Technical Analysis for

Beginners

Candlestick Trading, Charting,

and Technical Analysis to Make
Money with
Financial Markets
Zero Trading
Experience
Required
Andrew Elder
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 Table of Contents

Introduction 8
Chapter 1. What Is Technical Analysis 10
Understanding Technical Analysis 10
How Technical Analysis Can Support Traders 11
Using Charts in Technical Analysis 12
A Brief History of Technical Analysis 13
Key Definitions and Philosophy of Technical
Analysis 13
Chart Construction 15
The Underlying Assumptions of Technical
Analysis 17
How Technical Analysis Is Used 18
Chapter 2. Basic Concept of Trend 19
The Trend Has 3 Directions 20
The Trend Has 3 Classifications 21
Support and Resistance 22
Trendlines 25
Trend Channel 29
Divergence 30
Chapter 3. Recognizing Breakout 33
 Breakout 33
Breakdown 37
Short Selling 42
False Breakout 44
Stop-Losses 44
Chapter 4. The 4 Types of Indicators You Need to
Know 46
Simple Moving Average (SMA) 47
Relative Strength Index (RSI) 50
MACD Indicator 52
On-Balance-Volume (OBV) 54
Chapter 5. Continuation Patterns 57
Pennants Pattern 58
Flag Pattern 59
Wedge Patterns 60
Triangles 61
Rounding Bottom 64
Gaps 64
Head and Shoulders Pattern 65
Double Bottom 66
Double Top 67
Chapter 6. Reversal Patterns 69
The Head and Shoulders 69
Moving Average 76
 In Summary 77
Chapter 7. 24 Candlestick Patterns That Every
Trader Should Know 78
What Is a Candlestick? 78
Practice Reading Candlestick Patterns 79
6 Bullish Candlestick Patterns 79
6 Bearish Candlestick Patterns 83
4 Continuation Candlestick Patterns 86
Other Candlestick Patterns 89
Chapter 8. Avoid the Traps 97
Fakeouts and Fake Head-and-Shoulders 97
No Trend at All 99
Adjust Your Moving Averages 101
Risky Symmetrical Triangle 102
Super Rocket Stock 103
Long Candles 105
Lack of Discipline 106
Chapter 9. Trading Psychology 107
Trading With Emotions 107
Bias in Trading 109
Psychology Affecting Traders’ Habits 111
Why Trading Psychology Is Important 117
Psychologically Approach Toward Success 119
Chapter 10. 10 Top Tips for Each Aspect of
Trading 121
1. Research 121
2. Stop-Loss/Take Loss 121
3. No Planning 122
4. Over-Rely on a Broker 122
5. Message Boards 123
6. Calculate Wrong 123
7. Copy Strategies 123
8. The Main Tools Used in Trading 124
9. Market Data and Trading Platform 124
10. Stocks Scanner and Watch List 125
Chapter 11. Designing Your Trading
Strategies 127
Where to Start? 127
What Is the Best Site? 127
What Broker Do I Use? 128
Chapter 12. Structuring Your Analysis
Framework 130
What Is a Technical Analysis Framework 130
Structuring Your Trend Analysis Framework 131
Structuring Your Support and Resistance
Framework 133
Secondary Frameworks 136
 Selecting Timeframes 137
Putting It All Together 138
Components of a Trading System 139
Chapter 13. School of Indicators 139
Choosing Indicators and Brokers for Forex 142
Moving Averages 143
Relative Strength Indicators (RSI) 146
Stochastic Indicators 152
Bollinger Bands 158
Moving Average Convergence Divergence
Indicator 160
Chapter 14. The Best Trades: Putting It All
Together 165
Examples of Best Trades 170
Top 10 Rules for Successful Trading 173
How Much Do You Buy or Sell? 174
Conclusion 175
Glossary 178
 Introduction

Technical analysis has some similarities to fundamental

analysis but is different in its approach. It is important to
understand both of these aspects of analyzing a stock.
Technical analysts use charts, market indicators, and
other tools to predict future price movements. They
study the patterns of supply and demand over time or
trade volume on a particular stock or index.
In contrast, fundamental analysts focus their attention
on company finances and economic data about
industries for which the stocks trade (also known as
industries). They are concerned with factors like
corporate earnings reports, profit margins,
unemployment rates, and gross domestic product (GDP)
growth rates. They examine these economic factors to
determine how they will affect the demand and supply of
a particular stock.
Technical analysis is more concerned with the price
movements of a stock or an index by examining historical
records of trading activity. A technical analyst looks at
past data to predict future price movements. They
believe that history tends to repeat itself in the stock
market and that past performance is the best indicator
of what will happen in the future.
The difference between these 2 approaches really boils
down to who is in control, whether it be fundamental or
technical.
Technical analysis is concerned with things that a
company does not directly control. For example, stock
prices constantly react to whether or not people are
optimistic about the future of a stock. If lots of people
are buying a certain stock, it will typically go up in price.
People are optimistic about that stock because they think
it has potential for future growth. Unfortunately, the
characteristics of fundamental analysis do not directly
affect how much people are interested in buying a stock
or what their expectations for its future growth might be.
In order to provide this kind of insight into its
performance, fundamental analysts turn to earnings
reports and other data released by companies that
provide some indication of how well or poorly they are
performing. The fundamental analyst looks at how the
company is doing as a whole and tries to get an overall
grasp of how the market reacts to these reports.
The technical analyst, on the other hand, is more
concerned with the stock's past performance and charts
this data in order to predict its future movement.
This analysis uses many different tools and a variety of
charts such as bar charts, line charts, and candlestick
charts. These charts help traders identify things such as
the strength or weakness of support or resistance levels,
which can be identified by drawing trend lines through
significant highs or lows in price movements on a chart.
Trend lines are used to identify optimal entry and exit
points in the market.
The actual tools used in charting may differ from one
technical analysis tool to another, but they each provide
some unique insight into history. Technical analysis can
be a useful way for investors to decide whether or not an
investment is worth their money. It can help determine
the future value of a stock by looking at its past
performance.
For example, if a stock has historically closed at $20 per
share and it drops to $15 per share, then there may be
some reason for investors to believe that the price will
move back up again closer to
$20 per share as opposed to breaking through the
support level.
 Chapter 1. What Is
Technical Analysis

echnical analysis is turning into an

inexorably famous way to deal with exchanging,
thanks to some degree to the progression in
charting bundles and trading platforms. In any
case, for a beginner trader, understanding technical
analysis—and how it can support
foresee patterns on the lookout—can be overwhelming and
testing.

Technical analysis analyzes price movements in a

market, whereby traders utilize striking chart patterns
and indicators to predict future patterns on the lookout.
It is a visual representation of the execution at different
times of a market. It permits the trader to utilize this
data as price activity, indicators, and examples to direct
and educate future patterns before entering a trade.
This guide, Technical Analysis for Beginners, will
acquaint you with the essentials of this exchanging
approach and how it may be used to trade the monetary
business sectors.

Understanding Technical Analysis

Technical analysis includes the understanding of

examples from charts. Traders utilize important
information considering price and volume and use this
data to distinguish exchanging openings dependent on
basic examples on the lookout. Various indicators are
applied to charts to decide section and leave focuses for
traders to boost a trades potential at great danger
reward proportions.
The underneath chart is an illustration of a diagram with
the utilization of the MACD and RSI indicators.
While investors of technical analysis accept that financial
variables are the primary supporters of movements in
the market, technical analysis traders keep up those
past patterns that can support anticipating future price
movements. Albeit these exchanging styles can shift,
understanding the contrasts among principal and
technical analysis—and how to join them—can be very
helpful.
Study consolidating key and technical analysis.

How Technical Analysis Can Support

Traders

Numerous traders have discovered technical analysis to

be a valuable apparatus for hazard the executives, which
can be a key hindrance. When a trader comprehends the
ideas and standards of technical analysis, it very well
may be applied to any market, making it a versatile
logical device. Where key analysis hopes to recognize
characteristic worth in a market, technical analysis hopes
to distinguish patterns, which helpfully can be brought
about by the essentials.
Advantages of using technical analysis incorporate the
accompanying:

Can be applied to any market using any period.

Technical analysis can be used as an independent
technique.
Allows traders to distinguish patterns on the lookout.
Using Charts in Technical Analysis

The beneath chart is an illustration of a candle chart for the

EUR/USD cash pair.

Technical analysis was developed to figure future price

patterns in different business sectors. It is the foundation
of analysis for some traders in the present quickly
evolving markets.
There are 2 analysis instruments that traders and
financial backers use for anticipating future price
patterns: Technical analysis and fundamental analysis. In
this guide, we will examine the first of the 2. We will
discuss a wide range of technical analysis metrics, which
will be a somewhat expanded guide.
When all is said in done, numerous traders utilize both,
technical and fundamental analysis consolidated. Be that
as it may, some trust one is better than the other and
works better. Whichever the case, regardless of whether
you are a bad-to-the-bone fundamentalist, you can't
ignore the way that numerous traders utilize technical
analysis and follow through on regard for some key price
levels. Furthermore, that can move the market the other
way to that proposed by basic research alone. If enough
individuals accept a specific technical highlight to be
pertinent, it will undoubtedly be market-moving and
represent the deciding moment of a trade. For this very
point, it delivers profits to know about technical analysis
in the business sectors, at any rate at a fundamental
level.
A Brief History of Technical Analysis

A few parts of technical analysis started to show up in

Amsterdam-based trader Joseph de la Vega's records of
the Dutch monetary business sectors in the seventeenth
century. Nonetheless, many credit technical analyses to
Munehisa Homma (1724–1803), additionally alluded to
as Sokyu Homma or Sokyu Honma. He was a well-off rice
vendor and trader from Sakata, Japan, who lived during
the Tokugawa Shogunate. He is credited as a pioneer of
technical analysis because he developed Candlestick
Charting, which is a spine of technical analysis right up
'til today.
At first, in Japan, just actual rice was traded, yet starting
in 1710, a fates market was set up where coupons
addressing future conveyance of rice were traded.
Homma was a fruitful trader in this optional market of
exchanging rice coupons. Famous for his capacity in
exchanging the rice market, Homma turned into a
monetary guide to the public authority and was even
granted the position of privileged Samurai. In 1755, he
composed The Fountain of Gold: The 3 Monkey Record of
Money, a book zeroed in on market psychology research.
Hundreds of years after the fact, the Candlestick Charting
method has been brought toward the Western world and
is presently used by numerous traders everywhere in the
world.
The history of technical analysis in the US started a little
while, in the late nineteenth/mid-twentieth century. The
most credited work has come from the gathered
compositions of Dow Jones prime supporter and
supervisor Charles Dow, who was additionally the
pioneer of the Dow Theory. A hypothesis that has been
based on all through late many years and now frames
the premise of current technical analysis.

Key Definitions and Philosophy of

Technical Analysis

Before we get more inside and out of the technical

analysis, we must characterize what is unmistakable. In
this guide, we will hold that technical analysis is the
analysis of market action, principally using charts to
figure future price patterns. The expression "market
activity"
incorporates 3 principle wellsprings of data accessible to
professionals: price, volume, and open interest (open
interest is just used in futures and options markets).
There are 3 premises at which point technical analysis is
based:

Market Action Limits Everything

The assertion "market action discounts everything"

shapes the premise of technical analysis. Numerous
different standards follow this thought. What it implies is
essential that anything that can affect the market price
(fundamentally, politically, psychologically, and
otherwise) is reflected in the market price. For example,
if a price rises, it should imply that the request exceeds
supply at the end of the day. On the other hand, if the
price falls, it should mean that supply exceeds demand.
In this manner, an analysis of price action is always
necessary.
An expert doesn't accept that knowing the reasons why
the price rises or falls is fundamental. That may appear
to be fairly outrageous, and this is the specific
motivation behind why numerous traders like to utilize a
mix of technical and fundamental analysis.
Technical experts accept everything from a company's
fundamentals to broad market components to showcase
brain research areas now evaluated into the stock. This
perspective is consistent with the Efficient Markets
Hypothesis (EMH), which accepts a comparable price
decision. The solitary thing remaining is the analysis of
price movements, which technical analysts see as the
result of market interest for a specific stock in the
market.

Prices Move in Trends

Another reason that is vital to technical analysis is that

prices move in trends. That is, a price moving is bound to
persevere than to switch—the whole movement
following techniques predicated on riding a current
trend until it gives indications of inversion. Assuming
prices didn't move in
directions, there would be no reason for examining price
patterns by any stretch of the imagination. That is, as all
price movements would be random and unpredictable.
Technical analysts anticipate that prices will display
drifts, even in random market movements, paying little
heed to the period being noticed. As such, a stock price is
bound to proceed with a past trend than move
unpredictably. Most technical trading strategies depend
on this assumption.

History Repeats the Same Thing

Another supposition in technical analysis is that human

instinct doesn't change. Along these lines, since market
action depends on human psychology research, history
will generally repeat the same thing. Thus, there is a lot
of things we can gain from market history and analysis.
Technical analysts accept that set of experiences will, in
general, repeat itself. The redundant idea of price
movements is frequently ascribed to market psychology,
which will be truly unsurprising depending on feelings like
fear or excitement. Technical analysis uses chart patterns
to analyze these feelings and ensuing business sector
movements to get trends. While numerous types of
technical analysis have been used for over 100 years,
they are as yet accepted to be important because they
delineate patterns in price movements that frequently
repeat themselves.
Chart Construction

This part is intended for individuals who are new to chart

movement. We will be looking at how 3 sorts of charts
are developed and how they portray similar data. We will
likewise examine volume and open interest.

The Line Chart

The most fundamental chart and quite possibly the most

generally used one is the line chart. Since closing prices
are of outrageous importance to chartists, the line chart
associates closing prices and
makes them into a continuous line. The line chart is one
of the least demanding to understand charts.
In any case, it additionally does not have a ton of data.
We just know where the price has closed, yet don't have
a clue where it has gone. 2 other chart types assist us
with getting this data. Those are the bar chart and the
candle chart.

The Bar Chart

The bar chart passes on more data than the line chart.
Notwithstanding, it is likewise more hard to peruse. The
accompanying chart shows the critical metrics of a bar
chart:
As should be obvious, the full scope of the price
movement is the length of the upward line. The base
mark of the upward line is the low of the reach, while the
top is the high of the reach. Likewise, the flat left-pointing
tick shows the initial price, while the right-pointing tick
shows the end price. The open and closing prices show
the everyday range without the spikes in prices. These
are significant attributes because not the entirety of the
time the end price of the last bar is the initial price of the
following bar, as is with the line chart. Once in a while,
there are gaps in charts and they portray that the price
has opened at an unexpected price in comparison to the
past closing price. The chart underneath shows the bar
chart inside a similar time range for a similar instrument
as in the past line chart.

Notice how there is an enormous hole in the chart. That

is something you would not see on a line chart since all
price focuses are associated with a line.

The Underlying Assumptions of

Technical Analysis
There are 2 basic techniques used to analyze securities
and settle on investment decisions: fundamental
analysis and technical analysis. Fundamental analysis
includes analyzing a company's fiscal summaries to
decide the reasonable worth of the business. In contrast,
technical analysis expects that a security's price mirrors
all openly accessible data and, therefore, centers around
the measurable analysis of price movements. Technical
analysis endeavors to understand the market
estimation behind price patterns by searching for
patterns instead of dissecting a security's fundamental
attributes.
Charles Dow delivered a series of publications discussing
technical analysis hypotheses. His works included 2
fundamental presumptions that have kept on shaping the
structure for technical analysis trading:
1. Markets are efficient with values representing factors
that influence a security's price
2. Even random market price movements appear to
move in identifiable patterns and trends that tend to
repeat over time.

How Technical Analysis Is Used

Technical analysis endeavors to conjecture the price

movement of for all intents and purposes any tradable
tool that is for the most part subject to powers of market
interest, including stocks, securities, fates, and money
sets. Indeed, some view technical analysis as
fundamentally the analysis of market interest powers as
reflected in the market price movements of a security.
Technical analysis most ordinarily applies to price
changes. However, some experts track numbers other
than price for pattern, trading volume, or open interest
figures.
Across the business, many patterns and signals have
been created by specialists to support technical analysis
trading. Technical experts have additionally built up
various trading frameworks to help them figure and
trade on price movements. A few indicators are centered
around distinguishing the current market pattern,
including support and resistance zones. In contrast,
others are centered around deciding the strength of a
pattern and the probability of its continuation. Ordinarily
used technical indicators and charting signals
incorporate trendlines, channels, moving averages, and
momentum indicators.
 Chapter 2. Basic Concept of
Trend

raders often say, "the trend is your friend."

If a given trend has become established, you can
piggyback it in whatever direction it's going. And
generally, traders only trade with the trend. So, if a
trend is going up, you only trade bounces, and if
it's going down, you'll
generally trade it by going short (that is, selling stock to
take advantage of the dips). The idea is that even if you
don't execute your trade particularly well, the trend will
help you out and usually ensure you don't make a
thumping loss.
A trend is quite simply a direction of price movement.
For instance, prices may be trending upwards. That
doesn't mean you'll get a price rise every day, but it
means that the price will tend to rise over time. For
instance, in an upwards trend, you might have closing
prices for a bit more than a couple of weeks that went
something like; 50, 52, 51, 51, 54, 53, 56, 56, 57, 56, 59,
60, 59. You can see that sometimes prices are up, flat, or
even down, but they are moving up on the whole. That's
a trend—a general direction. There will be oscillations
within the trend, but the trend itself remains unchanged.
That means that you can trade these oscillations within
the trend; as long as the trend continues, if you buy
when prices are trading lower than the trendline, and
sell when they're above the trendline, you'll make
money. Trend trading strategies are very common and
can be nicely profitable.
Trends often reflect a certain market sentiment—that is,
if investors feel the economy is doing well, earnings are
going up, the future will deliver better earnings still,
there will probably also be an uptrend. But trust what
you see on the chart, not what you see in the
newspapers or on the bulletin boards.
I also need to give you a warning. Traders also
sometimes say, "Is it a trend or will it bend?" That's why
in the technical analysis we need to be able to recognize
trends, but we also need to be able to recognize signals
telling us that trends are about to end or even reverse.

The Trend Has 3 Directions

Okay, this is pretty simple. In the words of "those

magnificent men in their flying machines," there are 3
directions:
Up
Down
Flying around—or what traders call “sideways.”

If you know the lyrics of the song, up and down are

exciting—UP-tiddly-up-up and DOWN-tiddly- down-down
—and the “flying around” or “sideways bit” is not really
emphasized. It's the same on the stock market. Up and
down will make you money. They're good strong trends.
Sideways, also known as “ranging” or “consolidation,”
can be a big problem, and a market with a sideways
trend is hard to make profits in. (On the other hand,
when you get a breakout from a sideways trend, you'll
notice!)
You'll see many times throughout the book some of my
handout slides—yes, they're all drawn with my
interactive whiteboard pen, but the good thing about
the slides is that I've removed all the
distractions that you get on a regular share price chart.
No dates, prices, moving average lines, volume bars,
whatever—just the trend!
A proper uptrend has increasing highs, but it also has
increasing lows. And while a downtrend will hit ever-
increasing lows, it should also see each bounce
achieving a lower and lower level. Sideways, on the other
hand, price movement can be anywhere—sometimes
within a really tight range, sometimes just looking
chaotic on the chart with prices all over the place.
Technical analysis can help you identify trends and give
you good reliable signals when a trend is coming to an
end.

The Trend Has 3 Classifications

As well as 3 directions, the trend has 3 classifications or

time zones:

Short-term trend: Less than 3 weeks.

Medium-term trend: A few months.
Long-term trend: 6 months to 1 year.

Each market has its typical way of defining these 3-time

classifications. Futures markets such as commodities
futures tend to have shorter timescales, and equity
investors have longer timescales, but you'll get the feel
of whichever market you trade in after a while.
A short-term trend can be part of a medium-term trend,
and a medium-term trend can be part of a long-term
trend—in other words, trends can come nested inside
each other. Within a long-term bull market (a market in a
long-term uptrend), for instance, the S&P may have
shorter-term uptrends separated by short-term
downtrends—rallies and dips. A longer-term investor who
is a less active trader may see a continuing uptrend,
where you, as a shorter-term trader, can see a
pronounced short-term downtrend.
You might use different trends as different signals.
 Long-term trend: Okay, there's a trend here, so
this is a stock I want to look at. And it's a long-term
uptrend, so I will generally be buying stock when I
think there's a medium-term uptrend.
Medium-term uptrend: This gives me my profit
expectation. Suppose we're trading low in the long-
term trend, I can guess where the stock price should
be headed within that trend. For instance, in a long-
term trend where the recent high was around $62,
and it looks like if it continues it would get to $65
quite easily, and the price is now $56, I have a $9 a
share profit potential (and $6 profit potential if the
trend fades).
Short-term uptrend: This gives me my timing. So
I've got that medium-term trend in mind, but when is
the best time to get in? When I see a real short-term
tick up that says to me this is the right time to
initiate that short position.
Some people like to look at super long trends, like the
idea of Kondratieff waves and 40-year cycles, but those
are outside the scope of this book.

Support and Resistance

The trends we want to look at go up and down, and so

do their trendlines. But we can also draw some really
important straight lines on the chart, and these are
called support and resistance lines.
You'll often see a share price exhibit a particular pattern
of nearly getting to a price and then refusing to go any
further. It's a bit like watching a child playing at the
seaside, running down the beach towards the sea, but as
soon as a wave comes, running back up the beach
squealing happily so their toes don't get wet. Share
prices behave just the same way!
A share price might keep falling to a particular price but
then rising back again—that's a support line. It's likely
that if the share price approaches that line, it will bounce
off it again, so this supports the price. On the other hand,
a share price might keep testing a high, but it never
crosses that level—
that's a resistance line, and the chances are, if it gets to
it again, it'll not manage to maintain enough momentum
to push its way through.

