependent on the type of set-up |
| or day trades, while allowing you to set conservative | | | | you've designed. The entries must be designed |
| strike prices. | | | | differently depending on the type of strategy you |
| Whether you are a novice or experienced day | | | | choose to trade. |
| trader, you now have the opportunity to learn how | | | | There are two rules which should be followed to |
| to take advantage of today's chaotic market | | | | enter a trade. |
| conditions and target attractive profits. | | | | The first rule requires prices to move in the |
| However you must realise that trading a volatile | | | | expected direction before entering the market. If our |
| market, e.g. day trading, is inhabited by the sharpest | | | | set-up indicates a long position, we would require the |
| minds in the game. They are all out to grab your | | | | price action to move up in some specified manner |
| money. The best way to start day trading is slowly, | | | | before we would be comfortable taking a position. |
| calmly and armed with all the education and the best | | | | We want the price action to confirm the set-up and |
| mentorship you can muster. Look at your market | | | | force us into taking a position. |
| indicators and learn how they interact. | | | | For instance, let us assume that on today's close our |
| Comparing medium or long term trading with day | | | | set-up has given us a long signal. We might require a |
| trading is like comparing a wombat with a kangaroo. | | | | breakout above the high of today's bar to confirm |
| Entry points, exit points and risk reward ratios are | | | | that the market is in bullish mode. With this breakout |
| different. Go slowly when you begin day trading. | | | | as a condition of entry, we have now required |
| Preserve your trading capital and most of all, don't | | | | specific market action in the direction of the set-up |
| trade without a trading plan. | | | | before we risk taking a market position. |
| Let us have a look what indicators I use. | | | | You may decide to place a buy order if the price is a |
| I use volume, 3 moving averages (MA), MACD and | | | | set number of points above the previous day's close. |
| stochastic indicator. | | | | It is up to you to decide what your entry point |
| Generally, I use a 5 minute chart with the MA set at | | | | should be, once you have a set up. |
| 18, 39 at 50 periods. The MA18 and 39 are my main | | | | The only limit to creating viable entries is your |
| ones, while I keep the 50 as my trend indicator. I | | | | creativity. There are potentially many techniques that |
| have also volume, MACD and stochastic on the chart. | | | | make interesting entries. |
| When trading CFD, I set my daily range as per my | | | | The second rule requires you to enter the trade if |
| Bias Indicator, as outlined on my web site. Then I | | | | your entry point is met. You should not hesitate to |
| look for possible trades on a number of charts in my | | | | enter. |
| watch list. I look for trends and volatility. | | | | Trading the set-up and entry concept and making |
| If the trend is going up, I watch for an opportunity | | | | sure that you follow the rules gives far superior |
| to go long, if the trend is going down, I seek to go | | | | results when compared to trading either set-ups or |
| short. Always wait for a retracement, watch the | | | | entries by themselves. Using both a set-up and an |
| MACD and stochastic indicators. In this discussion, I | | | | entry together enhances the performance and |
| will concentrate on going long, however you can | | | | profitability of a strategy. |
| apply the opposite technique to go short. | | | | I wish you success with your trading. Please do not |
| Let us assume that we have an uptrend and the last | | | | hesitate to email questions to me. |
| few candles show a retracement. Watch your | | | | It is of benefit to look for a good mentor to help |
| stochastic indicator. If it shows oversold, wait for it | | | | you to keep on the path of learning. If interested, |
| to turn up. Also watch your MACD. It should also | | | | look on my web site where you can find a good (I |
| start to turn up. If possible, candles should show a | | | | hope) and affordable mentoring program. I may well |
| clear swing low. | | | | be of help to you. |