Here you can see my handouts. I promise you I had not

been drinking when I made this one! See how the share
prices just touch the resistance and support lines. (A
channel has a resistance line at the top and a support
level at the bottom—you can make some neat short-term
trades inside a well- established channel, but the most
profitable trades you'll make are on breakouts—which
we'll talk about later.)
For instance, look at the way in the chart below. The
AT&T share price in the second part of the chart keeps
coming up to $29.50 and just falling back again. At the
beginning of January 2021, it gets from $28–29.25, but it
doesn't manage to stay there. Then it gets to $29.75
about 25th January, and then it falls off, then it gets
there again about 17th February, and again, it falls off.
That's a resistance line, a kind of tidemark. You could put
a ruler on the chart and draw it across, and there you
have your resistance line.
Now the stock has finally managed to push through to
$30. It has actually gone through the
resistance line… but I'm not sure I'm convinced. I'd want to
see another indicator confirming that.

But there's another interesting thing; it does look as if the

stock has formed a support line, too. Have a go at
guessing where it is—and I'm going to give you a clue,
again you'll be looking at the more recent half of the
time period. Can you draw a straight line which the price
approaches, but won't go through? I reckon it's at about
$28. Look, it's there just before that bit spikes up, then it
falls back to it after the spike, then again at the
beginning of March, and every time it bounces.
Now the support line is interesting because it says if I
buy at $29, I probably only have 1 dollar downside, and I
know that if the share price goes below $28, then it's
time to take that loss and get out.
Why do support and resistance levels work? One reason
is “anchoring,” the way that certain information gets
stuck in our minds. Investors and traders often
remember the price they bought or sold at, and a lot of
investors say, "I'm not going to sell till I get my money
back.” If a lot of them bought at $52 and the price went
down temporarily to the mid $40 levels, then when they
see $52
again, they'll sell—which by the rules of supply and
demand, will cause the price to stop rising. That's a
resistance level in action.
The more times a share price unsuccessfully tests a
support or resistance line, the stronger that support or
resistance becomes. Buying close to support or selling
close to resistance makes a good trade, as you'll
capitalize on the bounce. But you'll want to put a stop-
loss just below a support line (or above resistance) to
make sure that if there's a breakthrough, you cut your
losses and make a quick exit.
By the way, if a share price does break through a
resistance line, that old resistance line will now become
a support line. And if a share price breaks through a
support line to the downside that support line will now
function as a resistance line preventing the price from
rising past it.

Trendlines

It's not always easy to see the market trend. If there's a

lot of price movement, you may be able to see that the
market's in an uptrend, but not how steep the slope is or
how fast prices are rising. You're seeing all the noise,
and that makes it difficult to see the signal—the real
trend.
Drawing trendlines on the chart can help you visualize
the trend. Basically, if the market's in an uptrend, then
you're going to try to find a line that it keeps coming
back to at the bottom. Find the lowest points that the
price hits, and join them up. You are lucky. The software
will do it for you—
or at least help you do it—whereas this was a pencil-and-
ruler job well into the 1980s. So, what you should have is
a chart that now looks as if all the peaks are “sitting” on
a line of support.
For a market in a downtrend, you're going to do things
differently. You're going to draw a line that goes through
the highest highs—the places that the price gets to when
it bounces, but then runs out of steam and falls back.
Okay, with support and resistance, I showed you my
hand-drawn pictures first. This time let's jump right into
the real world and look at Amazon. I went on StockCharts
and I just couldn't believe what a great example of a
channel I'd got, so I stuck it into my drawing software
and put in the trendlines—the real trendline is the
straight one underneath, that's pushing it upwards, but
you can also see there's a straight resistance trendline at
the top. (The other 2 curvy lines are Moving Averages,
which we’ll cover later on.)
A trendline shows you very clearly the direction in which
the market is moving and the speed of the move. It also
acts as a support of the resistance line; for instance, in a
downtrend, if the price goes towards the trendline (which
is above the price bars), then you're getting to a decision
point where it will either fall back again or make a
breakthrough.
What you're doing is not very different from drawing
support and resistance lines, but you're trying to get a
slope instead of a horizontal line. The chart we just
looked at is horrible for trying to draw a trendline,
although it's got good support and resistance, so let's try
something with an uptrend.

Here's Realty Income, where you have quite a lot going

on, but I want you to look for one very clear uptrend. Just
look at the candlesticks and ignore the other lines on the
chart for the moment. But this is the kind of thing you'll
see when you open a charting package—this one comes
from StockCharts—and you need to get used to focusing
on the lines that matter first, and then to look at the
rest. Get some practice by grabbing a straight edge
and trying to find the line of best fit—
that's the trendline. (The trendline is not shown on this
chart, you have to draw it yourself—but if you want to
see a live visual demonstration on how to draw a
trendline correctly, then I would recommend you watch
my free bonus companion masterclass, as that covers
this topic in a lot more detail to help your understanding.)
You see from the dip in the share price in early 2021
(down to 11th January) that it quickly establishes an
uptrend, and if you draw a line under the lows, although
it heads higher, and then back, it doesn't break the
trendline, it keeps bouncing back from it and making
higher highs (that is, every little spike goes higher even
if it falls back a little in between) all the way through
January and the first part of February. Let's assume you
got in around $58 in mid-January because you waited a
little while to be sure it was a real uptrend; the stock
would have gone to $63 (around 14th February) before
finally breaking the uptrend by dipping to about $61
towards 18th February. That's $3 a stock profit, or 5% in
about a month. You might have done a bit better than
that, of course, if you didn't wait for the sell signal, but
got out nearer to $63 a few days earlier.
One way of thinking of the share price is that it's
connected to the trendline by a rubber band. It can get
further and further away from the trend, but the stretchy
rubber band will generally keep pulling it back. If it hits
the trendline, it'll usually bounce. But as it gets close to
that trendline, you're going to want to watch out—this is a
dangerous time, and it's also, for some traders, an
opportunity, as there could be a breakout.
Occasionally you might need to redraw a trendline. It
may become steeper or it may, on the other hand,
become less steep as price rises decelerate. That doesn't
necessarily mean the trend has ended. However, when
an uptrend becomes very steep, that could suggest the
kind of manic frenzy that often accompanies a market
top, so beware of trading in such conditions and keep an
eye out for bearish signals (that is, signals telling you the
price is going to fall) such as a drop in momentum or
moving averages.
Trend Channel

We already saw how if you connect up the highs and the

lows, you can create a wide bar with roughly parallel
lines, as we did with Amazon. These 2 lines define the
trend channel. I actually like trend channels a lot as a
way to trade, but you do need practice in drawing them
properly.
There are several things you need to know about trend
channels:

The longer a channel continues, the stronger the

trend. (Remember that Amazon trend! Over a decade
of it!)
If a trend channel is combined with a strong trading
volume, it's more reliable than if trading is weak.
If the price breaks out of the channel, it is likely to
move quite significantly in the direction it has now
established.
A narrow channel doesn't give you much room for
trading—if a stock is always trading within about 2%
of the trend that limits your potential profit. On the
other hand, a wide channel, where the stock has
some volatility within the overall trend, gives you a
chance of larger profits.
If you get a good horizontal channel, running all the way
across the page instead of up and down, this is one of
the few times it's worth trading a stock that is not in an
uptrend or a downtrend. You may have a stock where, for
instance, a certain level of dividend yield means income
investors tend to buy whenever it comes down to the
bottom of the range, and sell when it gets to the top—
you don't need to know the reason, just trade the
channel. Buy at the bottom of the channel, sell at the
top.
Channels are also really useful for setting your stop-
losses and profit expectations. If you buy at the bottom,
you're looking to exit at the top, but you should also set
a stop-loss just below the bottom of the channel. If
you've got it wrong, that stops you from being caught by
an unexpected breakout.
By the way, you can even sometimes see from a channel
how long the share price usually takes to move from
bottom to top of the channel. That gives you a good idea
of how long your trade will last so you can time it nicely!
Besides simple price channels, there are other kinds of
channels, which use volatility rather than price
indicators, such as Bollinger bands. But for the moment,
let's just stick with the price channel; that's quite enough
to get your head around!
Now go and find a few stock charts, and see if you can
spot some price channels. See how many times the price
bounced around within the channel and work out if you
could have made a profit by trading it every time the
price touched, or nearly touched, the bottom line.

Divergence

Remember, "Is it a trend or will it bend?" Divergence is one

way to tell.

Now so far, we've talked about trends, channels, and

support and resistance. You can make nice profitable
trades by using them as your guide. But sometimes
prices break out of their trends.
There are quite a few reasons that might happen. For
instance, you sometimes see that if a stock gets
promoted to a major market index, and big investment
funds and Exchange Traded Funds have to buy the stock
because it's in the index. Or a stock might have a profit
warning which the market wasn't expecting, and the
price goes way below the range. Or a war might break
out, or there could be unexpected political news that
drives the markets higher or lower. You might also see
the end of a big investor exiting their position—for
instance, with some IPOs, the end of a lock- in period
may see some of the sponsors, founders, or
management selling out. Or it may happen "for no
reason.”
Well, the reason is really that every time the trendline
was tested before, there were buyers or sellers at the
right price to send the stock back up. And this time,
there weren't. And if that's the case, that
quite likely reflects a slight change in market sentiment,
and there are a few ways you could pick that up before
the breakout. That's where divergence comes in.
When you're looking at your price chart, use a
momentum or a trading volume indicator (like an
oscillator) running beneath it. (We'll take a good look at
those and the way they work later—for the moment,
don't worry about what they mean, just look at the
pictures.)

Usually, you'll see the 2 lines run pretty much in the

same direction most of the time. But if you have an
uptrend, and the oscillator is headed downwards, that's
a negative divergence and it suggests that the uptrend
might not continue.
On the other hand, if the price just made a new low, but
the momentum indicator is headed up, that suggests
prices might rise—positive divergence.
What you're seeing in the case of negative divergence is
that while the price trend looks as if it's continuing, it is
decelerating or falling behind the market. So, that's an
indicator that your price trend isn't as strong as you
think it is. But you don't need to pay attention to it all
the time—just if:
Your price is hitting new highs/lows
You think you've got a double top or bottom forming
(and we'll talk about those later).

To check if you really have divergence, connect up the

highest highs, or lowest lows, and connect up the lines
for the indicator for the same period—joining highs to go
with price highs and lows to go with price lows. If the
slopes are the same, great. If they're moving in opposite
directions, you have divergence.
Divergence is not a signal—it doesn't tell you to trade.
But it is an alert—that is, when you see divergence, if
you're risk-averse, it's time to exit your position, and if
you're a risk-on kind of person, it's time to stick close to
your trading screen and watch that stock like a hawk.
 Chapter 3. Recognizing
Breakout

o far we have talked about trading within a

range. That can be really profitable and it can also
be quite a low-risk, low-effort form of trading if you
identify the right stocks and keep an eye on the
patterns.
But if you want to hit the big time, you want the runaway
profits that come with a breakout. Remember that "ball
on a rubber band" idea I used when I talked about the
share price and the trendline? What happens when the
rubber band breaks? The ball goes way, way up into the
air (or, of course, if we're talking stocks, it could also
go in the other direction)—that's a breakout!
Compared to trading the range, trading a breakout is like
jumping on a train when it's already started moving.
Just so you know: A breakout can happen in either
direction, up or down—it's simply breaking out of a
pattern.
A breakdown, on the other hand, only goes down.
Breakout
A more technical description of a breakout is that it's
when a stock price moves outside an established
channel, support, or resistance line, with increased
volume. (The increased trading volume is required to
show that it's a real breakout and not just a fluke.)
Breakouts move to the upside, and they move fast.

A genuine breakout is a big, bold move. If you're looking

at a candlestick chart, you'll see a big- bodied candle
closing well above the resistance level. If all you see is
the price just poking over the edge of the resistance
level, that's not a real breakout—it's a fakeout. If you see
the price getting near to the resistance line, but it hasn't
gone through it yet—it's a fakeout. Wait for the line to be
broken before you trade.
Note by the way that a breakout can happen even in a
bear market, that is, a market that is in a major
downtrend—there won't be so many breakouts to trade,
but stocks that have the strength to move against the
market are stocks that should really get going once they
start, so you will still get that speedy rise.
Your signal is simple—it's the first time that the price
breaks out of the channel, or breaks the resistance line,
and closes above it.
How do breakouts work? One way they work is what's
called a lockout rally. Imagine you have a well-known
stock that had bad results for a couple of years, it's taken
a bit of action, and it's stopped going down but it hasn't
begun to move up yet.
Everyone is thinking it will soon be time to buy it again,
but they haven't bought it yet; they're waiting for
something. And for whatever reason you get a little
buying—maybe one brave fund manager, maybe a
couple of brokers getting in—and it goes through the
line, and now all those people who haven't bought it
have a massive feeling of FOMO (which, as if you didn't
know, means Fear of Missing Out). It's motoring, so it
must be time to buy, so they buy, so it goes up a bit
more, so more people buy…
At that point, of course, the short-term traders are
already getting out with their profits!

How to Find Breakouts

If you're looking for breakouts, you won't find them.

What you're looking for is the pre-breakout pattern.
You're looking for stocks that are trading in a fairly
narrow channel, that are trading in a really boring way—
almost so the candlesticks fill the channel. You're looking
for stocks that are range-bound. That is, stocks that are
stuck in a range, which keep bouncing from top to
bottom and back again without ever going anywhere.
This kind of build-up is absolutely classic. It's like a
pressure cooker—when it goes, it's going to explode.
You can also look for stocks that are close to their 52–26-
week highs—this information is easy to find on any
finance site. If stocks are trading at a high for the period,
they're also going to be close to a resistance level or
close to the top of the trendline. That means they'll
either be close to a fall back down again into the
channel, or they'll be ready to break out. By looking for
stocks that are close to a high, you've cut out all the
stocks that are not really going anywhere much, so
you've reduced the number of charts you need to look at
before you find a good breakout pattern emerging.
Of course, you can also look for stocks close to 52–26-
week lows. That might catch the “bouncers.”

Draw your resistance lines on the chart—even if they

were the last hit some time ago—and keep monitoring
those stocks every time the price gets towards that
resistance line. Use a volume indicator too—the best
stocks for a breakout are those that haven't traded in
great volume. You're
looking for a market where investors have got bored,
and they're not doing much—when you get the breakout,
that's when they will get interested again! Then you will
see the volume accompanying the share price move,
which is how you know it's for real.

Another good potential configuration is where you see a

resistance level that has been repeatedly tested by
sharp spikes. You're looking for the share price to make
big spikes, to make a big jump to test the resistance
level, and then for it to fall back really steeply. You don't
want to see gentle waves; you want to see a spiky
mountain landscape of strong rallies that quickly
reversed. Or if you're a beach bum—you want to see big
surf, not nice gentle waves. These spiky, punchy price
movements show that the resistance level is a good
strong one. It's as if the share price took a real run-up,
but it still couldn't punch through the wall. So that's a
tough wall, and any breakout that makes it through the
resistance will be a massive one. The bigger the
breakout, the more money you'll make on the trade.
Further good signs that a breakout could be coming are:
The channel grows narrower.
A build-up period in which prices form a tight cluster.
Trendlines which make an ascending triangle—the
lows are getting higher, but the highs have been on
the same trendline.
The resistance level has been tested unsuccessfully
several times.
The longer the build-up, the bigger the breakout. Once
you've found your targets, plan your trade in detail
before any breakout. I'm going to talk about trading tips
later—but you should always plan your trade so that
when the breakout comes, you can act real fast.
Remember, breakouts are fast.
What do you do if you miss a breakout? If it was
preceded by a really good consolidation period (trading
within a limited price range) and has made a definitive
move to the upside, you should jump in even though
you're a bit late. Or if it looks as if it's a pretty small
breakout, you could wait for the price to test the line that
was the old resistance level and has now become a
support level, and you could buy it then. Happily, you do
quite often get a second chance!

Breakdown
What's a breakdown? It's just a breakout, except that the
share price goes down instead of up. So it will usually be
announced by a descending triangle in some cases—
lower highs, but the lows are
forming a horizontal line. Like a breakout, it's usually on
high volume and will lead to a large price swing and,
usually, into a new downtrend. It can often be very quick,
which is why you need to set up your trendlines and then
monitor them whenever you see a potential breakdown
trade setting up.
Looking for a breakdown by just looking at loads of charts
is like looking for a needle in a haystack. On the other
hand, if you have collected half a dozen charts that show
tight consolidation build- ups and descending triangle
trendlines, you pretty much know that one is going to
show up—but you have to be ready to act when it does.
(That might mean actually watching your screens, but it
could also mean setting up stop-limit orders with your
broker and just letting them run.)
However, taking advantage of a breakdown isn't as easy
as trading a breakout because you need to be able to
short trade or trade options. Not everyone is happy
trading short. (There's a subsection on this coming up.)
If you do go short, the best way to set up the trade is to
put a sell stop-limit order just below the support level.
That is an order, which specifies a price at which the
order becomes valid, and a price limit after which it is no
longer valid (e.g., "Sell 100 IBM if the stock price falls
below 90 but not if it goes below 95). It's a good way of
entering a breakout or breakdown trade. But if there is
high volume and a lot of price action, you might not get
your order filled. So waiting for a retest (or another
chance) of the trendline that has now become a
resistance level might give you a better price—if, of
course, there is a retest. You can never be sure.
Think about that for a second; the moving average
shows the average of prices for the last 20 days, let's
say. As the share price falls quickly, it will fall below the
moving average, because the moving average still has
all the higher prices from previous trading days in it. As
long as the price is still falling quickly, that will continue
to be the case, but the moving average will eventually
catch up once the fall decelerates. At this point, the stock
might rebound, but even if it doesn't, the easy gains are
gone and you can find a better trade elsewhere.
Channel Break—Some Trading Tips

Let's look at a typical channel break and see how to

trade it. Technical analysis will give you good trading
ideas, but you also need to learn how to trade. And if you
haven't been involved in the stock market before, or if
you've always been a buy-and-hold investor making
simple market buy orders, you have a lot to learn.
First of all, you need to work out your profit target, and
this will probably (though not always) also be your exit
point. This is something buy-and-hold investors never
bother with. It's easy with a channel break, though; look
at the width of the channel, and if it's $6, then add $6 to
the price at the resistance line, and that's your
immediate profit target. If you're trading a round lot (100
shares), that's a total $600 profit.
Your goal should be to stack the odds in your favor, so
usually, I like to see a stop-loss order that's half the size
of the expected profit if the trade works. In this case,
that would be $3. If the stock falls to $3 below the
resistance line, you're out. You've lost $300. This seems
like a reasonable balance to me, risking $300 against
$600 with a good chart formation that has something like
a 70% probability.
In fact, let's just multiply the probabilities to see how
good it is:

$600 x 70% = $420

$300 x 30% = $90
So, if I'm right about that probability, then I have an
expected value of $420 - $90 = $330. It's positive. But
even if the probability was only half—now come on, do
the numbers. It's still a good chunky positive number.
What we calculated here was what statisticians call the
expected value of all the probabilities, and you need this
number to be a positive one. If it's negative, what you're
making is not a trade but a gamble.
Don't just set the trade and run away. Keep monitoring it.
In particular, you should be watching the volume
indicator—if this is a genuine breakout, then you'll see
the sellers coming in and the volume
increasing. So you might get to your original exit point,
and say that having reconsidered the situation, this looks
like a massive breakout. In which case, set a new stop-
loss order, and you might even decide to scale in, that is,
increase your position by buying more shares.
But if you do scale-in, remember to reset your stop-loss
order. With a breakout into a bullish trend, you may have
this setup:
You entered the position at $70
Expected profit $6 (using the channel range) = $76
share price
So, the stop-loss order is $3 = $70 - $3 = $67
The price quickly gets to $73, you can see a lot of
volume in the market, so you decide to scale in. If
you keep your stop-loss order at $67, your potential
extra profit is $3 (from $73– 76), but your potential
loss is now $6 ($73 all the way down to $67).
So, you need to pull your stop-loss order up higher,
to say $71, so your expected return is still greater
than your possible loss.
Also, remember how we talked about different lengths of
a trend? A breakout could just be one breakout in a
series. Look at the chart of Mattel above, and you'll see
that there are 3 series of consolidation/build-up phases,
tight channels of trading, followed by breakouts. Can you
draw the rough trendlines and work out the dates?
(C'mon, this is what you're going to be doing every day
as a trader.) Okay… Consolidation from late January to
the middle of April, then a breakout (or breakdown);
more consolidation till the middle of June when there's
another breakout; then more consolidation through July,
with a bit more volatile price action this time, and then a
breakdown just before the beginning of August.
If you're a long-only trader, this chart is no good for you.
But if you can go short, whether your broker lets you sell
short (and effectively “lends” you the stock for the
meantime), or whether you can take out options, then
this is a great chart. It's particularly good because you
have these short- term big steps down. Going short costs
money, and options have expiry dates—so you're looking
for shorter-term trades as well as simply going short.
The first breakout in mid-April went from $25 to $21, then
the second one in June went from about
$22 to $20. But the third one in late July started at $21,
and the downtrend ran all the way to below
$15 by mid-September. The final breakout in mid-
November leads to a severe downtrend in December. If
you'd made good money on the first breakout, you might
have said, "Right, I'm done with that stock.” You would
have been wrong. There were another 2 good chances to
make almost the same profitable trade, and the last was
the best.
Hey, what was that gap up in November 2017 though?
Apparently, the stock had got so low that there was talk
of bigger toy company Hasbro buying it, and the stock
jumped—but as you can see from the end of the chart,
nothing happened.
The “gap” by the way is when prices open above the
previous day’s closing price, with nothing in between.
You'll quite often find it relates to corporate news,
whether that's a takeover rumor, as here, or an earnings
surprise.
Short Selling

If you want to make the most of breakdowns, you're

going to need to be happy short selling or using
instruments that allow you to replicate a short sale.
Basically, short selling is selling a stock you don't own.
It's as if you promised to deliver a new smartphone to a
friend of yours, anticipating you can get it at money off on
Black Friday. You charge your friends 10% less than the
retail price, you get the phone at 40% off, and keep the
change (though possibly not your friend). Short selling
allows you to make money out of a forecast that a price
is going down. If you'd shorted Nasdaq just before the
tech crash, you'd have made a huge return, but a lot of
traders just take 4–5% on each of their shorts.
The risk, of course, is if you'd sold your friend the
smartphone at 10% below retail, then found out that the
version they want has just had a price rise and isn't in
the Black Friday sale, you'd lose money because you'll
have to buy it at retail and they’re still going to want
that 10% off.
Shorting is not that easy to do as a retail investor—
institutional investors like big mutual funds, pension
funds, or hedge funds, and bank trading desks, make
more use of it, often for portfolio protection rather than
trading purposes. However, there are a few ways you
can go short in the market.
If you have a margin account with your broker, and
permission to short, your broker will “lend” you the
shares in your margin account and then sell them on the
market on your behalf. You will at some point either close
the trade at a profit, close it at a loss, or possibly have to
pay a margin call to keep your trade going if it's out of
the money at the time (which is why you need a tight
stop- loss order).
For the market as a whole or for individual sectors, you
could buy an inverse ETF (exchange-traded fund). This
kind of fund delivers the reverse of the market return, so
if the market goes down, the ETF goes up. You buy and
sell them just like you buy and sell a share, and they are
low-cost funds,
so you won't lose a load of entry commissions like you
would with a mutual fund. This is my preferred choice if I
see a good short trade in the S&P, for instance.
You can also use options. Frankly, there is a whole lot of
very specific knowledge that you need to trade options—
for instance, they come with expiry dates, so their value
varies according to the time you have left as well as the
price of the stock. Unless you are mathematically
minded and willing to get to grips with the specifics (and
take a look at the Black-Scholes formula if you're
tempted), leave them alone.
Finally, you could use something called a Contract for
Difference (CFD), unless you're in the US or Hong Kong.
However, you may find in other jurisdictions they are
only available to certain investors—professionals, high
net worth individuals, and those who can display a high
level of market expertise. Frankly, I would avoid them till
you've got several years of profitable trading behind
you. Even then—be careful. Please, let me emphasize
that while stop-losses orders are important for all
trading, they are especially important if you go short. If
you buy a stock at $600 and it falls, the most you can
ever lose is $600 a stock. That's it. Wipeout. But your
house, your car, your collection of Pokémon cards, none
of that's on the line. Nor are your other stock positions. I
have been completely wiped out on 1–2 stocks (both, as
it happens, involved corporate fraud), but I lived to tell
the tale.
On the other hand, how high can a share price go?
$100? Higher. $500? Higher. Tesla has been as high as
$900. Want more? Berkshire Hathaway trades at
$380,482.75. There is, effectively, no limit to how high a
share price can go. That means if you go short, there is
no limit to the amount you could potentially lose. You
could lose your shirt—your house, your savings, the rest
of your portfolio, the lot.
So, if you go short, make sure you have your trades
thought through in advance, including your stop-loss
order, and don't let anything prevent you from using that
stop-loss. That stop-loss could just save your life.
False Breakout

This is the biggest problem with breakout trading—there

are simply too many false breakouts. And that's one
reason I've emphasized probabilities and stop-losses
because not every breakout trade will work, so you need
to minimize the impact of the fakeouts. That's in contrast
to trading within a channel, where your profits will be
more limited, but you have a slightly better probability.
This is why you need a good trading strategy—you'll
need to maximize your profits and make sure that you
control any losses very tightly, because the win/lose
ratio is probably not going to be as good as with range
trading.
One indicator you need to look at is volume, and there's
actually one in particular, which is useful for breakouts—
Volume Weighted Moving Average (VWMA). In the case of
a fake breakout, it won't do much at all—in the case of a
real breakout; it will accelerate upwards, giving you
confirmation that you've made a good trade. VWMA also
gives you your exit level, as once the price falls below
the VWMA—indicating that the balance between buyers
and sellers has tipped—you have exhausted the short-
term profit potential of the trade.
It's worth keeping an eye on the news pages by the way.
If a breakout happens along with fundamental news,
such as a positive earnings surprise or a new product
launch, it's probably a real breakout—and some serious
institutional funds may back it.
Plus—don't give up! This could be part of the
consolidation, the build-up—the last unsuccessful test of
resistance before the real breakout. Patience is well
rewarded.

Stop-Losses

Set your stop-losses tight for breakouts. If a breakout

reverses, it could be fast and hard. The ideal for a
breakout, though, is that if you've read the signals right,
it should make money from the moment you enter the
trade.
So, most traders put a stop-loss order just below the
resistance line. If the price falls back here, it could fall
away pretty sharply back into the old trading range, so
stop yourself out of the trade. But remember that stocks
will often retest the level they have just broken within
the first few days, and then rise again—so don't set your
stop-loss order at or above the resistance line, just a bit
below. Only take your loss if the stock closes the day
below the line.
Chapter 4. The 4 Types of
Indicators You Need to Know

n indicator is a mathematical
computation based on a stock's price and/or
volume. The outcome is utilized to forecast future
prices. Technical indicators are used broadly in
technical analysis to forecast changes in stock
trends or price patterns in any traded
asset.

Indicators are calculations based on the price and the

volume of a stock (security) that gauge such things as
money flow, trends, volatility, and momentum. Indicators
are utilized as a secondary measure to the actual price
movements and add extra information to the analysis of
stocks. Indicators are utilized in 2 major ways: to validate
price movement and the quality of price patterns and to
create buy and sell signals.
There are 2 main sorts of indicators: leading and lagging.
A leading indicator precedes price movements, giving
them a prognostic quality, whereas a lagging indicator is
a verification tool because it chases price movement. A
leading indicator is believed to be the strongest in
periods of non-trending trading ranges (sideways),
whereas the lagging indicators are still helpful during
trending periods.
There also are 2 kinds of indicators based on its
construction: those that fall under a bounded range and
those that don’t. Those that are bound within a range
are referred to as oscillators—these are the foremost
common sort of indicators. Oscillator indicators have a
range, for instance between 0– 100, and signal periods
where the stock is oversold (near zero) or overbought
(near 100). Non- bounded indicators still form buy and
sell signals in conjunction with showing weakness or
strength, however, they vary in the manner they do this.
The 2 major ways that indicators are utilized to form buy
and sell signals in chart analysis are through divergence
and crossovers. Crossovers are the most popular and are
mirrored when either
the price cross over the moving average or when 2
different moving averages cross over one another. The
second way indicators are utilized is through divergence,
which occurs when the price movement of an asset and
the indicator are both moving in opposite directions. This
hints to indicator users that the current price trend is
weakening.
Indicators that are utilized in chart analysis provide an
awfully helpful source of additional information. These
indicators help out determine volatility, momentum,
trends, and several other aspects in a security to aid in
the chart analysis of trends. It is significant to note that
while some traders use a single indicator exclusively for
buy and sell signals, they are best employed in
conjunction with chart patterns, price movement, and
other indicators.

Simple Moving Average (SMA)

A simple moving average just takes several periods—say

10 days (which is 2 working weeks); it adds together the
closing price for each day and divides by 10. So it's the
average price of the stock over the last 10 days. You can
calculate it over any period—20 days, 200 days, 1 year
(though 1 year is probably not very useful for a trader).
Or rather, you can get a chart package to calculate it for
you, these days.
Why do we use simple moving averages? We use them
to take the “noise” out of the chart so that you can see
the trend more easily. The idea is similar to trendlines,
just a bit differently executed. But you should look at
SMAs together with the price chart because it's when you
put the 2 together that you get the best information—
and when you use 2 SMAs together, you can also get
some interesting information.
For instance, when the price dips below a moving
average, that's a sign that the stock might be breaking
downwards. In this sense, an SMA can be treated a little
like a resistance or support level. As a rule, in an
uptrend, the price should be above the moving average
—if it breaks down, this
could be a strong signal that prices are shortly going to
head downwards. But it's not got the best probability, so
check with another indicator before you do anything
about it.
Another way of using moving averages is to take 2
averages of different lengths and to look for a significant
crossover. All technical traders have their favorites;
some like to use the 10 and 20 days MAs, others prefer
50 and 200 days, longer-term averages.
When the shorter-term MA crosses over the longer term,
it gives you a bullish signal—the “golden cross.” It's
telling you that over the shorter period, on average,
share prices have been trending higher than over the
longer term. You might not see that so clearly from the
actual price line if the prices reported have been volatile.
If the short-term MA crosses to the downside, you have a
“death cross.” Prices are trending lower. That could be a
good sell signal.
The problem, of course, is that while moving averages
clarify what's happening, because the majority of a
moving average is made up of older price data, they
have a built-in time lag. And if a stock is trading in a
range, in a fairly choppy way, you may find that the
averages keep crossing over without delivering you any
real information.
Important points of simple moving average (SMA) are:
It is a moving average of the stock price based on the
time period and it acts as strong support and
resistance.
A buy signal is generated when the closing price of a
candle moves above this moving average. A sell
signal is generated when the closing price of a
candle dips below the moving average.
The most common SMA used are 20, 50, 100, and 200
time periods.
The above figure shows 20 SMA, the average price
movement of 20 days.

In order to access this indicator, a trader can go to the

trading platform (example: Tradingview). Click
“Indicators,” and then type “Simple Moving Average.”
Relative Strength Index (RSI)

The relative strength index (RSI) is a momentum

indicator used to evaluate overbought or oversold
conditions. It is perhaps one of the most well-known
oscillators used by traders. Developed by Welles Wilder,
the RSI is a momentum oscillator that measures the
speed of the changes in price in any given timeframe. In
plain English, the RSI tells us how quickly the price is
changing at the moment. Just like the Stochastic
oscillator, the RSI hovers between 0–100. Unlike the
Stochastic though, there are clearly defined overbought
and oversold levels. Generally, a reading above 70 is
considered overbought and below 30 is oversold. These
levels generate entry signals but, just like the Stochastic,
divergences, centerline crossovers, and other types of
divergences generate signals as well.
It is necessary to highlight here once again that this
indicator is not infallible. It must be used in conjunction
with other indicators, preferably those which measure
trend strength and direction, to confirm readings. Many
traders are quick to dismiss indicators because they do
not understand this concept and instead expect the
indicator to provide an infallible entry time after time.
The markets do not work in this manner and if you let go
of this expectation it will do wonders for your results as
well as your peace of mind.
Now that that’s out of the way, let's dig deeper into
understanding how this number is calculated. The RSI
has 3 basic components: the average gain, the average
loss, and relative strength. The default lookback period
of the RSI is 14 as recommended by Wilder but can be
changed by the trader based on their needs. The RS
component is calculated as follows:
RS = Average
gain / Average loss The
RSI itself is calculated
as follows:
RSI = 100 - (100/(1+RS))

Important characteristics of the RSI are:

 RSI is usually used on a 14-day timeframe with 70
and 30 as high and low levels respectively. The region
above reference level 70 is considered as
overbought and the region below reference level 30
is considered as oversold.
If the RSI is in the overbought region, a correction or
a pullback is likely to occur.
If the RSI is in the oversold region, a bullish reversal
is likely to occur.

Investors usually buy a stock when the RSI is in the

oversold region and sell a stock when it is in the
overbought region.
RSI is the curved line shown in the figure above.

Note: The RSI can sometimes stay oversold or

overbought for days and it should only be used in
conjunction with other indicators to determine the
probability of a reversal in direction.
MACD Indicator

This is one of the most popular and used indicators in

chart analysis. MACD is a trend-following momentum
indicator that demonstrates the connection between 2
moving averages of prices. The MACD is merely the
difference between these 2 moving averages plotted in
opposition to a centerline. The centerline is the point at
which the 2 moving averages are equal. Together with
the MACD and the centerline, the EMA of the MACD itself
is plotted on the chart. The thought behind this
momentum indicator is to gauge short-term momentum
compared to long-term momentum to assist signal the
present direction of momentum.
MACD = Shorter run moving average - Longer run moving
average

When the MACD is positive, it indicates that the short-run

moving average is higher than the long- run moving
average and recommends upward momentum. The
opposite holds true once the MACD is negative—this
indicates that the short-run is below the long-run and
recommends downward momentum. Once the MACD line
crosses above the centerline, it indicates a crossing in
the moving averages. The most general moving average
values employed in the computation are the 12-day and
26-day exponential moving averages (EMA). The signal
line is generally formed by using a 9-day EMA of the
MACD values. These values can be adjusted to satisfy
the requirements of the technical trader and the security
(stock). For more volatile securities, shorter-term
averages are employed whereas less volatile securities
must have longer averages.
Another side to the MACD indicator that’s usually found
on charts is the MACD histogram. The histogram is
drawn on the centerline and delineated by bars. Every
bar is the difference between the MACD and the signal
line or, in most cases, the 9-day EMA. The longer the
bars are in either direction, the more momentum behind
the direction during which the bars point (see the figure
above).

Interpretation

There are 3 general methods employed to interpret the

MACD:

1. Crossovers: As shown in the chart above, once the

MACD falls below the signal line, it’s a bearish signal,
which signifies that it may be time to sell. On the
other hand, once the MACD rises higher than the
signal line, the indicator offers a bullish signal, which
recommends that the price of the security is probably
going to experience upside momentum. Several
traders wait for a confirmed cross higher than the
 signal line before stepping into a position to evade
getting faked out (stepping into a position too early
on), as shown by the primary arrow.
2. Divergence: When the stock price diverges from
the MACD. It indicates the end of the present trend
(see the figure below).
3. Dramatic rise: Once the MACD increases severely
—that’s, the shorter moving average pulls far away
from the longer-run moving average—it’s an
indication that the stock is overbought and will
shortly come back to normal levels.
Traders as well watch for a move below or higher than
the zero line because this indicates the position of the
short-run moving average in relation to the long-run
average. Once the MACD is higher than zero, the short-
run average is higher than the long-run average, which
indicates upside momentum. The opposite holds true
once the MACD is lower than zero. As you can see from
the chart above, the zero line usually acts as an area of
resistance and support for the indicator.

The chart shown above is an example of bullish divergence

in MACD.

On-Balance-Volume (OBV)
This is a momentum indicator that utilizes volume flow
to forecast changes in the security price. The OBV metric
was developed by Joseph Granville in the 1960s. He
considered that, once volume raises sharply without a
major change in the security's price, the price will sooner
or later jump upside and vice versa. It’s also one of the
simplest volume indicators to calculate and understand.
The OBV is computed by taking the entire volume for the
trading period and allotting it a negative or positive value
based on whether or not the price is down or up
throughout the trading period. Once the price is up
throughout the trading period, the volume is allocated a
positive value, whereas a negative value is allocated
once the price is down for the period. The negative or
positive volume sum for the period is then added to a
sum that is accumulated from the beginning of the
measure.
It is significant to focus on the trend in the on-balance
volume (OBV)—this is more vital than the actual value of
the OBV measure. This measure enlarges the
fundamental volume measure by joining volume and
price movement.

Interpretation

The theory behind OBV is relied on the difference

between smart money—specifically, institutional
investors—and less complicated retail investors. As
pension funds and mutual funds begin to buy into an
issue that retail investors are selling, the volume could
increase even as the price remains comparatively level.
Finally, volume drives the price upside. At that time,
bigger investors start to sell, and smaller investors start
buying.
The OBV is a running total of volume (negative and
positive). There are 3 rules employed when computing
the OBV. They are:
1. If today's closing price is less than yesterday’s price,
then: Current OBV = Prior OBV— Today's volume
2. If today's closing price equals yesterday's price,
then: Current OBV = Prior OBV
3. If today's closing price is more than yesterday's
price, then: Current OBV = Prior OBV + Today's
volume
 Chapter 5. Continuation
Patterns

t some times during a particular trend,

the most predominant movement pauses for so
many reasons. One of such reasons is that as the
trend continues, long buyers will begin to sell with
the mindset of making a profit. With this, there
is bound to be buying
pressure which causes the price to drop.

A synth of this selling and buying pressure leads to

sideways price action. Contrarily, a chunk of downward
movement sparks short selling to take over, thereby
causing buying pressure to counter the downtrend. Note
that market trends happen all the time in all markets to
create recurrent patterns on charts.
This pattern can, therefore, be defined as a pause in the
middle of a predominant trend when the bulls gather
momentum in an uptrend or when the bears catch their
breath for a while amid a downtrend. As a price pattern
forms, traders can't possibly tell whether this is going to
be a continuation or reversal so they must pay keen
attention to the trendlines. This is to understand the price
pattern to know if the price falls below or above the
continuation line. The best practice that has worked for
me so far is to assume that the trend is going to
continue until a reversal is confirmed.
Generally, when a price pattern takes longer to form, the
price movement within such a pattern will also take a
long time to take shape, the movement is bound to be a
significant one once the price breaks either below or
above the continuation zone.
Pennants Pattern

A pennant pattern is typically forecasted by a sudden

price rise. It is an almost vertical rise in prices that is also
known as the flagpole or the mast. The 2 trend lines that
come together to form the pennants pattern are down
trend lines which stand for the no-so-highs. They can
also be upward trend lines that stand for the lesser lows.
A pennant pattern that forms after a sharp downward
move tends to keep sliding downwards and can be seen
as a bearish pennant, while the pennant that forms after
a sharp upward trend will be taken as a bullish pennant.
It is important to note that pennants usually appear
around midway through the whole price movement so
any move that follows the breakout of the pennant will
carry the same weight as the flagpole.
Flag Pattern

Flags come to life after 2 parallel slopy parallel trend

lines come together in either an upward, downward, or
sideways/horizontal movement. Generally, when a flag is
in an upward slope, it shows as a pause in a market
downtrend. This means that a flag that aligns itself
downwards portrays a break in a market uptrend. In most
cases, when the flag forms, it is followed by a decline in
volume which picks up as soon as the price breaks away
from the flag formation.
The flag pattern in a market chart has the shape of a
sloping rectangle which has support and resistance lines
that are parallel until a breakout happens. The breakout
typically comes in the opposite direction of the
trendlines. This means that the flag pattern is a reversal
pattern.
Wedge Patterns

The wedge pattern stands for the tight price movement

that stands within the support and resistance lines which
may either be a rising or falling wedge. Unlike what is
obtainable with the triangle pattern, the wedge pattern
does not include a horizontal trend line, but it is either
marked by a couple of upward or downward trend lines.
When the wedge is a downward one, it means that there
will be a price break in the resistance line. An upward
wedge, however, indicates that the price will break from
the support line. This, however, proves that the wedge is
a reversal pattern because its breakout is in contrast to
the general trend.
Triangles

Triangles are some of the most popular price patterns

you’ll come across in technical analysis because you are
likely to come across them more than every other
pattern. The most popular triangles are the ascending,
symmetrical, and descending triangles. These patterns
can stay for as long as weeks to many months.
For triangles like symmetrical triangles, they happen
when 2 trend lines come together facing each other to
indicate that a breakout is about to happen. It doesn't
show direction. Ascending triangles on the other hand
can be identified by their flat-up trend line and their
rising low-trend lines which indicates that a high breakout
may happen. The up-trend lines in descending triangles
indicate that there might be either breakouts or
breakdowns. The weight of either the breakdowns or the
breakouts usually stands at the same height as the
triangle's left vertical side.
Let’s go deeper into understanding the 3 types of
triangles one after the other:
Symmetric Triangles

Symmetric triangles come to life following the meeting of

the connecting lines of the highs with the trendline that
links the lows, such that it forms a triangle. These
patterns are marked by a down trendline as well as an
up trendline that comes together.
Because the 2 lines of the ascending triangle are marked
by the same slope, it isn't quite possible to predict its
direction. In most cases, there is a possibility of a
breakout from one direction or the other. One can't tell
which direction it will be. The direction of the triangle is
also neither upward nor downward and this is because
the slope of the 2 lines reflects one another.
The role of this pattern is to tell traders that the existing
trend before the formation of the pattern will continue
even after the price breaks away from the triangle.
Ascending Triangle

This pattern is characterized by a flat line that

accompanies the highs that remains at almost the same
price as well as an up-trend line that follows the higher
lows. In a nutshell, this trend indicates that the highs will
remain the same while the lows increase.
When this pattern appears, it means that buying
pressure is more than the selling pressure which will
eventually end in a breakout at the upside.

Descending Triangle
The descending triangle pattern can be likened to an
upturned ascending triangle. This means that rather than
facing up, it faces down.
This pattern is birthed by a flat slope at the base of the
trendline as well as a sharp downward slope above the
trendline. The descending triangle pattern indicates that
sellers are taking over from buyers and forcing prices to
decline. It is a bearish continuation pattern that
forecasts a downward breakdown as soon as the pattern
breaks.

Rounding Bottom

The rounding bottom pattern, which is also known as the

cup, forecasts a bullish uptrend. The middle of the U
shape presents traders with the opportunity to buy by
taking advantage of the bullish trend that comes after
the breakthrough from the resistance levels.

Gaps
Gaps are usually formed after a space within 2 trading
periods as a result of a notable boost or decline in prices.
A security can, for example, close at $10.00 and open at
$12.00 after some earnings or other contributors.
Gaps are categorized into 3 distinct types which are the
runaway, breakaway, and exhaustion gaps. While
runaway gaps are formed at the middle of a trend,
breakaway gaps form at the beginning of the trend.
Exhaustion gaps on the other hand form somewhere
close to the end of the trend.

Head and Shoulders Pattern

The head and shoulders pattern forms to forecast the

transition from bull to bear market reversal. This pattern
is marked by a big peak which has 2 other small peaks
at both sides. The 3 levels in this pattern drop to the
same support level after which it is expected to break
out in a downward movement.
This pattern may form at the top or bottom of the
market in a series of 3 different pushes. The first is
known as the initial peak or tough, while the second one
is the larger one. The third push takes the form of the
first one.
When there is an interruption in an uptrend by the head
and shoulders pattern, it is most likely followed by a
trend reversal which eventually leads to a downtrend.
Contrarily, when a downtrend leads to the heads and
shoulders bottom, it is likely to culminate in an upward
trend reversal.
It is not unusual for horizontal or sloppy trendlines to
form, then connect the peaks and the troughs which
reflect within both the head and shoulders. There may
be a decline in volume as the pattern is formed. The
volume, however, springs up as soon as the price breaks
above the head and shoulders bottom or below the top
of the head and shoulders on the trendline.

Double Bottom
This pattern is the reverse of the double top pattern. It
takes the shape of the letter “W” and shows that the
price has tried to break through the support level at 2
different times. This is a reversal chart pattern because it
indicates a price reversal. After the 2 unsuccessful
attempts at breaking through the support line, the
market moves towards an upward trend.
Double Top

This is the opposite of the double bottom pattern. It

takes the shape of the letter “M” and falls into the
reversal trend after 2 failed attempts at pushing through
the resistance level. The trend eventually falls back to
the support base, then begins a downward trend which
pushes through the support line.
Both the double tops and bottom patterns signal at the
points where the market tried to push through the
support or resistance level twice without any success.
The double top on the other hand is marked by the
previous push up to the resistance level which precedes
a second failed attempt then culminates in a trend
reversal.
Summarily, price patterns form after prices take a pause.
They point towards those areas where there may be a
consolidation that would either result in a reversal or a
continuation of a dominant trend. Trendlines are
particularly important aspects of understanding these
price patterns as they can appear in different forms like
double tops, flags, cups, or pennants.
Volume is also another especially important aspect of
this pattern. They usually decline as the pattern forms,
then increase when there is a price breakout from the
pattern. As a technical analyst,
you should be able to use price patterns to predict future
price trends which would include both continuations and
reversals.
 Chapter 6. Reversal Patterns

The Head and Shoulders

he head and shoulders is one of the best known

and probably the most reliable of the reversal
patterns. A head and shoulders top is characterized
by 3 prominent market peaks.

While the peak, or the head, is higher

than the 2 surrounding peaks (the shoulders), as this
pattern was forming, your original trend and/or channel
line would have been headed upward and would have
been on the low after the first shoulder was formed. That
trend line would have been broken after the head was
formed and the ensuing low was reached. A new trend
line would have had to be drawn that now is actually the
neckline, which is drawn below the 2 intervening
reaction lows. Remember, the preceding upward trend
was already broken when the second low was reached,
and now a close below the neckline completes the
pattern and signals an important
market reversal. Let’s take a look at a head and
shoulders reversal that started a bear market which led
to a severe market decline. See the figure below.

By the way… Does the above chart look familiar? Yes,

this is a chart of the Dow Jones Industrial Average during
the all-time-high set in October of 2007. And as you
remember—that was the beginning of a major bear
market. First of all—Look at the clear head and shoulders
pattern. The left shoulder was the first high. Then the
head is the all-time-high. Then the right shoulder is the
third high, also called the third “peak.” This is a classic
head and shoulders pattern.
When you see one of these forming whether it is on an
individual stock, index fund, or in this case, the Dow
Jones Industrial Average, it is time to “sit up and pay
attention!” This formation is one of the most reliable
chart patterns you will see.
How do we know that distribution was underway after
the first peak? Volume. The heavy volume during the
pullback after the high on the left shoulder is our first
clue. Look at the increased volume during that pullback.
It tells us there was heavy selling, and, it tells us the
volume was not
confirming the uptrend that had been in place. For
volume to confirm the uptrend, you want to see higher
volume during advances and lower volume during
pullbacks.
Let’s take a closer look at the volume, and how volume
must confirm the trend.

See the figure below.

When looking at the volume across the bottom of the

chart, as the first high formed (left shoulder), the volume
was a little higher. Normally that is good. It is nice to see
a stock, or in this case, the market, make a higher high
on increased volume. But during the sell-off after the
first high, the volume was higher than the volume of the
advance while making the high. Thus, distribution…
Now, notice the volume on the all-time-high (head) is
decreased volume. This is more distribution. The volume
is not confirming the trend. The volume then increases
on the next pullback. Inexperienced buyers are scooping
up the stock and the pros are happy to sell. Make no
mistake,
distribution is always a result of the pros selling
(distributing) their shares to the uninformed, the
novices, the unsuspecting, and yes, the pigs that are
greedy and hoping for more of an advance.
Now, look at the volume on the third high (right
shoulder). Yep, we’re in trouble now! The pullbacks and
sell-offs after each high were on increased volume. Thus,
more and more distribution, and more lambs being led to
the slaughter. More dumb money listening to TV Talking
Heads claiming all sorts of brainless prophecies.
At this point, the market is still trading above support
levels. No major concerns, right?

At about this time you probably became dreadfully tired

of the “Talking Heads” on every financial news network
proclaiming all sorts of things. Personally, I remember
hearing some who claimed that the DOW could, and
should, reach 20,000. Do you think the ones claiming
this had just purchased stocks “hoping” for further
advance in the market? Maybe… Or they may be selling
and want to keep the buyers coming so they can unload.
Let’s also apply a little common sense. When the high at
the first shoulder is reached, the DJIA is about 1,000
points above the 200-day moving average. Once again,
when the head (all-time high) is formed the DJIA is about
1,000 points above the 200-day moving average. Who
sees this and realizes at the very least there is most likely
going to be a pullback or correction and begins selling?
Yes, the smart money, the experienced traders. Sure,
some might not sell out completely, but will certainly cut
back and/or go to cash to preserve most of their profits.
At the very minimum, tightening up the stop loss would
be the smart thing to do. Simply, a stock, or the market,
will normally not trade too far above the 200-day moving
average for a long period of time before declining back
closer to the moving average. In this instance, the
market is 1,000 points above the moving average, so a
decline should be expected.
Now, think risk vs. reward. Would a seasoned investor be
buying a top? Would a smart investor be chasing the
market, realizing there has been a long-term advance,
buying in, and hoping it will go
higher? No! The risk of a correction is too high, and, the
chance the market is going very much higher is very low.
As a chartist, you can apply this knowledge to every
investing and trading decision you make. For instance,
before entering the market, you have to ask yourself:
What is the market currently doing?
Where is the market in relation to the moving
averages?
What does the volume tell you?
What is the risk/reward?
Are you buying a bottom or are you chasing the
market?
How do you protect your investment capital?

Every time you purchase an investment, your money is

at risk. Therefore you must always make sure you are
purchasing at a time when the risk is low, the reward is
high, and your money is protected.
Let’s look at support levels. Support levels are very
important. We always want to know where
support may be in case of a decline. (See the figure
below.)
We see that there were only 2 support levels of any
significance during this distribution phase. One was
minor support just prior to the left shoulder and then
there is the more significant support where the pullback
landed on the 200-day moving average. The next
significant support is found after the all-time high. These
2 significant support levels are what is considered the
“neckline” on this pattern. The decline following the left
shoulder top took about 30 days to find support and
move higher to eventually form the highest peak, the
head. That support level was tested and held prior to the
right shoulder formation. But once that second support
level was broken, a dramatic decline ensued. This is
because the break below the neckline is a confirmation
of the head and shoulders pattern.
Note again, the volume increased as the market moved
past the all-time-high and then past the right shoulder.
See the increase in volume on the declines compared to
the volume leading up to the highs? What does that tell
you?
For one, increased volume certainly tells us that more
stocks are changing hands, more buyers, more sellers,
but the increased volume is happening during declines.
The volume must confirm the trend. And in this case, the
highs are on low volume and the sell-offs are on high
volume. Thus
indicating further advance is not likely, and, the volume
is confirming the developing trend, a new downward
trend. Historically, every market top has experienced the
very same signals, warnings, and told the investors what
it was about to do. There is always low volume on
advances, higher volume on declines, along with trend
lines and support broken. This scenario always leads to a
new trend with lower highs and then lower lows. The
right shoulder in this pattern is the first “lower high.”
Let’s look at one more thing using the very same chart.
This time I added a trend line.
See the figure below.

As we learned earlier, by connecting 2 or more lows, we

can draw a trend line. The 200-day moving average is a
trend line that can be added to any chart, and it is about
as good as it gets, so to speak. The 200 DMA is also
shown on the above chart. Now take note of the volume
when the market broke below the support line. Yes, it
was increased volume. Once the market closed below
the support, panic ensued. Short sellers piled on.
Yes, a dramatic decline hit. But that can be expected
once support is broken. When you think about every
decline during the distribution phase for the 6-months
prior to breaking support, yes, the pros were selling
continually. Not so much to cause panic, but very
methodically, and constantly
selling. That is why the volume is low on advances when
the market is topping out. The big money is not buying,
they are gradually unloading. They wait for a little
bounce and then sell into the strength. They are taking
their profits. Many have been holding the stocks since
they purchased them at the bottom during the previous
“accumulation phase.” In this case, that may have been
in 2003 after the previous bear market when the Internet
bubble burst.
You see, smart money knows that the market doesn’t
always go up. Anytime the DJIA is 1,000 points above the
200-day moving average, the smart money expects a
pullback. There is never any guarantee that a pullback
will be just a small correction. Any pullback may turn into
a major correction or a bear market with a 30–50% drop.
Experienced traders take some money off the table at the
tops. There is no sense in allowing a profit to disappear,
or worse, turn into a loss.
Also note that after the all-time-high was reached and
the head of the pattern was formed, over the ensuing 45
days there were at least 4 big down days where the sell-
off created dark engulfing candles. These are very
telling! They are your early warning signs. They indicate
what is to come.

Moving Average
Moving averages are a very useful tool for determining
trends. They can be applied to any chart. When
displaying a chart, most will allow you to choose a 10-
day moving average, a 20, 50, 100, or a 200-day moving
average. The 200-day moving average is the most
powerful of all. Whether you are dealing with an
individual stock or a market index, when buying, your
investment should be above the 200-day moving
average (200 DMA). This average historically acts as
both support and resistance. Meaning, if the stock or
index is above the average, there should be support at
or near the 200 DMA. If the stock or index falls below it,
then the 200 DMA will usually act as resistance when the
stock is trying to advance.
Notice in the above chart, in July of 2007 the first
shoulder (peak) was formed, and then the market
retreated to support right on the 200 DMA. Then after
hitting the all-time-high, it fell through the 200 DMA.
Something significant—Take a look at the candle that
formed when reaching the 200 DMA the second time. Do
you see how it fell below the 200 DMA then traded
higher to close above it? Yes, the following candle was a
bearish engulfing candle that clearly fell through the
support of the 200 DMA. But think of the psychology of
the traders and investors. Many obviously believed there
would be support at the 200 DMA and started buying.
This buying provided a close above the average. The
support of the 200 DMA didn’t last, but traders were
obviously buying in hopes the support would hold.
The 200 DMA is historically a great tool for the long-term
investor. It can be used to signal buy and sell points.
Meaning, the investor simply sells out when the security
falls below the 200 DMA and waits for the security to
cross back above the 200 DMA to reenter the position.

In Summary

Any way you look at the above charts of the head and
shoulders formation—any way you analyze it—even
pretend that 2008 has not arrived yet, and you are
looking at these charts as they form on a daily or weekly
basis.
Whether you would have drawn a trend line on the lows
leading up to the very first peak (left shoulder), or drawn
a support line, or drawn a channel line, used a 100 DMA
or a 200 DMA, the result would have been the same.
Once the market broke below the first line of support
and then broke the second line of support (neckline), the
head and shoulders pattern was formed.
 Chapter 7. 24 Candlestick
Patterns That Every Trader
Should Know

andlestick patterns are used to forecast

the future course of price movement. Find 24 of
the most widely recognized candlestick patterns
and how you can use them to distinguish trading
opportunities.

What Is a Candlestick?

A candlestick is a method of showing data about an

asset's price movement. Candle charts are quite possibly
the most mainstream parts of technical analysis,
empowering traders to decipher price data rapidly and
from only a couple of price bars.
It has 3 fundamental highlights:

The body, which addresses the open-to-close range

The wick, or shadow, that shows the intra-day high and
low
 The color, which uncovers the course of market
movement—a green (or white) body demonstrates a
price increase, while a red (or dark) body shows a
price decline
Over the long run, singular candlestick from patterns
that traders can use to perceive significant support and
resistance levels. There are a considerable number of
candlestick patterns that demonstrate a chance inside a
market – some give understanding into the harmony
among buying and selling pressures, while others
recognize continuation patterns or market hesitation.
Before you begin trading, it's critical to acquaint yourself
with the nuts and bolts of candlestick patterns and how
they can advise your decisions.
Practice Reading Candlestick
Patterns

The most ideal approach to figure out how to peruse

candlestick patterns is to work on entering and leaving
trades from the signals they give. You can build up your
abilities in a danger-free climate by opening an IG demo
account, or on the off chance that you feel adequately
sure to begin trading, you can open a live record today.
When using any candlestick pattern, it is critical to recall
that in spite of the fact that they are extraordinary for
rapidly anticipating patterns, they ought to be used
close by different types of technical analysis to affirm
the general pattern.

6 Bullish Candlestick Patterns

Bullish patterns may frame after a market downtrend,

and signal a reversal of price movement. They are an
indicator for traders to think about opening a long
situation to profit from any upward direction.

Hammer
The hammer candle chart is shaped of a short body with
a long lower wick and is found at the lower part of a
descending pattern.
A hammer shows that despite the fact that there were
selling pressures during the day, eventually, a strong
buying pressure drove the price back up. The shade of
the body can shift, however, green hammers show a
more grounded positively trending market than red
hammers.

Inverse Hammer

A comparatively bullish pattern is the inverse hammer.

The only contrast being that the upper wick is long, while
the lower wick is short.
It shows a buying pressure, trailed by a selling pressure
that was not sufficiently able to drive the market price
down. The converse hammer proposes that purchasers
will before long have control of the market.

Bullish Engulfing
The bullish engulfing pattern is framed by 2 candlesticks.
The main light is a short red body that is totally
immersed by a bigger green candle.
Despite the fact that the subsequent day opens lower
than the main, the bullish market pushes the price up,
coming full circle in an undeniable win for buyers.

Piercing Line

The piercing line is likewise a 2-stick chart, comprised of

a long red candle, trailed by a long green candle.
There is typically a huge gap down between the primary
candlestick’s closing price, and the green candlestick’s
opening. It shows a strong buying pressure, as the price
is pushed up to or over the mid-price of the previous day.
Morning Star

The morning star candlestick chart is viewed as an

indication of expectation in a disheartening market
downtrend. It is a 3-stick chart: one short-bodied
candlestick between a long red and a long green.
Customarily, the “star” will have no cover with the more
extended bodies, as the market holes both on open and
close.
It flags that the selling pressing factor of the principal
day is dying down, and a positively trending market is not
too far off.

3 White Soldiers

The 3 white soldiers’ pattern happens more than 3 days.

It comprises sequential long green (or white) candlestick
with little wicks, which open and close logically higher
than the earlier day. It is an extremely strong bullish
sign that happens after a downtrend and shows a
consistent movement of buying pressure.
6 Bearish Candlestick Patterns

Bearish candlestick patterns as a rule structure after an

uptrend, and sign a state of resistance. Substantial
negativity about the market price frequently makes
traders close their long positions and open a short
situation to exploit the falling price.

Hanging Man

The hanging man is what could be compared to a

hammer pattern; it has a similar shape, however, frames
toward the finish of an uptrend.
It shows that there was a critical auction during the day,
however, that buyers had the option to push the price up
once more. The huge auction is frequently seen as a sign
that the bulls are failing to keep a grip available.
Shooting Star

The shooting star is a similar shape as the inverse hammer,

yet is framed in an uptrend; it has a little lower body and a
long upper wick.
Typically, the market will gap somewhat higher on opening
and rally to an intra-day high prior to shutting at a price
simply over the open—like a star falling to the ground.

Bearish Engulfing

A bearish engulfing pattern happens toward the finish of an

uptrend. The main candle has a little green body that is
immersed by a resulting long red light.
It means a peak or lull of price movement and is an
indication of a coming market slump. The lower the
subsequent candlestick goes, the more critical the
pattern is probably going to be.
Evening Star

The evening star is a 3-candlestick pattern that is what

could be compared to the bullish morning star. It is
shaped of a short light sandwiched between a long
green candle and an enormous red candlestick.
It shows the reversal of an uptrend and is especially solid
when the third candle deletes the increases of the main
light.

3 Black Crows

The 3 black crows’ candlestick pattern involves 3

successive long red candlesticks with short or non-
existent wicks. Every meeting opens at a comparative
price to the previous day, yet selling pressures push the
price lower and lower with each nearby.
Traders decipher this pattern as the beginning of a
bearish downtrend, as the traders have overwhelmed the
buyers during 3 progressive trading days.

Dark Cloud Cover

The dark cloud cover candlestick pattern shows a

bearish reversal—a dark cover over the earlier day's
confidence. It involves 2 candlesticks: a red candle that
opens over the past green body and closes beneath its
average.
It flags that the bears have assumed control over the
meeting, pushing the price strongly lower. On the off
chance that the wicks of the candlestick are short, it
proposes that the downtrend was incredibly definitive.

4 Continuation Candlestick Patterns

If a candlestick pattern doesn't demonstrate a shift in

market bearing, it is the thing that is known as a
continuation chart. These can assist traders with
distinguishing a time of rest on the lookout when there is
market hesitation or nonpartisan price movement.
Doji

At the point when a market's open and close are nearly

at a similar price point, the candle takes after a cross or
in addition to sign—traders should pay special mind to a
short to the non-existent body, with wicks of changing
length. This present doji's pattern passes on a battle
among buyers and traders that outcome in no net
addition for one or the other side. Alone a doji is an
impartial sign, yet it tends to be found in reverse
patterns, for pattern, the bullish morning star and
bearish evening star.

Spinning Top

The spinning top candlestick pattern has a short body,

focused between wicks of equivalent length. The pattern
demonstrates uncertainty on the lookout, bringing about
no significant change in price: the bulls sent the price
higher, while the bears pushed it low once more.
Spinning tops are frequently deciphered as a time of
union, or rest, following a critical uptrend or downtrend.
On its own the spinning top is a generally considerate
sign, however, they can be deciphered as an indication of
things to come as it implies that the current market
pressure is letting completely go.

Falling 3 Methods

A 3-method arrangement pattern is used to forecast the

continuation of the latest thing, be it bearish or bullish.
The bearish pattern is known as the “falling 3 methods.”
It is shaped of a long red body, trailed by 3 little green
bodies, and another red body—the green candlestick are
completely contained inside the scope of the bearish
bodies. It shows traders that the bulls need more strength
to alter the course.

Rising 3 Methods
The inverse is valid for the bullish pattern, called the
“rising 3 methods” candlestick pattern. It includes 3
short reds sandwiched inside the scope of 2 long greens.
The pattern shows traders that, in spite of some selling
pressure, purchasers are holding control of the market.

Other Candlestick Patterns

Blue Sky Breakout

Generally, it's a good idea to wait for consolidation

before taking out a long position on a security that has
been ascending on the price charts. But sometimes it
continues to move up for several days or more, causing
the traders who are waiting for an entry on the sidelines
to feel like they are missing out on the big move. In a
relentless bull market, sometimes a trader is left with
little choice but to jump into a security without waiting
for it to dip a little bit.
A regular breakout is when a stock breaks above a
resistance level, but there are still more resistance levels
up ahead. A blue sky breakout is when the stock breaks
through the final resistance level, leaving no other
resistance points up ahead. A resistance level is a zone
that a security commonly gets rejected at, indicating
that supply has exceeded demand. During a blue sky
breakout, you might see a series of green candles
consecutively after resistance has been broken. The
trouble with blue sky breakouts is that by the time the
stock takes out the final resistance zone, it is usually
already overextended, which could lead to a significant
pullback.
If you decide to jump into a blue sky breakout, it's
important to watch the trade closely, and not to hold
onto it for longer than a few days. One way of knowing if
the security will continue to go up is by assessing how
much follow-through the stock has after it breaks
resistance. If it breaks resistance, but only by a few
cents, that's not a very good follow-through.
Cup and Handle

As the name implies, the candlesticks on the chart will

resemble a cup and handle. The cup will be on the left
side of the handle and it will be in the shape of the letter
“U,” while the handle will have a slight downward trend.
As long as the bottom has a “U” shape, it is considered
bullish, so it presents a buying opportunity. If the bottom
has more of a “V” shape, it is best avoided, as the
technical analysis indicates.
The candlesticks travel in a “U” formation. After making
the “U” shaped recovery, they will start trending slightly
downward again. Picture a downward slope at the top-
right corner of the “U.” The buy signal is presented
during the consolidation period of the slight downtrend
after the “U” shaped recovery. A realistic profit target
can be assessed by measuring the distance between the
bottom of the “U” and the top of the “U.”

If the move from the bottom of the cup to the top was
20%, the profit target could be 20%, with a stop-loss
placed slightly below the handle formation. One of the
drawbacks to playing a cup and handle pattern is that it
can be difficult to tell if the cup is truly presenting a “U”
or if it is actually a “V.” Sometimes a sharp, V-looking
bottom actually plays out quite well. Another drawback
is that the cup sometimes forms without the handle.
The Bearish Abandoned Baby

The bearish abandoned baby is a candlestick pattern

that usually tells us a reversal in the current uptrend is
on its way.
First of all, the previous advance is eclipsed by a doji.
That in itself is our first signal, but the confirmation
comes the next day with a bearish engulfing candle.
When you look at an advance at a stock’s price while
viewing a chart and see the doji and then see heavy
selling the following day that should be enough to get
your attention.
In fact, experienced traders who see this pattern form
and are holding the stock, usually begin to look back on
a longer-term chart to see where support might be found
for the stock’s price. If it is very far below the current
price, they would exit the trade.
The Bullish Abandoned Baby

The bullish abandoned baby is the mirror image of the

bearish counterpart.

And once again, the doji is the first sign of change. It

appears at the bottom, after a decline, telling us the
buyers and sellers are virtually equal. The confirmation
of this pattern is the positive candle the very next day.

The TRI Star

The tri-star is another type of candlestick pattern that
signals a reversal in the current trend. This pattern is
formed when 3 consecutive doji candlesticks appear
after the stock has experienced an advance in price.
The above chart illustrates a bearish tri-star pattern at
the top of the uptrend and is used to mark
the beginning of a shift in momentum. A seasoned trader
would be thinking, “Look out below!”

Keep in mind that even though the tri-star in this chart is

clearly formed, many times there may only be 2 stars.
Also note that these “stars” are actually doji candles,
signifying that neither the buyers nor the sellers have
any control since the stock opened and closed at virtually
the same price on all 3 days. When you think about
neither the buyers nor sellers having control and the doji
forms at the end of an uptrend or a down-trend, then
many times a change in direction is likely. In this case, 3
dojis were formed. But the important thing is what had
previously happened.
The point is a trend in a particular stock or the overall
market takes time. We are always looking for
recognizable candles, patterns, or formations to appear
at the end of an advance or decline. I would prefer to
see a stock advance or decline a minimum of 5 days and
then see a bottom or top forming. This lets us ignore
small candles that appear a day or 2 after a change in
trend has happened.
The Bearish Harami
The bearish harami is a pattern that forms at the top
after an advance. It is indicated by a large dark
candlestick that forms on a negative trading day
signaling a change may be in store. Then there's a much
smaller candlestick with a body that fits inside the
vertical range of the larger candle's body. A pattern like
this indicates that the preceding rising trend is ending.
When you think about it, the lower close of the bearish
candle is an early warning sign. When this candle forms
after an advance, you know the sellers have stepped in.
Even before the next candle forms, you should be on
high alert if you are holding this stock. Then when the
next candle is formed showing the price cannot
penetrate the upper area of the previous candle, this
sometimes indicates a top has been reached and often
reverse in direction will soon take place.

The Bullish Harami

The bullish harami pattern may look very close to the
same as the bearish harami, but it forms at
the bottom after a decline in the stock’s price.

The bullish harami is a candlestick chart pattern in which

a large candlestick is followed by a smaller candlestick
whose body is located within the vertical range of the
larger body candle on the previous day. In terms of
candlestick colors, the bullish harami is a downtrend of
negative-colored
candlesticks engulfing a small positive (white)
candlestick, giving a sign of a reversal of the downward
trend.

The Harami Cross

The harami cross is like the previous Harami formations

except the small body candle is a doji. This indicates that
the previous trend is about to reverse.
Think trader psychology for a moment. With the bearish
harami cross, what might have happened in the trading
that formed this particular pattern?
Obviously, the large white candle was formed with the
market opening and the stock trading higher to the close
that day. But on the following day, there are a couple of
things we need to mention about the doji:
 The stock could not trade above the previous day’s
range
No one had control. It was an even match between the
buyers and the sellers.

Now, think about it a little further. If on this day when the

doji is formed there are no longer enough buyers to push
the price higher, and the sellers continue to sell at this
price preventing an advance, the doji tells us that when
the buyers and sellers are equal, then further advance
may be unlikely.
The bullish harami is just the opposite. There were not
enough sellers to push the price lower, meaning, the
buyers stepped in after a decline in price and began
buying at that level. So, once again, the doji tells the
story and indicates a change in direction.
 Chapter 8. Avoid the Traps

rading chart patterns always sound so

easy to do. Websites show you successful and
profitable trades, and you look at the pattern and
say, "oh yes, of course, anybody could have
spotted that,” and it looks so easy.
It's not. First of all, you have to kiss a lot of frogs—that
is, for every chart that shows you a meaningful pattern,
you're going to see an awful lot of charts where there's
no clear trend at all. Secondly, some patterns can be
deceptive and set traps for the unwary trader. For
instance, “headfakes” often happen when you were
expecting a proper breakout. And thirdly… some traders
make life awfully difficult for themselves, whether
through being too emotional, not setting stop- losses,
not considering risk, or not knowing what some of the
bad patterns look like.

Fakeouts and Fake Head-and-

Shoulders
Sometimes the set-up looks great… but then the
expected price movement fails to emerge. Prices move
the “wrong” way for your trade. These are like a
"headfake." But there are ways to check them out and
avoid a few of the fakes.
You may fall into the trap of looking at a head and
shoulders formation without realizing that it's actually
just a blip in a bigger trend. Always check your chart for a
longer time period before acting on some trade.
By the way, remember to check the pattern against the
big picture. In the chart below, you think you see a head
and shoulders formation, but actually, it's happening
within a major trend and the trendline, not the neckline,
is what matters. Always remember to look at several
different time periods—I always look at 1 month, 6
months, 1 year, and 5 years, which may be overdoing it
—so you don't get caught by a pattern that doesn't work.

Even if the price here had broken through the neckline,

the top line of the downtrend channel would probably put
up resistance, and that would limit your likely profits.
Or you may see the price come down to the neckline of
the right shoulder, but not actually break through it. It
might just dip below it in intra-day trading but still close
above it. This isn't a proper breakout—wait for the price
to close below the neckline before you buy.
In many head and shoulders patterns, there's a false
breakout with a retracement before the real one.
Sometimes, market practitioners are just trying to
ensure traders with tight stop-losses are “stopped out”
before the price really moves. So, don't put your stop too
tight, and be ready even if it's activated to jump back
into the next breakout.
You also get fakeouts—for example, the price breaks the
trendline to the upside, but then it falls back again,
instead of giving you the expected breakout. You'll
probably fall into that trap a few times, but some
confirmations can help you avoid it:
If there's a low volume of trading, it's probably a
fakeout; breakouts have high volume.
If the price is headed very slowly towards the
trendline, it's probably a fakeout; breakouts have
real momentum and tend to start with a really big
move.
A fakeout from a double top or double bottom is one
that doesn't lead to the expected reversal—instead,
you get a continuation. If you recognize it, you can
simply reverse your trade—if you expected a double
top to lead to a fall, and the price starts heading up,
then stop the short and go long.
Try placing your stops just short of the “expected”
price or just a little more. Double bottoms, for
 instance, are well-known patterns, and lots of
traders will have stop-losses at exactly the same
price, often a round number. If you stay away from
that level, you may not get faked out if the market-
makers try to "shake the tree."

No Trend at All

Almost every good chart pattern needs a good strong

trend established for it to work. It is really, really difficult
to make money trading when there's no trend. And the
market can be trendless for
60–70% of the time. If you don't trade for nearly 3-
quarters of the year, how on earth can you make money?
Mind you, if you don't see any good trades in a sideways
market, don't force the issue. It's always better to have
cash sitting in your account than to waste it trading for
the sake of trading. Taking a risk when you haven't
identified a return is one of the dumbest things you can
do.
Mean-reversion trades are probably your best bet. The
concept of mean reversion is that statistical probabilities
group towards the mean (average) so that if a price goes
to an extreme high, it will probably fall back; if it goes to
an extreme low, it will probably rise again. Even
sideways markets have a range, though they don't have
a trend, so identify that range and you've got a trading
strategy.
But to carry out these trades, you need to get 4 things
right:

Detect oversold/overbought stocks using momentum

and volume indicators, not just price charts.
Buy stocks when they are trading on the low side of
the range. It may be profitable to wait for a slight
bounce so you know you're not going to get stuck in
a downwards breakout that could cost you money.
Your target price is not the other side of the range,
but the middle (so your profit is half the width of the
range).
 Be careful with your stop-losses. If there's a breakout,
you do not want to get hit.
If there is a breakout, it may be worth joining it. Again,
be careful; set a tight stop-loss.

You will not make big money in sideways markets. You

can make a little. If markets are range- bound for a long
time then you may need to consider trading them, but to
be honest, the risk-reward ratio is not that good, so I
prefer to sit them out. Or you might look at another
market to trade— foreign exchange, commodity ETFs, or
futures; but to do that, you really should have already at
least paper-traded these markets, or you could be
jumping out of the frying pan into the fire.
Adjust Your Moving Averages

Most chart packages have already decided which moving

averages to display. These are often, for instance, the 9
and 18-day averages, or 9 and 26-day, or 50 and 200.
But these might not be the best averages for you. Don't
fall into the trap of letting a charting site decide which
moving averages you should use.
For instance, if you've decided to become a day trader,
you'll want to get something like 5-8-13 bar averages.
You can get price bars for every hour, every 5 minutes,
or every minute even, so you might have a 5-8-13
minute average instead of 5-8-13 days. Watch out
though, because though in a good trend, they'll give you
great signals; in choppy trading, they can be all over the
place, and you're best declaring time out, going flat
(closing all your positions), and going to get a coffee.
If you trade longer term, you'll want to look at longer-
term averages such as the 26 and 50-day SMAs or EMAs.
20/21 are good for swing traders together with the 50-
day; the 200 and 250-period MAs go well as the slower
average.
Remember, the EMA moves faster than the SMA, so it
will flag up trades more quickly—but you pay a price for
this because it will give you more false signals than the
SMA. If you're happy making a lot of trades and closing
the bad ones quickly, use the EMA, as it will get you into
a price swing more quickly; but if you want to trade
longer-term, and keep your positions longer, then SMAs
will give you winning trades that are slightly less
profitable, but fewer stopped-out trades and fewer
trades overall.
One of the reasons MAs work is that nearly everyone
uses them. So, while you might think it's fun to create a
34-day moving average, it might not give you any
useful, actionable information. You can try it, backtest it
on a few charts and see. But I doubt you'll actually find
that it's a secret weapon. I've tried a few and they've
never worked out.
And lastly, moving averages just don't work in trendless
markets. When the market is ranging, don't try to use
the MAs for trading ideas—they're going to be all over
the place and will only get you into trouble. Wait till you
can see a clear trend again.

Risky Symmetrical Triangle

We've looked at ascending and descending triangles,

which can give you a great trading signal. But sometimes
the trendlines form a symmetrical triangle. The highs are
getting lower, and the lows are getting higher, and when
the 2 lines meet, something has got to happen. The
trouble with this formation is that it's super risky. The
chances are 50% it'll be up, and 50% it'll be down, and
at a guess about 90% that it'll be fast and furious.

As I've stressed repeatedly, the trend is your friend, and

trading a market that's not got a clear trend is tricky. And
by definition, with one trendline going up and one
coming down, with the symmetrical triangle, you have a
trendless market—unless there's a really good strong
moving average line, for instance, in which case you
have a 50–60% chance that the breakout will be in the
same direction. But there's also a good chance that
there will be a fakeout first (usually with low volume
while the real breakout will see an increase in trading
volume).
So if you're risking on one of these triangles, it may be
better to wait till the breakout and new trend are clear—
and keep your stop-losses tight or the price could run
away from you in the wrong
direction. In fact, prices quite often gap-up (or down)
from these formations, so even your stop-loss may not
help you.
Your profit target can be measured by taking the depth
of the triangle when it began to form and adding that to
the breakout point. Your stop-loss should be at the last
point at which the price touched the bottom line of the
triangle. Since this is a 50–60% probable pattern, you're
going to want a better than 2:1 risk/reward ratio for it to
be potentially profitable. I wouldn't take it on much below
4:1, personally.
But you can ride the trend if you look at the moving
average. As long as the price stays above the 20–50-day
MA, you can keep your trade moving and bring your
stop-loss up to date with the moving average every day.
That way, you'll be stopped out automatically if the
trend changes. A trailing stop like this is a great way to
run a longer-term position.

Super Rocket Stock

One of the big dreams of the stock market is the one

stock that will make you your fortune. "If I'd put every
penny in my IRA into this stock… if I'd mortgaged my
house and bought this stock… If I'd maxed out my credit
card to buy this stock…"
Point one: Do not trade anything other than risk capital.
That is money that you know you could afford to lose. If
you lost your house and your pension and owed the
credit card company $50,000, you would be in dire
straits. Don't go there.
But secondly, this dream is exactly that—a dream.
Shares do not go up and up and up. They go all around
the houses.
Let's look at Cisco—a “rocket” of the tech boom. If you
bought and held Cisco at $1.92 in 1994, you would have
made a load of money. If you'd bought it at $15 towards
the end of 1998, you would have seen it soar to over
$80—and then fall back to below the price you paid for it
by the end of 2002. Now, it would be worth $50. (This
chart is from Bigcharts. Their data goes way, way back.
Not all chart sites have such good long-term data.)
Plenty of gurus are keen to sell you their “rocket stocks.”
They'll use a combination of different approaches—
analyst upgrades, earnings surprises, charting, trade
volume. And they perform okay—for a while. But the
problem with analyst upgrades is that analysts usually
base their estimates on what the company tells them,
and few analysts want to get out of step with a rising
market—they fear if they call the top and the market
keeps going up, they'll be fired. And the problem with
“rocket stocks” is that there are many other people who
have got in at the same time, and the same price, as
you. If things go wrong, they'll chicken out.
These stocks are often really speculative, like GameStop,
for instance. I'd call Tesla a super-rocket— it's been driven
by having a great story and a charismatic CEO, but it
hardly makes any money, and competition from
companies like Toyota, Volkswagen, and Renault is
heating up. (Incidentally, Volkswagen is up 62% from its
lows. Good money for those who caught it.)
That means there's nothing to keep the share price from
falling off a cliff. I know that we're talking about technical
analysis and not fundamentals, but with stocks like this, I
worry that the market is full of people who've heard the
story but don't really understand the numbers. That
pushes the stock up, and up, and up—and if you
remember the parabolic rise? That's the trap.

Long Candles

But sometimes, a super-long candlestick can be a trap. It

looks like a bullish signal—and for a little while, it is. But
while the share price may test resistance above this long
candle, it's usually a bull trap and the share price will,
after a while, come back to earth. And it can hit the
ground hard.
Why does this big candle happen? New buyers are
coming into the stock thinking that it's making a
breakout. Maybe some big players are pushing the price
up. What's important is that this long candle doesn't sit
nicely among the other candlesticks—it's isolated. There
may even be 2 big candlesticks.
Maybe you missed that signal, and you're sitting in the
trading range on top. You'll often get another chance
because a huge candlestick with a big upside shadow or
wick will fake a breakout from the trading range. Novice
traders will look at a big white or green candle and say,
"Yay! Breakout!" Experienced traders will look at the big
shadow on the upside, and they know that it means the
market was trying to push prices higher and higher, but
it wasn't working.
However, you should always check signals in a longer or
shorter timeframe. For instance, a green/white weekly
candle with a huge upper shadow looks as if the market
tested the highs and couldn't sustain them. If you look at
the daily candles, though, you may find that you have a
pattern that is trading within the expected channel—up
to the topside trendline and then just a small correction.
In that case, don't get suckered—if you are long on the
stock, it's still on course.

Lack of Discipline

The worst trap that most traders face is a lack of

discipline. That might mean not getting up to catch the
market open, not setting stop-losses, or not taking a
trade where all the signals look good because you don't
like the stock. Once you've decided on a trading strategy
and on which signals are the ones you're going to trade,
stick to your strategy and system. Chopping and
changing lose trader's money…
It's about trading psychology—the psychology of other
traders, but most importantly, your own.
 Chapter 9. Trading
Psychology

Trading With Emotions

t is common for traders to have their emotions

and feelings jumbled up when day trading, from the
highs and the lows they experience from the market.
This is a far outcry from the confident self that a trader
usually poses before the markets open, bubbling up
with excitement over the money and profits that they
intend to make. Emotions in trading can mess up and
impair your judgment and your ability to make wise
decisions. Day trading is not to be carried out without
emotions, but rather as a trader. You should know how to
work your way around them, making them work for your
good. A clear level headed and stable mind should be
kept at all times, whether your profits are on the rise, or
whether you are on a losing streak. This does not mean
that as a trader, you are supposed to disconnect from
your emotions. A person cannot avoid emotions, but in
the face of real market scenarios, you have to learn how
to work on and around them. The personality type of a
trader plays a huge role in determining which kind of a
trader they are. The cautious traders are mostly
controlled by fear when opening up trades, while the
risky type is in the greed-motivated bandwagon. Fear
and greed are such huge motivators that they go a long
way
in the layout of losses and profits.

Greed

A trader may be fueled to earn more money by checking

their balances in their accounts and seeing it be as of a
low level. While this may be a motivator to work hard,
some traders take it too far, wanting to earn a lot of
money right there and then. They make mistakes while
trading that has reverse effects than the intended ones.
Such mistakes include an overtrade, taking unnecessary
risks, among others.
Taking Unnecessary Risks

Greed for more money will seek to convince the trader to

take risks that are not worth it to achieve a certain
financial threshold in the trading account. These will
most likely end up in losses. The risky traders may take
risks such as high leverage, that they hope will work in
their favor, but at the same time may have them making
huge losses.

Making an Overtrade

Due to the urge to make more and more money, a trader

may extend trading over long periods of time.
Commonly these efforts are futile because the
overtrading through market highs and lows put a trader
in a position where their accounts can be wiped out due
to greed. Disregarding the fact, time to trade and dive
into opening trades without having done an analysis will
most likely result in a loss.

Improper Profit and Loss Comprehension

Wanting to earn a lot of money within a short period of

time, a trader will not close a losing trade, maintaining
the losses, and on the other hand, overriding on profit-
making trade until a reverse in the market happens,
canceling out all the gains made. It is advisable to
maximize and specialize in a successful trade and close a
losing trade early enough, avoiding major losses.

Fear

Fear can work in both directions, as a limit to an

overtrade, or also as a limit to making profits. A trader
may close a trade so as to avert a loss, the action
motivated by fear. A trader may also close a trade too
early, even when on a winning streak in making gains, in
fear that the market will reverse and that there will be
losses. In both scenarios, fear is the motivator, working
in avoiding failure a success at the same time.
The Fear to Fail

The fear to fail in trading may inhibit a trader from

opening up trades, and just watch as the market changes
and goes in cycles when doing nothing. The fear of
failing in trading is an inhibitor to success. It prevents a
trader from executing what could have been a successful
trade.

The Fear to Succeed

This type of fear in trading psychology will make a trader

lose out their profits to the market when there was an
opportunity to do otherwise. It works in a self-harming
way in market scenarios. Such traders in this category
fear to have too much profit and allow losses to run, all
the while aware of their activities and the losses they are
going to make.

Bias in Trading

There are several market biases that a trader may tend

to make that may be as a result of the emotions play,
which traders are advised against. In the psychology of
trading, these biases may influence a trader to make
unwise and uncalculated trading decisions that may
prove to be loss- making ones. Even when the trading
biases are in focus, as a trader, you have to be aware of
the emotions in you and come up with ways to keep
them under control and maintain a cool head in your
trading window. They include the bias of overconfidence,
confirmation, anchoring, and loss.

Bias in Overconfidence

It is a common occurrence with traders, especially new

traders, that when you make a trade with huge profits,
you get in euphoria in the state of winning. You want to
go on opening up trades, with the belief that your
analysis cannot go wrong, boiling down to the profits and
gains you’ve made. This should not be the case. You as a
trader cannot be too overexcited and overconfident in
the analysis skills that you believe you cannot make a
loss. The market is a volatile one, and therefore,
the cards can change at any given time, and when they
do, the overexcited and overconfident trader now turns
into a disappointed one. Get your analysis of the market
right before opening up any trade, regardless of the
previous trades, whether they were a loss or gain.

Bias in Confirming Trades

In trading psychology, the bias in confirmation of a trade

you have already made, justifying it, is one of the factors
that waste a lot of time and money for traders. This type
of bias is mostly associated with professional traders.
After making a trade, they go back in evaluating and
analyzing the trade they just made, trying to prove that
it was the correct one, whether they sailed according to
the market. They waste a lot of time digging for
information that they are already aware of. They could
also be proving that the mistake they did in opening a
wrong trade and making a wrong move was a correct
one. Nevertheless, the bias in confirmation occurs when a
trade they made turns out to be correct, and this
strengthens their determination in their researching
skills, further pushing them in wasting time in proving to
themselves already known facts. They could also lose
money in the process, and it is, thus, advisable against
this form of bias in trading.

Bias in Anchoring on Obsolete Strategies

This type of bias in the psychology of trading applies to
the traders that rely so much on outdated information
and obsolete strategies that do more harm than good to
their trading success. Anchoring on the correct but
irrelevant information when trading might make the
trader susceptible to making losses, a blow to the
traders who are always lazy to dig up new information on
the market. Keeping up with the current events and
factors that may have an impact on the market is one of
the key aspects of having a successful trading career.
Lazy traders will tire of keeping tabs with the ongoing
economic and even political situations whose influence is
exerted on the foreign exchange market. An example of
this is that some traders will have a losing trade, but
they hope that the markets will reverse their
assumptions based on obsolete information and
strategies. Carry out extensive research, mindful not to
be too time-consuming, to ensure you make trades in
accordance with the right data.

Bias in Avoiding Losses

Trading with the motive to avert losses usually boils

down to the factor of fear. There are some traders whose
trading patterns and their trading windows are controlled
by fear of making losses. Having gains and making
profits is not a motivation to them when fear hinders
them from opening trades that could have otherwise
been profitable. They also close pas trade too early,
even when making profits in a bid to avert the losses,
their imaginable losses. After carrying out a proper and
detailed analysis on the market, go for making profits
without being deterred with the bias of avoiding to make
a loss, for that just holds many traders. Come up with a
plan for your day trading to deal with doubts about the
trades you are to make.

Psychology Affecting Traders’

Habits

Psychological aspects affect habits in trading, the

mistakes, and the winning strategies that a trader comes
up with. Explained below are the negative habits that
many traders make, with the influence of psychology on
their habits.

Trading Without a Strategy

With no trading strategy and plan, a trader will face

challenges with no place to refer to the anticipated end
result. A proper strategy should be drawn by a trader to
be a referencing point when facing a problem in trading
in the market. It should be a clearly constructed plan,
detailing what to do in certain situations and which type
of trading patterns to employ in different case scenarios.
Trading without a strategy is akin to trading to lose your
money.
Lack of Money Management Plans

Money management plans are one of the main aspects

of trading, and without solid strategies in this, it is
difficult to make progress in making gains in the trades
opened. As a trader, you have to abide by certain
principles that will guide you in how to spend your
money in the account in opening up trades and ensuring
that profits ensue from that. Without money
management plans, a trader would be trading blindly
with no end goal in mind, risking the money in non-
profitable trades.

Wanting to Be Always Right

Some traders always go against the market, placing

their desire of what manner they would like the market
to behave in. They do not follow the sign that the market
points to, but rather they follow their own philosophy, not
doing proper analysis and always wanting to be right.
Losses ensue from such psychological habits. When the
trading window closes, the market will always overrule
the traders. Thus, a trader’s want to be always right
against the market is overruled.

Looking at the Analysis

It’s important to understand how to perform a proper

technical analysis not just to determine the value of a
certain option but also to make sure you don’t scare
yourself away with any certain number. You might see a
dip in a chart, or a price projection lower than you
hoped, immediately becoming fearful and avoiding a
certain option. Remember not to let yourself get too
afraid of all the things you might come across on any
given trading chart. You might see scary projections that
show a particular stock crashing, or maybe you see that
it’s projected to decrease by half.
Make sure before you trust a certain trading chart that
you understand how it was developed. Someone that
wasn’t sure what they were doing might have created
the display, or there’s a chance that it was even
dramatized as a method of convincing others not to
invest. Always check sources,
and if something is particularly concerning or confusing,
don’t be afraid to run your own analysis
as well.

Hearing Rumors

If you are someone that hangs around with other traders,

maybe even going to the New York Stock Exchange daily,
there’s a good chance you are talking stocks with others.
Make sure that any “tips” or “predictions” you hear are
all taken with a grain of salt. Tricking others into
believing a certain thing is true about different stocks
and options can sometimes dapple into an area of legal
morality, but it’s important to make still sure you don’t
get caught up with some facts or rumors that have been
twisted.
You should only base your purchases on solid facts,
never just something you heard from your friend’s
boyfriend’s sister’s ex-broker. While they might have the
legitimate inside scoop, they could also be completely
misunderstanding something that they heard. Before you
go fearfully selling all your investments from the whisper
of a stranger, make sure you do your research and make
an educated guess.

Accepting Change

As animals, we humans are constantly looking for a

constant. We appreciate the steadiness that comes
along with some aspects of life because it’s insurance
that things will remain the same. Sometimes, we might
avoid doing something we know is right just because we
are too afraid to get out of our comfort zone. Make sure
that you never allow your fear of change to hold you
back.
Sometimes, you might just have to sell an old stock that
has been gradually plummeting. Maybe you have to
accept that an option is no longer worth anything, even
though it’s been your constant for years. Ask yourself if
you are afraid of losing money or just dealing with the
fear.
Know When to Stop

For you to know when to stop can be the most

challenging part of life. It’s so hard to say no to another
episode when your streaming service starts playing the
next one. How are we supposed to say no to another chip
when there are so many in the bag? Sometimes, if you
see your price rising, you might just want to stay in it as
long as you can. In reality, you have to make sure that
you know when it’s time just to pull out and say no.
If you wait too long, you could end up losing twice as
much money as you were expecting to make. This is
when the gambling part comes in, and things can get
tricky. Make sure you are well-versed in your limits and
that you are not putting yourself in a dangerous position
if you don’t trust your own self-control.

Accept Responsibility

Sometimes, we don’t want to have to admit that we’re

wrong, so we’ll end up putting ourselves in a bad position
just to try to prove to someone, even just ourselves, that
we were right. For example, maybe you told everyone
about this great investment you were going to make,
sharing tips and secrets with other trader friends about a
price you were expecting to rise.
Then, maybe that price never rises, and you are left with
just the same amount that you originally invested. You
were wrong, but you are not ready to give up yet. Then,
the price starts rapidly dropping, but you are still not
ready to admit you are wrong, so you don’t sell even
though you start losing money. You have to know when
just to accept responsibility and admit that you might
have been wrong about a certain decision.
Discipline

Having a good knowledge and understanding of different

stocks and options is important, but discipline might be
the most crucial quality for a trader to have. Not only do
you have to avoid fear and greed, but you have to make
sure to stay disciplined in every other area.
On one level, this means keeping up with stocks and
staying organized. You don’t want just to check things
every few days. Even if you plan on implementing a
longer strategy for your returns, you should still keep up
with what’s happening in the market daily to make sure
that nothing is overlooked.
On a different level, you have to stay disciplined with
your strategy. Decide where personal rules might bend
and how willing you are to go outside your comfort zone.
While you have to plan for risk management, you should
also plan that things might go well. If the price moves
higher than you expected, are you going to hold out, or
are you going to stay strict with your strategy?

Stick to Your Plan

If you don’t stick to the right plan, you might end up

derailing the entire thing. You can remember this
element in other areas of your life. You can be a little
loose with the plan, but if you go off track too much,
what’s the point of having it in the first place? If you are
too rigid, you could potentially lose out on some great
opportunities, but too loose can make everything fall
apart.

Prepare for Risk Management

Aside from just knowing when to pull out to avoid being

greedy, you also need to make sure that you are doing it
so you don’t end up losing money. Have plans in place
for risk management, and make sure that you stick to
these to ensure you won’t be losing money in the end.
Determine What Works Best

The most important aspect of a trading mindset is

remembering that everyone is different. What works
best for you could be someone else’s downfall and vice
versa. Practice different methods, and if something
works for you, don’t be afraid to stick to that. Allow
variety into your strategies, but be knowledgeable and
strict with what you cut out and what you let in. Identify
your strengths and weaknesses so that you can
continually grow your strategies and always determine
how you can improve and how you can cut out
unnecessary losses.

Exercise Patience

In the world of investing, patience is the greatest virtue

you can exercise. Most folks who venture into the world
of investing in financial markets are hopeful they can
make a good amount of money quickly. However, like
anything in life, it takes time before you can become
good at it.
This is why professional investors always preach patience.

If you go to your local bank right now and talk to an

investment advisor, they will tell you to be patient,
especially if it is going through a rough patch. They will
tell you that you can make good returns, but you need to
stay in the market long enough to see the results. They
may even show you calculations of how your money
compounds over time, thus giving you fabulous returns
after 10– 20 years.
Now, you surely don’t have 20 years to make money at
the moment. Well, it might be a good secondary
investment, but certainly not something that you’d be
betting on. Nevertheless, being patient is essential to
making money in any type of investment.
You are only risking a small portion of your overall
investment. This means that you can start small, but due
to the power of compounding, you can make a serious
amount of money.
This strategy has been successful for plenty of investors.
But it takes time and study before you can make this
strategy work. You need to keep in mind that rolling over
money like this requires you
to go on a winning streak. Therefore, you must have the
right tools and information before making it big.

Why Trading Psychology Is

Important

Most people fail in day trading because they start at the

wrong end. They start by learning trading skills first, then
move on to money and risk management techniques,
and the last stop is to learn, superficially, about trading
psychology.
In fact, the right sequence of learning day trading should
be learning the trading psychology first, then money and
risk management techniques, and the last part should
constitute learning the trading skills.
It is very easy to learn technical analysis and how to use
technical indicators. But it is very difficult to control one's
emotions like fear and greed while trading or astutely
manage money while day trading.
If you look at people in different fields, you will find the
mindset is the main difference between those who reach
the pinnacle of their chosen career and those who
remain mediocre. Be it business, science, technology,
sports, or any other creative pursuit; people who train
their minds for success are the ones who win the race.
In intra-day trading also, hundreds and thousands of day
traders use the same methods of technical analysis;
however, only a few of them succeed in making
profitable trades, and others go home with losses. It is
the trading psychology that makes the difference
between successful traders and those who failed.
Every trader, who tries to learn day trading, knows that
there are certain rules to be followed, and still, the
majority of them fail to do so; therefore, if you want to
succeed in day trading, you must pay attention to how
you react to markets. Stock trading is nothing but
watching the price rise and fall and trading off with the
trend. But still, traders fail to follow this simple method
of trading.
Day trading happens 90% in the mind of a day trader,
and only 10% in what happens in markets. A day trader
takes decisions based on what they think is going to
happen in stock markets and not on what is happening.
This is the biggest mistake day traders make, and the
reason is their emotions.
To overcome this psychological hurdle, day traders must
learn how to manage their trades without emotions. They
can do so only with the help of technology and self-
discipline. If they do not have self-control or do not
follow a disciplined trading plan, they cannot make
profits in stock markets.
At a fundamental level, traders’ emotions usually drive
markets across the globe.

There are essentially 2 sentiments and states of mind

that determine failure or success in stock trading: greed
and fear. A trader’s emotional nature largely establishes
if they are going to be successful in stock trading. In
establishing trading success, any trader's trading
psychology can be as crucial as some other qualities,
like knowledge, skill, and experience. Self-discipline, as
well as risk-taking, are 2 extremely crucial parts of
trading psychology. For the success of one’s trading
plan, following these factors is very important. Although
fear and greed are definitely the 2 common emotions
related to trading psychology, some other emotions also
generate trading habits, such as hope and regret.
To have an understanding of trading psychology, just
think about a few examples of the emotions connected
with it.
Greed is usually an extreme wish for riches. Greed
frequently motivates traders to remain in a profitable
trade more than is sensible, in an attempt to get more
profits from that trade, or even undertake big risky
positions. Greed can be most evident in the last stage of
bull markets, where speculation operates on a wider
level, and traders and investors become careless.
On the other hand, fear makes traders exit positions too
early or even stay away from tasking risk due to anxiety
about big losses. Fear can be prevalent in the times of
bear markets, which, as a powerful emotion, can induce
traders and investors to do something irrational in their
rush to close
the trade. Fear usually turns into panic, which usually
provokes markets to fall at a considerably faster pace
compared to their upward trend.
Regret is another emotion that could cause a trader to
enter a trade after originally missing it, as the stock
changes too quickly. It is against trading wisdom and
quite often leads to the trader entering way too late in
the trade.
Successful traders follow some common psychological
rules that add to their success. These include:

They do not overtrade. They know their limits.

They preserve their trading capital through risk
management to gain trading success.
They maintain their trading discipline at all times.
They know the difference between not going against
the trend and following the herd.

Psychologically Approach Toward

Success

It may not seem to be a significant factor on the surface.

However, psychology plays a huge role in the way
investors conduct their trades. Psychology is arguable
the most important aspect when investing. The fact of
the matter is that for all of the analysis and research that
you can conduct, you may find yourself falling victim to
some of the most common issues that occur to traders.
When an investor can control their emotional responses
to the way trades are conducted, there is a greater
possibility of success.
The most important factor you can put into practice
when it comes to devising your investment approach is
realistic expectations. This means that you are aware of
the fact that investing takes time and effort. Of course,
you’re not expecting to take years before making a
profit. However, you should keep in mind that starting
small can ultimately pay off in droves later on.
When you start small, you can build momentum. When
you build momentum, there is a snowball
effect that makes you make more money. Sure, it’s
tempting to think that you could make 1 year’s
salary when in a single trade. Still, then again, you will
eventually reach that level after gaining the experience
that top traders have gained.
It’s like pilots; as they accumulate flight hours, they can
fly without instrumentation, relying on their experience
and better judgment. Now, that doesn’t mean that the
pilot no longer needs the plane’s instrumentation. It just
means that they can use their judgment, especially when
unexpected circumstances arise.
Also, having realistic expectations is vital to ensure that
greed doesn’t get the better of you. You see, greed is a
very powerful force, particularly when you are good at
investing. There is a temptation to take greater and
greater risks. Eventually, though, you make one mistake
that can derail a long time’s worth of success. So, having
realistic expectations is a great way of curbing the
temptation to take unnecessary risks.
 Chapter 10. 10 Top Tips for
Each Aspect of Trading

ou have to understand that the stock

market is a very volatile place, and anything can
happen within a matter of a few seconds. You have
to be prepared for anything that it throws at you.
In order to prepare for it, you have to make use of
risk capital. Risk capital
refers to money that you are willing to risk. You have to
convince yourself that even if you lose the money that
you have invested, then it will not be a big deal for you.
For that, you have to make use of your own money and
not borrow from anyone, as you will start feeling guilty
about investing it. Decide on a set number and invest it.

1. Research

You have to conduct thorough research on the market

before investing in it. Don’t think you will learn as you
go. That is only possible if you at least know the basics.
You have to remain interested in gathering information
that is crucial for your investments, and it will only come
about if you put in some hard work towards it. Nobody is
asking you to stay up and go through thick textbooks. All
you have to do is go through books and websites and
gather enough information to help you get started on
the right foot.

2. Stop-Loss/Take Loss

You have to understand the importance of a stop-loss

mechanism. A stop-loss technique is used to safeguard
investment. Now say, for example, you invest $100 and
buy shares priced at $5 each. You have to place a stop-
loss at around $4 in order to stop it from going down any
further. Now you will wonder as to why you have to place
the stop-loss and undergo one, well, by doing so, you will
actually be saving your money to a large extent.
Take a Loss

It is fine to take a loss from time to time. Don’t think of it

as a big hurdle. You will have the chance to convert the
loss into a profit. You have to remain confident and
invested.
You can take a loss on a bad investment that was
anyway not going your way. You can also take a loss on
an investment that you think is a long hold and will not
work for you in the short term. Taking a few losses is the
only way in which you can learn to trade well in the
market.
These form the different “do” of the stock market that
will help you with your intra-day trades. Below are the
“don'ts” of day trading.

3. No Planning

Do not make the mistake of going about investing in the

market without a plan in tow. You have to plan out the
different things that you will do in the market and go
about it the right way. This plan should include how much
you will invest in the market, where you will invest, how
you will go about it, etc. No planning will translate to
getting lost in the stock market, which is not a good sign
for any investor.

4. Over-Rely on a Broker
You must never over-rely on a broker. You have to make
your own decisions and know what to do and when.
The broker will not know whether an investment is good
for you. They will only be bothered about their profits. If
they are suggesting something, then you should do your
own research before investing in the stock. The same
extends to emails that you might receive through certain
sources. These emails are spam and meant to dupe you.
So, don’t make the mistake of trusting everything that
you read.
5. Message Boards

You have to not care about message boards. These will

be available on the Internet and are mostly meant to
help people gather information. But there will be
pumpers and bashers present there. Pumpers will force
people to buy a stock just to increase its value, and
bashers will force people to sell all their stocks just
because they want the value to go down. Both these
types are risky, as they will abandon the investors just as
soon as their motive is fulfilled. So, you have to be quite
careful with it.

6. Calculate Wrong

Some people make the mistake of calculating wrong.

They will not be adept at math and will end up with
wrong figures. This is a potential danger to all those
looking to increase their wealth potential.
If you are not good at calculating, then download an app
that will do it for you or carry a calculator around to do
the correct calculations. The reason is to make the right
calculations and increase your wealth potential.

7. Copy Strategies
Do not make the mistake of copying someone else’s
strategies. You have to come up with something that is
your own and not borrowed from someone else. If you
end up borrowing, then you will not be able to attain the
desired results. You have to sit with your broker and
come up with a custom strategy that you can employ
and win big.
These form the different “don't” of the stock market that
will help you keep troubles at bay.
8. The Main Tools Used in Trading

Just like starting any other business or profession, you

need a few important tools to begin day trading.
Basically, you need a broker and a platform to execute
your orders. These are the tools that you will certainly
need to function as a day trader.
As explained, you also need a stock scanner to help you
find a watch list and look for potential setups in real-
time. On top of a stock scanner, it is ideal to be part of a
trading community.
For you to carry out day trading successfully, there are
several tools that you need. Some of these tools are
freely available, while others must be purchased. Modern
trading is not like the traditional version. This means that
you need to get online to access day trading
opportunities.
Therefore, the number one tool you need is a laptop or
computer with an internet connection. The computer you
use must have sufficient memory for it to process your
requests fast enough. If your computer keeps crashing or
stalling all the time, you will miss out on some lucrative
opportunities. There are trading platforms that need a lot
of memory to work, and you must always take this into
consideration.
Your internet connection must also be fast enough. This
will ensure that your trading platform loads in real-time.
Ensure that you get an internet speed that processes
data instantaneously to avoid experiencing any data lag.
Due to some outages that occur with most internet
providers, you may also need to invest in a backup
internet device such as a smartphone hotspot or
modem.

9. Market Data and Trading Platform

You can be successful in your trades if you know how to

execute your trades in a jiffy. You must be able to move in
and out of the trades easily.
It can be a challenge to perform trades fast enough if your
broker doesn’t use a platform or software
with hotkeys.
You need to make fast decisions so you can make extra
dollars when the stock suddenly spikes. If the stock
rises, you need to be able to place money in your
account and make money from it fast. You certainly don’t
want to be bumbling with your orders. You need fast
executions, which is why you really need to use a good
broker as well as a platform for quick order execution.

10. Stocks Scanner and Watch List

One of the common concerns among new traders is that

they do not know the stocks to trade. Every day,
thousands of stocks move in the market. However,
looking for a setup that is an excellent fit for your risk
tolerance and consistent with your day trading strategy
can be difficult.
You need to use a scanner to browse the
market and look for good trades. The most
popular stock scanners for day traders are
the following:
Stock Rover
Cartmill
Finviz
Stock Fetcher

Community of Traders
Even though day trading can be really exciting, it is also
quite tricky and can be emotionally overwhelming.
It is best to join a community of retail traders and ask
them questions. Consult them whenever necessary,
learn new strategies, and receive some expert insights
and alerts about the stock market. But don’t forget that
you also need to contribute to the community.
You can also talk to each other and share screens and
platforms so you can watch each other as you trade. It
can be a fun, interactive environment, and you can learn
from each other. Through this, you can gain more
knowledge and experience in day trading.
You will meet experienced traders in an online
community from whom you can learn much, and you can
also help other newbie traders in exploring this lucrative
business.
If you join an online community, you will see that other
day traders lose money often. It can make you feel good
to see that losing trades is quite common in this area,
and everyone, including seasoned traders, still loses
money in the process.
Bear in mind that you need to be an independent
thinker. Basically, people may change when they join
groups. They become more impulsive and unquestioning,
nervously looking for a leader whose trades they can
mimic. They respond with the crowd rather than using
their own minds.
Members of the online community may be influenced by
some trends, but they could lose a lot of money if the
trends suddenly reverse. Don’t forget that successful
traders are usually independent thinkers.
You must develop good judgment so you can decide when
to trade and when not to trade.
 Chapter 11. Designing Your
Trading Strategies

magine you just started your own business and

want to branch out into an entirely new market. What
do you do? First, you need a strategy. But where do
you start designing your trading strategies?

Where to Start?

The answer is to start looking for the best site for your
research. You will then have a place to go back
whenever you want to re-do the research or go in a new
direction. Without this, all of your efforts are wasted;
you'll be starting from scratch each and every time.
However, with a choice location that contains all of your
accumulated data and notes in one spot, when you get
an idea, it's just a single step away from putting it into
action!

What Is the Best Site?

There are dozens of sites out there that present market
information in different ways. Finding the best one for
you will depend on what information you want and how
it's presented. Find the best site for you by focusing on
the following:
All of the data you're interested in is presented in an
easy-to-use format. Keep track of a lot of different
information? Make sure that you can get all of it
quickly and easily.
The site is well organized and its data is presented in
a clear manner. If everything isn't there, it's easy to
find what is missing and add it to your list of what's
needed.
The site has a good selection of tools for analyzing
the data, like charts, indicators, drawing tools, etc.
These can help you see the information and draw
conclusions that might not be obvious at first glance.
 The site is easy to use so you aren't wasting a lot of
time getting started. It should also have good
options for keeping your information private; you
don't want everyone else on the Web knowing what
your plans are!

What Broker Do I Use?

Your broker is just as important as your research site, if

not more so. If you open an account with the wrong one,
the problems probably won't stop at just trading issues
either. Here's an introduction to some of the things that
you need to find out about any broker before
committing:
Regulation. You need to know if your broker is
regulated by any of the banking or regulatory
agencies in your country. This shows that they have
to follow strict guidelines and provide assistance to
you when you have a problem.
Regulation compliance. If they aren't regulated, it
doesn't mean that they can't be trustworthy. Just
make sure that their registration is current and
contact them to see what kind of assistance they
provide for new traders.
Licensing status. If asked for proof of licensure,
the firm should be able to confirm it immediately
and without any trouble whatsoever because it
should be on file with them as well as with the
financial authority where the firm is located.
The broker should have an active online
presence. This way you can contact them
whenever you need to instead of waiting for a
response during regular business hours.
Leverage. Make sure that your account has the
available leverage that you want. This will help make
trading easier and less costly when profits are made,
but it also has the opposite effect when losses are
suffered.
Fees and commissions. Brokers typically charge
either fees or commissions on every trade, or both,
so find out how much each one is. Also find out how
they handle any additional costs such as exchange
rates when international trades are made and extra
fees for electronic payments like credit cards or debit
cards, etc...
Binaries. Look at how the broker handles the buying
and selling of options, futures, and spot metals, and
other instruments. Sometimes there are restrictions
to what you can trade with one particular broker; it's
a good idea to find out which ones work best for
your needs, as well as costs.
Order flow. The order flow will show you how much
liquidity each broker has available at any given time
so that you don't have to worry about getting filled
or left out of a trade on your way up or down in a
market.
Risk/reward ratio. This is the amount of money
you can expect to make per unit of risk involved
when trading with the broker. The higher the
number, the better; anything above
1.00 is considered a good risk/reward ratio.
Deposit and withdrawal methods. Each broker
has its own method of handling deposits and
withdrawals; you need to find out what is available to
you so that there are no delays or surprises when you
either deposit money or want it back!
Online trading tools. Different brokers will offer
different things on their online trading platforms, so
you need to see what's available and how easy it is
to use. Some of these might include charting
 programs, research tools, or other things that help
with your analysis.
Trading restrictions. Some brokers are limited as
to which instruments or strategies you can trade.
This will vary and be based on your location, so look
for something that fits your needs.
Your research and broker will help you make sound
decisions when choosing to get involved in foreign
currency trading where you can plan and execute trades
more easily than ever before. Don't take any shortcuts
and don't settle for anything less than the best when it
comes to these 2 important aspects of Forex trading.
 Chapter 12. Structuring Your
Analysis Framework

What Is a Technical Analysis

Framework

ur technical analysis framework is our

personal set of rules and guidelines for analyzing
the market. Personal is a keyword here. What I’m
going to present to you is my personal guidelines
on how to structure a good framework, from that
you can take what works
for you and ignore what doesn't.

Here are the different components of my technical analysis

framework:

Trend analysis framework

Support and resistance framework
Secondary frameworks
Selecting timeframes
First, I like to create a trend analysis framework, this
gives me the ability to consistently determine the state
of the market. Every single time I open a chart, I will use
the same strategies to determine what the trend is
doing. Then, we're going to talk about creating a support
and resistance framework, when I select a level as a
support and resistance I want to be randomly assigning
value to it every single time. I want to be able to value
these levels in a consistent manner. Then, I’m going to go
over potential secondary frameworks you can use in
conjunction with the core trend analysis and support and
resistance frameworks I like to use. And then, finally,
we'll talk about selecting timeframes.
Structuring Your Trend Analysis
Framework

Step 1. Select Your Primary Tools

Moving averages – Which moving averages?

How many? Moving averages are one of my
favorite tools for analyzing trends and I did a very in-
depth lesson explaining how to use these tools so if
you wish to include moving averages in your trend
analysis framework you need to select which moving
averages you want to use and how many.
Candlestick analysis. Those of you who are a bit
more discretionary as traders may want to
incorporate candlestick analysis in your framework.
Fibonacci retracements. Fibonacci retracements
are very useful in conjunction with moving averages
and candlestick analysis.
Volume and open interest. Volume and open
interest can be useful tools as well.
Any other tool you enjoy using for trend
analysis. Finally, do not forget you can use any
other tool you enjoy using for trend analysis, even
ones I have not covered in this book. There is no right
or wrong way to do this, initially, we want to build
consistency above everything.

Step 2. Create Your Frameworks

Once we've chosen the tools we're going to use, we're
going to create the framework itself. In
example 1, I’m going to present to you a very simple
framework using only moving averages.

Example 1: Simple moving average framework. I’ll be

using MA20, MA50, and MA100.

I've selected 3 moving averages: the 20, the 50, and the
100. Now every single time I open the chart I will have a
consistent way of determining the market conditions. I
will know if the 20 is above the
50 and it's above the 100 that the trend is bullish. I'll
know if the 20 and 50 are crisscrossing or there isn't
much distance between them but they're both above the
100, the trend is a rather weak bullish trend, so bullish-
neutral bias. In an instance where the 20, the 50, and
the 100 are crisscrossing and there's no clear trend I’ll
know it's neutral. In an instance where the 20 and the 50
are crisscrossing below the 100, I’ll know there's a
bearish-neutral trend. And if the 100 is above the 50 and
the 20 is below the 50, I’ll know there is a strong bearish
trend. This would make it extremely easy for me to
record trades, it'll make it extremely easy for me to
backtest trades because it's consistent and I can do the
same thing every single time.
Now, let's take a slightly more complicated example. Say
your system is extremely sensitive to the current market
conditions, you may want to introduce more variables.
Example 2: Moving averages + Open interest framework.
I’ll be using the MA20, MA50, and MA100.

Last time we had 5 different market conditions. By adding

open interest alongside moving averages, we now have
10 different market conditions. When open interest is
confluent with our moving averages, we assign more
strength to the argument. I hope you can see how this
framework allows us to be consistent.
Here are a few more possible combinations you can play
around with to decide which ones you want to use:
Moving Averages + Fibonacci (+ Open Interest/Volume)
Candlestick Analysis + Fibonacci (+ Open
Interest/Volume)
Moving Average + Candlestick Analysis
You can combine moving averages with the Fibonacci
retracement tool if you want even more complexity, add
open interest and volume on top of that. You can
combine candlestick analysis with the Fibonacci
retracement tool. You can even combine moving
averages with candlestick analysis. Your only limitations
are your creativity and your understanding of the tools
themselves.

Structuring Your Support and

Resistance Framework

This is going to be a bit more difficult than our trend

analysis framework because there is a lot more discretion
when it comes to this.

Step 1. Select your Value System

I like to go about a support and resistance framework by

creating a value system, so I use different things such as
the number of data points, quality of data points, the
length of time of an argument, psychological levels, and
you can use any other factors you deem important to
create a value system.
In an example now I’ll show you how this value system
would work in practice. We're going to
analyze the $9,500 to $9,300 support area marked out
over here:
First, we're going to calculate the number of data points.
I'm going to add one point for every data
point there is then I’m going to subtract one point for every
deviation.

Number of Data Points (Max 10)

• +1 for Data Point

-1 for Deviation

Let's look at the data points in the picture (8.1), we have

point (1) where it acted as a resistance before it flipped,
then we have points (2), (3), (4), (5), (6), and (7); seven
data points. I don't see any data points which disagree
with this level so no points are taken away for deviation.
That leaves us with +7 points for seven data points. Next,
quality of data points, I’m going to subtract 1 for a messy
point and I’m going to subtract 1 for weak context.

Quality of Data Points

-1 for Messy Point

-1 for Weak Context

(2) , (3), (4), (7), these 4 points are messy in my

opinion because these don't quite reach the support
area and the points (3) and (4), while they didn't close
below our region the wicks did go through. We're going
to subtract 4 points because they aren't clean data
points. Next, we're going to subtract some points for
weak context, if you remember it’s what happens after
we interact with our level, at points (a), (b), (c), (d) the
price is progressively getting lower and lower every
time. These data points are quite significant for me I’m
going to use my discretion, subtract an extra 1 point for
weak context. That puts us at -5. Next, the length of time
of an argument.

Length of Time of Argument (Max 3)

Discretionary point
I'm going to set the max for 3 points and it's going to be
discretionary. This support area is held for several
months, it's longer than the average support area I tend
to analyze so I’ll be giving 2 discretionary points for the
length of time of argument. That puts us at +2. Then
psychological levels.

Psychological Levels (Max 2)

Discretionary points

I don't see $9,500 and $9,300 as a key psychological

level, so I won't be adding any points for that. So, that
leaves us with a final score = 4/10. This is without a
doubt an area of support but it is below
average in strength. This is an example I’ve come up
with to show you guys how you can create a
value system. By this point in the book, hopefully, your
intuitive understanding of the data will let you create
your own value system and through this, we have a
consistent method of assigning value to our support and
resistance arguments.

Step 2. Select Your Confluence Indicators and

Assign a Value System to Them

Now that we have our base value system, we can expand

it a bit more. We can use certain indicators that can be
confluent with our support or resistance levels and
incorporate them as complementary parts of the value
system.
Moving averages
Fibonacci
Anything else you’d like to include

Step 3. Select your Invalidation and Break

Conditions

Now, we have our base value system, we need to

determine our invalidation and breaking conditions.
Under what conditions will we consider a support or
resistance level broken?
 1–2 candles close above your level?
Candle close with increasing open interest/volume?
Candle close and moving average cross?
Candle close and without a retrace greater than 0.238?

You can see now why there's a lot of work to be done in

this lesson. You need to sit down and create your own
framework and if you don't understand the tools well
enough to come up with your own then you're not ready
to create your framework yet. Do not build your trading
on a weak foundation, take the time to understand what
you're doing.
Next, under what conditions do you no longer consider a
support or resistance level significant? Will it be a failure
to retest after it's broken or would it be when your value
system drops to 0 so when your argument drops to 0 you
no longer consider that level significant?
Failure to retest after being broken?
When does the value system drop to 0?

I'm just giving you ideas here, the end result has to be
something you've come up with yourselves. With that,
you will have a framework for analyzing support and
resistance levels.

Secondary Frameworks
Let's cover some secondary frameworks you can use
alongside your primary ones. For those who wish to
complicate their analysis further. You could include a
framework using oscillators like the relative strength
index or Bollinger bands. You can use Elliott Wave theory
if that appeals to you. Some traders like to study
statistics on certain months of the year, days of the
week, or times of the day and incorporate that into their
systems. Also, if you're trading multiple similarly
behaving assets you should have a system for analyzing
liquidity to make sure the market has enough liquidity
for your orders.
Selecting Timeframes

Next, we're going to talk about selecting our time

frames. While this is important for our analysis
framework, it's something I’d like to cover in a lot more
detail in a future psychology book because your personal
psychology and lifestyle is a huge factor when deciding
which time frames to trade on.

Primary Timeframe

What type of trader do you want to be?

Day trader: 1 hour

Swing trader: 1 hour to 1 day

I've explained to you multiple times throughout this book

the difference between time frames, when you go to
higher timeframes data becomes more significant,
volatility decreases. At lower timeframes data is less
significant and volatility increases so you're going to
have a lot more opportunities on lower timeframes and
you're going to have a lot fewer opportunities on higher
time frames.
Personally, I like to trade on lower timeframes, I’ll get
into positions multiple times a day. I don't like waiting
extended periods of time for positions to close because I
cannot stop thinking about a position once I am in it.
This is why psychology is extremely important when
trying to select your time frame but for the purpose of
this book, you can select what timeframes you like based
on what type of trader you want to be. Do you want to be
a day trader and trade timeframes under 1 hour? Do you
want to be a swing trader trade timeframes from the 1
hour to say the 1 day or do you want to be an even
longer time frame trader and trade weekly and monthly
charts? That's up to you.
Experiment with both and decide which one you want to
use and then I'd recommend selecting 2 complementary
timeframes.
Complementary Timeframes

Higher timeframes for trend analysis

Lower timeframes for pinpointing support and
resistance invalidations/breaks

Now a higher timeframe can be extremely useful for

trend analysis and also pinpointing significant support
and resistance levels. Then you also want a lower
timeframe to complement this help and help pinpoint
support on resistance and validations and breaks.

Putting It All Together

Now, we put it all together, here's your checklist:

Analysis timeframes
Trend analysis
Support and resistance analysis
Secondary analysis

You want to select your analysis timeframes. You want to

have a trend analysis framework that you can perform on
these timeframes. You want to have a support and
resistance analysis framework. A value system in which
you can assess the importance of different support and
resistance levels and you can accompany this with any
secondary analysis tools you want and you will go
through this checklist every single time you analyze the
market. This is a complete technical analysis framework.
Once you have built your technical analysis framework,
congratulations! You have completed my technical
analysis foundation book. Your next task is to translate
your technical analysis framework into a trading system.
You will use your framework to come up with a
hypothesis for entry and exit strategies. You will then test
these in the markets and attach correct risk management
to them. Once your data shows that you are profitable
you can then enter the market with your strategy.
Components of a Trading System

Psychology: Without the metal framework to

execute your trades, even the best system in the
world is useless.
Risk management: Every system is vulnerable to
failure. A system will most likely be wiped out before
it can earn money if it does not have long-term risk
management.
Entry: The least important part of a system.
Choosing the best market circumstances to enter a
trade.
Exit: Exits are used to maximize winners and
minimize losses. Often overlooked and far more
important than specific entries.

Chapter 13. School of

Indicators

orex indicators are frequently used by

traders to increase their chances of profiting on the
foreign exchange market while trading. Indicators,
 like other types of data and analysis, can influence
trading decisions and serve as the foundation for
Forex trading strategies. By
analyzing historical market behavior and patterns,
traders may be able to use the best Forex indicators to
forecast how the market will behave in the future and,
consequently, which trades are likely to be profitable.
What are currency market indicators? Before trading on a
platform, Forex traders analyze a variety of data points to
determine how the market is performing and how it is
likely to change in the future. Traders should be able to
employ more effective trading strategies and earn a
higher return with detailed market analysis.
Indicators for Forex trading are one method of examining
market data. Indicators use historical data, such as
currency prices, volume, and market performance, to
forecast how the market will
behave in the future and which patterns are likely to
repeat. Once traders have access to this information, they
can make more informed trading decisions and potentially
earn a higher return.
There are numerous different types of Forex indicators,
and it's beneficial to understand what each one does
before trading. The most frequently used Forex
indicators are as follows:
Trend indicators:

Average directional indicators

Moving averages

Parabolic
Momentum
indicators:
Relative strength index
Moving average
convergence divergence
Volatility indicators:
Bollinger Band strategy
Average true range
Volume indicators

With so many different types of Forex indicators

available, you may be unsure where to begin. This book
can assist you in mastering the more technical aspects
of trading. The best Forex indicators operate on the
premise that historical patterns are likely to repeat
themselves when similar circumstances arise. Rather
than viewing the foreign exchange market as a random
series of events, Forex indicators look for patterns in the
market's specific behavior.
If a currency fell immediately following a political crisis,
for example, this could have occurred as a result of
repeated episodes of political instability. If this is the
case, Forex indicators will record this information and
use it to forecast whether or not the same behavior will
occur in the future. By
gaining access to this data, traders can gain insight into
the factors that influence currency prices and the market
as a whole and trade accordingly.
Forex indicators can be used to:

Conduct technical analyses

Contribute to risk minimization
Establish a foundation for your trading strategies

Is it necessary to use Forex indicators? Technical

instruments and sophisticated data are not only for
seasoned traders and professional analysts. Indeed,
indicators serve as a means of simplifying extremely
complex and voluminous data, and anyone can benefit
from their use. These indicators are an integral part of
forex traders' daily routines while trading and play a
significant role in their decision-making process. The
more knowledge you have about the market, its
operation, and the variables that influence it, the more
informed you will be. By making trading decisions based
on historical market activity and informing your trading
strategy with previous currency patterns, you can
increase your returns and profits.
How do you gain access to foreign exchange trading
indicators? With so many indicators available, it can be
difficult to determine which indicator is the best or most
important for your trading needs. While a variety of
indicators can be used to examine market behavior and
forecast future market events, you may not want to use
every Forex indicator when you first begin. By working
with the best Forex broker, you can ensure that you have
access to a variety of resources, including Forex
indicators, Forex signals, and a Forex calendar. When
you use multiple tools to develop a trading strategy, you
take into account more variables, which may provide you
with a more accurate picture of how the market will
perform.
Access to Forex indicators is critical to trading success,
so you'll want to ensure that your chosen broker offers
in-depth market analysis and a variety of tools.
Similarly, you may wish to choose a
broker that offers a variety of potentially beneficial
trading features, such as Forex signals and the best
Forex trading app.
Along with access to Forex indicators and market data,
the best Forex broker for you may offer Forex glossaries,
coaching, and curated investments, as well as support
during both Forex trading hours and non-trading hours.
Forex technical indicators are classified into 4 broad
categories: trend, momentum, volatility, and volume,
and are used to generate a technical analysis of the
foreign exchange market. Technical indicators make
quick calculations and then plot the results on a
convenient graph. You can avoid time-consuming,
complex mathematical calculations by utilizing these
technical indicators, such as the moving average
convergence divergence indicator, the relative strength
index, or the Bollinger Bands.
Forex technical indicators generate simple-to-understand
data that serves as a great visual guideline for past
trends and potential future market activity, making it
easier for traders to take action.

Choosing Indicators and Brokers for

Forex

Choosing the right Forex indicators is just as critical as

choosing the right broker. By incorporating various
indicators into your trading strategy, you can increase
your chances of success, and by carefully selecting Forex
indicators and brokers, you can practice risk
management and maximize your potential returns. For
instance, choose a broker that offers all the tools and
functionalities you require.
PayPal Forex brokers may make it simple to fund your
account, and brokers that offer 24-hour support may
provide you with the reassurance you require when you
begin trading. Many people want to know what Forex
leading indicators are, as they can appear quite
complicated at first glance. However, the rationale for
using Forex indicators is quite straightforward. Prior to
making any trading decisions or transactions, you should
gather as much information as possible. Knowing
which events impacted the market in the past and the
magnitude of their impact can aid in forecasting future
market behavior. If you have a crystal-clear picture of
what will happen to currency prices and the FX market in
general, you should have a better chance of selecting
the optimal entry and exit points and executing
profitable trades.

Moving Averages

Moving averages are a widely used technical indicator in

the Forex market. As popular as moving averages are,
one question remains at the top of the list for the
majority of traders—"How to make the most of moving
averages?"
We will discuss what moving averages are and how to
use them effectively. Additionally, we will discuss some
of the drawbacks to moving averages that all traders
should consider before incorporating them into their
trading strategy.
Let’s begin with answering the question, what is a
moving average calculator?

To begin, it's worth noting that the moving average is a

lagging indicator. This indicates that it is based on
previous price movements. Moving averages are
classified into 2 types: simple moving averages (SMA)
and exponential moving averages (EMA). The simple
moving average, as the name implies, is a simple
average of a currency pair's movement over time. On
the other hand, the exponential moving average gives
greater weight to recent price action.
I prefer exponential over simply because I believe it
provides a more accurate picture of what is occurring
rather than what has occurred.
Moving averages can be used in a variety of ways, but
the 3 methods below are my personal favorites. Because
the moving average is a lagging indicator, it should
always be used in conjunction with other price action
patterns and signals to help you improve your odds.
Analyze Trends

Moving averages are arguably the most frequently used

indicator for trend analysis. There are numerous moving
average combinations that a trader can use to analyze a
trend, but my favorite is the 10 EMA and the 20 EMA.
As is the case with the majority of things in the Forex
market, using moving averages to analyze trends is not
an exact science. Nor is it something on which you want
to rely solely. However, when used properly, these 2
moving averages can significantly simplify the process of
identifying a trend. Consider the following example.

Observe how we are only looking for buying opportunities

in the AUDUSD daily chart above when the 10 EMA is
above the 20 EMA. Because the 10 EMA is more closely
related to price action than the 20 EMA, when it is on
top, it indicates that the market is in an uptrend.
On the other hand, when the 10 EMA is below the 20 EMA,
we want to look for selling opportunities only, as this
frequently indicates the start of a downtrend.
Support and Resistance in Dynamic Modes

Additionally, these 2 moving averages can act as

dynamic support and resistance. Several moving
averages carry more weight in the market than others,
including the 10 and 20 period moving averages. The
following is a list of the 5 most frequently used moving
averages by Forex traders:
10
20
50
100
200

Due to the frequency with which the periods above are

used, the market tends to respect them more than
others. That is why support and resistance levels work in
the market—if a sufficient number of traders use the
same level to buy or sell a market, the market is likely to
react accordingly. Consider the 10 and 20 EMAs as
dynamic resistance levels during a downtrend.
Take note of how the 10 EMA began to act as dynamic
resistance once it crossed below the 20 EMA. When
combined with a price action sell signal, this type of
dynamic resistance can be extremely powerful.
Identifying Excessively Extended Markets

Finally, but certainly not least, moving averages can be

used to determine whether a market is overextended.
Forex traders frequently make the error of buying or
selling too late. We want to avoid investing in
overbought markets, and moving averages can assist us
in determining whether this is the case.
It's worth noting that this method is complementary to
the use of moving averages as dynamic support and
resistance. This is an illustration of how to use moving
averages to avoid selling into an overbought market.

On the daily chart of the NZDJPY, the market made 2

extended declines away from the 10 and 20 EMAs. As
price action traders, our objective is to avoid entering a
market that has moved significantly away from our
moving averages. Rather than that, we'd like to wait for
the market to normalize and return to its moving
averages before looking for a sell signal to join the trend.

Relative Strength Indicators (RSI)

Additionally, we'll discuss RSI trendlines and how to
trade the RSI with various strategies such as the RSI 2
Period Divergence and more. I'll then assist you in
identifying additional indicators to pair with the RSI
indicator in order to enhance your trading performance.
How to Trade the Relative Strength Index (RSI)
Indicator

Before we discuss the best strategies and settings for

day trading and intraday trading with the RSI indicator,
we should review some fundamentals. Technical analysis
is a technique for predicting future market trends and
price movements by studying historical market charts
and comparing them to current charts. Technical analysis
is concerned with what has occurred in the market and
what may occur in the future. It takes the price of
security into account and generates charts for use as the
primary tool.
One significant advantage of technical analysis is that
skilled analysts can monitor multiple markets and market
instruments concurrently. Before delving into the details
of the RSI indicator, it is necessary to review 3
fundamental principles of technical analysis:
The trend is your friend. Technical analysis is used to
identify market behavior patterns that have been
recognized as significant for a long period.
There is a high probability that many given patterns
will produce the expected results. Additionally, there
are recognized patterns that are consistently
repeated.
History tends to repeat itself. For more than a
century, Forex chart patterns have been recognized
and classified, and the frequency with which many
 patterns recur suggests that human psychology has
remained relatively stable over time. Price Action
offers substantial savings on everything.
This means that the current price reflects everything the
market is aware of that could affect it, such as supply and
demand, political factors, and market sentiment.
Technical analysts, on the other hand, are only
interested in price movements and not the reasons for
any potential changes.
RSI—the Relative Strength Index Indicator—is one of the
indicators heavily used in technical analysis. Due to the
strength of its formula and the possibility of utilizing RSI
divergence, RSI indicator trading has grown in popularity.
What Is the Relative Strength Index (RSI)?

The RSI calculates the ratio of upward to downward

movement and normalizes the result to a range of 0–100.
J. Welles Wilder invented it. The security is considered if
the RSI is greater than 70. An RSI of less than 30 is
interpreted as indicating that the instrument may be
oversold (a situation in which prices have fallen more
than the market expectations).
Contrary to popular belief, the relative strength index
(RSI) is a leading indicator. 2 equations must be solved to
calculate the RSI indicator. The first component equation
determines the initial Relative Strength (RS) value, which
is defined as the ratio of the average “Up” closes to the
average “Down” closes over “N” periods, as illustrated in
the following RSI formula example:
RS = Average of “N” day's positive closes / Average of “N”
day's negative closes

The actual RSI value is determined by indexing the

indicator to 100 using the RSI formula example below:
RSI = 100 - (100 / 1 + RS).

How to trade the RSI in the short term. Many traders find
that employing the RSI indicator in their day trading
strategy is extremely beneficial. The default RSI period
setting is 14, which is suitable for most traders,
especially swing traders. However, some intraday
traders use a different setting when trading the RSI
indicator. They dislike the 14-setting because it produces
infrequent trading signals. As a result, some traders
choose to reduce their time frame, while others choose
to decrease the RSI period to increase the oscillator's
sensitivity.
Generally, intraday traders (day traders) frequently use
lower settings with periods ranging from 9–11 hours.
Swing traders who trade on a medium-term basis
frequently use the default period setting of 14. Longer-
term position traders frequently set it to a higher period,
between 20 and 30 days. Which settings to use when
trading with the RSI indicator depends on your trading
strategy.
Setting the RSI Indicator for an Intraday Trading
Strategy

Determine the most effective settings for your trading

style by determining the amount of noise you are willing
to process with the data you receive. Keep in mind that
as you acquire experience with this indicator, regardless
of the level you select, your ability to detect trustworthy
signals will increase.
In the case of day trading and intraday trading with the
RSI indicator, you will be making short- term trades.
Traders frequently choose lower settings for all variables
in this environment due to the earlier signals generated.
As previously stated, short-term intraday traders
typically trade with lower settings and periods ranging
from 9–11.

Trading Strategies Using the RSI Indicator

You have now mastered the RSI indicator. However, you

must understand how to use the RSI indicator effectively.
It is now time to examine how to trade the RSI. The
following are some examples of RSI indicator settings
that can be used in conjunction with various trading
strategies:

Levels of RSI and OBOS

With this strategy, you can predict when the price will
bounce off the trendline, indicating an entry opportunity.
If the RSI drops below 30, the market is oversold and
may rise. A buy trade can be entered once the reversal is
confirmed. If the RSI exceeds 70, the market is
overbought and the price may soon fall. After
confirmation of the reversal, sell. Bullish (upper) and
bearish (lower) zones meet at the RSI 50 level. If the RSI
is above 50, the trend is up. If it is below, the trend is
down.
RSI 2-Period Divergence

This strategy is also known as an RSI 14 trading strategy.

Compare the 5-period RSI to the default 14 period RSI.
When using the RSI 14 trading strategy, the market may
not reach oversold or overbought levels before turning.
With a shorter period RSI, reversals can be detected
earlier. When the RSI 5 exceeds the RSI 14, prices are
rising. When the 5-period (blue) is oversold, a buy signal
is generated, and a 5 vs. 14 cross should occur (below
30). When the RSI 5 falls below and then becomes equal
to the RSI 14, it indicates that recent prices are declining.
This is a signal to sell. When the 5-period (blue) is
overbought, a 5 vs. 14 cross should occur (above 80).
Experienced traders may find that combining an RSI
trading strategy with Pivot Points significantly improves
their trading performance.
Trend Lines of the RSI

Trade the trendline break on the RSI chart. Create an RSI

uptrend line by connecting 3 or more points on the rising
RSI line. A trendline is formed when 3 or more points on
the RSI line fall together. Price trends may continue or
reverse after an RSI trendline break. Remember that an
RSI trendline break typically occurs before a price chart
trendline break, providing an early warning and trading
opportunity.

Divergence of the RSI Classic

RSI bearish divergence occurs when the price makes a

higher high while the RSI falls and makes a lower high.
RSI divergence typically forms at the peak of a bullish
market, and this is referred to as a reversal pattern.
When the RSI divergence forms, traders anticipate a
reversal. It is a forewarning of impending reversal, as it
appears in several candlesticks before the uptrend
reverses and breaks below its support line.
When the price makes a lower low and the RSI makes a
higher low, this is known as a bullish RSI divergence.
This is a signal that the trend may be changing from
down to up.
The RSI divergence indicator is frequently used in
technical analysis of the Forex market. Certain traders
prefer to trade RSI divergence on higher time frames
(H4, Daily). You can use these strategies to generate a
variety of RSI indicator buy and sell signals.
Stochastic Indicators

I'm constantly amazed at how few traders truly

understand the indicators they're using. Or, even worse,
many traders misuse their indicators because they never
took the time to learn them.

What Is a Stochastic Indicator (Stochastic)?

The Stochastic indicator provides insight into the

momentum and strength of a trend. As we will see
shortly, the indicator analyzes price movements and
informs us of their speed and strength. George Lane, the
inventor of the Stochastic indicator, stated that
Stochastics is used to determine the price's momentum.
Consider a rocket ascending into the air—before it can
turn down, it must first slow down. Momentum always
shifts in the opposite direction of price.

What Exactly Is Momentum?

Before we begin using Stochastic, it is necessary to
understand what momentum is. Momentum is the rate
at which the price of a security increases. I've always
been a fan of delving into how an indicator analyzes
price, and without getting too technical, this is how the
indicator analyzes price:
The Stochastic indicator analyzes a price range over a
specified period or number of price candles; the
Stochastic indicator is typically set to 5–14 periods/price
candles. This means that the Stochastic
indicator compares the period's absolute high and low to
the closing price. We'll see how this works with the
following 2 examples. I've chosen a 5-period Stochastic,
which means that the Stochastic will only look at the
previous 5 candlesticks.
When the Stochastic indicator is high, it indicates that
the price closed near the top of the range for a specified
time period or number of price candles.

The graph indicates that the low was $60, the high was
$100 (a $40 range), and the price closed almost exactly
at the top, at $95. The Stochastic indicator is at 88%,
indicating that the price closed only 12% (100% - 88%)
below the absolute top.
How to calculate a high Stochastic:

The 5 candles' lowest low: $ 60.

The 5 candles' highest point: $ 100.
 The previous candle's close: $95

The Stochastic indicator's value is [(95 - 60) / (100 - 60)]

88% x 100
As you can see, the high Stochastic indicates that the
price was extremely strong over the previous 5 candles
and that recent candles are pushing higher. In contrast,
a low Stochastic value indicates that the downside
momentum is strong. As shown in the graph, the price
closed only $5 above the range's low of $50.

Calculate the Stochastic

The 5 candles' lowest low: $ 50.

The 5 candles' highest point: $ 80.
The previous candle's close: $55
The stochastic indicator's value is [(55 – 50) / (80 – 50)]
* 100 = 17%

Stochastic of 17% indicates that price closed only 17%

above the range low, indicating that downside
momentum is very strong.
Stochastic Signal

Finally, I'd like to outline the most frequently used

signals and strategies for traders to employ the
Stochastic indicator:
When the Stochastic suddenly accelerates in one
direction and the 2 Stochastic bands widen, this can
indicate the start of a new trend. Even better if you can
also identify a breakout from a sideways range.

Following the trend: As long as the Stochastic

remains crossed in one direction, the trend is still
valid. When the Stochastic oscillates between
oversold and overbought levels, avoid fighting the
trend and instead attempt to hold onto your trades
and ride the trend.
Strong trends: At this point, the Stochastic is in the
overbought/oversold area, at this point try to stick to
the trend.

Trend reversals: When the Stochastic oscillates in

a new direction and moves away from the
overbought/oversold areas, this may indicate a trend
reversal. As we shall see, the Stochastic can also be
used effectively in conjunction with a moving
average or trendlines. In order to identify a bullish
reversal, the green Stochastic line must cross above
the red one and exit the overbought-oversold area.
Divergences: As with any momentum indicator,
divergences can be a critical signal, in this case,
indicating potential trend reversals or, at the very
least, the end of a trend.
Using the Stochastic in Conjunction with Other
Tools

As with any other trading concept or tool, the Stochastic

indicator should not be used in isolation. To obtain
meaningful signals and to enhance the quality of your
trades, you can combine the Stochastic indicator with
the following 3 tools:
Moving averages: They are an excellent addition
to this strategy because they act as filters for your
signals. Always trade in the direction of your moving
averages and look for longs only when the price is
above the moving average and vice versa.

Price formations: As a breakout or reversal trader,

you should search for wedges, triangles, and
rectangles. It may suggest a good breakout if the
price breaks out of this pattern with an accelerating
Stochastic.
 Trendlines: Stochastic divergence and reversal, in
particular, can be traded effectively with trendlines.
You must first identify an established trend with a
valid trendline and then wait for the price to break it
with Stochastic confirmation.

While you may not require the Stochastic indicator if you

are able to read the momentum of your charts simply by
looking at the candles, it certainly does not hurt to have
it on your charts if the Stochastic is your preferred tool
(this goes without a judgment whether the Stochastic is
useful or not).
Additionally, traders share a great deal of incorrect
information, and even widely used tools such as the
Stochastic indicator are frequently misinterpreted by the
majority of traders. Do not believe everything you hear;
conduct your own research and expand your trading
knowledge.
Bollinger Bands

Bollinger Bands are envelopes drawn at a standard

deviation above and below the price's simple moving
average. Because the bands' distances are based on
standard deviation, they adjust to changes in the
underlying price's volatility.
These bands are defined by period and standard
deviation (StdDev). The default values for a period and
standard deviation are 20 and 2, respectively.
Bollinger Bands assist in determining whether prices are
relatively high or low. They are used in pairs, with upper
and lower bands, and with a moving average.
Additionally, the pair of bands is not intended to be used
independently. Utilize the pair to validate signals
generated by other indicators.

The likelihood of a significant price movement in either

direction increases when the bands compress during a
time of low volatility. Volatility rises when the bands grow
exceptionally wide apart, and any current trend may
come to an end. Prices have a tendency to bounce
around within the bands' envelopes, touching one and
then going to the other. These fluctuations can be
utilized to help locate possible profit targets. The upper
band becomes the profit objective if the price rebounds
off the lower band and subsequently crosses above the
moving average.
Price can stretch beyond or hug the band envelope for
lengthy periods of time during strong trends. When a
momentum oscillator reveals divergence, you may want
to do further study to see if taking extra profits is a good
idea for you. A significant trend continuation is
anticipated if the price breaks out of the bands. If prices
quickly return back within the range, however, the
indicated strength is lost.
Calculate a simple moving average first. Calculate the
standard deviation across the same number of periods as
the simple moving average. For the upper band, multiply
the moving average by the standard deviation. The lower
band is obtained by subtracting the standard deviation
from the moving average. Typical values include the
following:
In the short term: We use a 10-day moving
average with bands of 1.5 standard deviations. (1.5
times the standard deviation plus or minus the SMA).
In the medium term, a 20-day moving average with
bands of 2 standard deviations is used.
In the long term: 50-day moving average, 2.5-
standard deviation bands.

Moving Average Convergence

Divergence Indicator

The MACD formula is as follows:

 MACD Line: (12-day exponential moving average - 26-
day exponential moving average)
MACD Line's 9-day EMA serves as the signal line.
Histogram of MACD Lines: MACD Line - Signal Line

You're most likely thinking, "It's far too complicated, and

I have no idea what it means." Avoid fleeing. Because
I'm about to deconstruct the MACD formula into
manageable chunks that even a 10-year-old can
comprehend. That sounds reasonable? Then continue
reading...
 Step by Step De-Mystification of the MACD
Indicator

You may now be wondering: "What are the optimal

MACD settings?" To be honest, there is no optimal
setting because it does not exist. And for this book, I'm
going to use MACD's default settings. With that in mind,
let us dissect the MACD indicator (step by step). It'll be
simple, I assure you.

1. MACD Line

Simply subtract the 12-day EMA from the 26-day EMA

(you can find it on your charts with zero calculations).
Additionally, poof! This is the MACD Line. Here is an
illustration:

I told you it was simple, correct?

2. The Signal Line

This becomes even simpler. Simply divide the MACD

Line's historical value by nine. That's it; you now have
your Signal Line.
Assume you have a MACD Line with these values, a, b, c,
d, e, f, g, h, add the numbers together (which equals
45), and divide by nine. As a result, you'll obtain 45/9 =
5.
3. Histogram of the MACD

This is ridiculously simple (to the point of being comical).

Simply subtract the MACD Line's value from the Signal
Line.

That is the MACD Histogram for you. This is what I mean.

You may now be wondering, "So, which MACD indicator
settings are optimal?" There is no such thing as the
optimal MACD settings due to the market's constant
movement. What works best at the moment is unlikely to
continue to work in the future.
Thus, the critical point is not to optimize for the optimal
MACD indicator settings—such a thing does not exist.
Rather than that, you should understand the MACD
concept in order to apply it to your trading needs.

Frequently Made Errors: How NOT to Use the MACD

Indicator

Allow me to share 2 common errors traders make when

utilizing the MACD indicator. They are as follows:
MACD Crossover Trading

This technique may be effective in markets that are

strongly trending. However, bear in mind that the
markets spend the majority of their time in a range. This
implies that the MACD crossover will generate numerous
false signals, resulting in "death by a thousand cuts."

There are now more effective ways to employ the MACD

crossover (but more on that later).

MACD Histogram Misinterpretation

You're most likely thinking: "There is considerable

momentum behind the movement. It is time to
purchase!" Wrong! Because when such a move occurs, it
is frequently too late to enter, and the market will almost
certainly reverse. Rather than that, a better strategy is
to trade against the trend—and profit from the reversal.
How to Interpret the MACD Histogram and Spot
Momentum Reversals
When I first began trading, I enjoyed "chasing"
breakouts. The more bullish the candles, the more likely
it is that I will purchase the breakout. However, I was
hemorrhaging money from my account. That's when I
realized I'd entered my trades "late." I purchased when
the price was on the verge of reversing direction. This
resulted in an AHA moment.
I was curious. "What if I abandoned my pursuit of
breakouts?" "How about I took the other side of the
trade?" "What if I look for opportunities to short during
periods of strong bullish momentum?" It worked
significantly better! However, I had difficulty explaining
what strong momentum is to traders. So, this is where
the MACD histogram is useful.
Allow time for the price to enter the market structure
(like SR, trendline, etc.)
The MACD histogram demonstrates significant
momentum (you want to see a high peak/trough).
Prior to trading in the opposite direction, wait for price
rejection.
 Chapter 14. The Best Trades:
Putting It All Together

he market is linear—it can only go up or

down. When you plot it on a conventional chart with
time on the horizontal axis, you add a second
dimension, but the market itself is the only price,
which means that it has only one dimension. You
can make bull and bear
bodies have different colors, incorporate volume into the
widths of the bodies, or add all kinds of indicators,
increasing the number of dimensions, but the market
itself is one-dimensional. The recurring theme of these
books is that the market is basically simple. It moves up
or down because it is constantly searching for the best
price, which changes constantly because of unending
changes in countless fundamentals. The fundamentals
are anything that traders feel is important and include
data on every stock, the overall market, politics, natural
and manmade events from earthquakes to wars, and
international factors. This results in the market always
trying to break out from a trading range (its current area
of agreement on the value of the market) into a trend, as
it searches for the appropriate instantaneous value for
the market. If the breakout is to the upside, the bulls are
momentarily successfully asserting their opinion that the
market is too cheap. If there is instead a downside
breakout, then the bears at least briefly are winning their
argument that the market is too expensive. Every
breakout attempt is met by traders holding the opposite
belief, and they will try to make the breakout fail and the
market reverse. This is true on every time frame and on
every bar and series of bars. The trading range can be a
single bar or a hundred bars, and the breakout can last 1
bar or many bars. The key to trading is developing the
ability to assess whether the bulls or bears are stronger.
When a trader believes that the odds favor one side over
the other, they have an edge. The “odds” refers to the
trader’s equation. An edge (positive trader’s equation)
exists if the probability of trade reaching their profit
target before hitting their protective stop is greater than
the probability of the market hitting their stop before
reaching their target.
Having an edge allows them to make money by placing
a trade. Every type of market does something to make
trading difficult. The market is filled with very smart
people who are trying as hard to take money from your
account as you are trying to take money from theirs, so
nothing is ever easy. This even includes making profits in
a strong trend. When the market is trending strongly with
large trend bars, the risk is great because the protective
stop often belongs beyond the start of the spike. Also,
the spike grows quickly, and many traders are so
shocked by the size and speed of the breakout that they
are unable to quickly reduce their position size and
increase their stop size, and instead watch the trend
move rapidly as they hope for a pullback. Swing traders
are often uncomfortable entering on the spike because
they prefer trades where the reward is 2 or more times
the size of the risk. They are willing to miss a high-
probability trade where the reward is only equal to the
size of the risk.
Once the trend enters its channel phase, it always looks
like it is reversing. For example, in a bull trend, there will
be many reversal attempts, but almost all quickly evolve
into bull flags. Most bull channels will have weak buy
signal bars and the signals will force those bulls who
prefer stop entries to buy at the top of the weak
channel. This is a low-probability long trade, even
though the market is continuing up. Swing traders who
are comfortable taking low-probability buy setups near
the top of weak bull channels love this kind of price
action because they can make many times what they are
risking and this more than makes up for the relatively
low probability of success.
However, it is difficult for most traders to buy low-
probability setups near the top of a weak bull channel.
Traders who only want to take high-probability trades
often sit back and watch the trend grind higher for many
bars, because there may not be a high-probability entry
for 20 or more bars. The result is that they see the
market going up and want to be long, but miss the entire
trend. They only want a high-probability trade, like a high
2 pullback to the moving average. If they do not get an
acceptable pullback, they will continue to wait and miss
the trend. This is acceptable because traders should
always stay in their comfort zone. If they are only
comfortable taking high- probability stop entries, then
they are correct in waiting. The channel will not last
forever, and they
will soon find acceptable setups. Experienced traders
buy on limit orders around and below the lows of prior
bars, and they will sometimes take some short scalps
during the bull channel. Both can be high-probability
trades, including the shorts if there is a strong bear
reversal bar at a resistance level, and some reason to
think that a pullback is imminent.
Once the channel phase ends, the market enters a
trading range, where there are many strong bull spikes
that race to the top and strong bear spikes that race to
the bottom. Traders often focus on the strong spike and
assume that the breakout will succeed. They end up
buying high and selling low, which is the exact opposite
of what profitable traders do. Also, the reversals down
from the top and up from the bottom usually have weak
signal bars, and traders find it hard to take the entries
that they have to take if they expect to make money in a
trading range. Within a trading range, the probability for
most trades hovers around 50%, and only occasionally
gets to around 60%. This means that there are few high-
probability setups. Also, lots of low-probability events
happen, like reversals that don’t look good but still lead
to big swings and no follow-through after strong spikes.
All of this makes it sound impossible to make money as a
trader, but if you go back to each relevant section, you
will remember that there are profitable ways to trade the
market, no matter how it is behaving. Your edge is
always going to be small, but if you are a careful,
unemotional, and objective reader of the chart in front of
you, and only look to take the best trades, you are in a
position to make a living as a trader.
There are traders trading for every reason and on all
time frames at every second on every chart. What
generalities can be made about how discretionary
traders, whether institutional or individual, will trade a
bull trend? A bull trend begins with a breakout, which is
a spike up and can contain one or many bull trend bars.
If the breakout fails, the market will fall back into the
trading range, and traders will fade the breakout (it will
be a final flag reversal) and continue to trade the trading
range. When a breakout is strong and successful, most
discretionary traders will buy with a sense of urgency.
They will buy at the market, on small pullbacks, at the
close of the bar, and above each prior bar. Once the
market transitions into a channel, they will buy below
the low of the prior bar,
like below low 1 and low 2 signal bars, expecting reversal
attempts to fail (in a trend, most reversal attempts fail),
and above the high of the prior bar, like above high 1,
high 2, and triangle buy setups. They will then buy
pullbacks from the breakouts of these small bull flags.
They will even buy the first breakout of a bear
microchannel in a strong bull trend, knowing that there
might not be a breakout pullback setup until after the
market has rallied many bars.
Early on, when the trend is strong, they will buy on new
breakouts above prior swing highs, but as the 2-sided
trading (selling pressure) increases, as seen by more and
larger bear trend bars and more bars with tails on their
top, traders will begin to sell above prior swing highs.
Most will be selling to take profits on their longs, but as
the slope of the channel becomes flatter and the
pullbacks become deeper, more traders will start to
short above swing highs, looking for scalps.
When the 2-sided trading increases to the point that the
bears are about as strong as the bulls, traders will see
the market as having entered a trading range. This
means that they are much less certain that the trend will
resume on each rally attempt (they no longer are looking
for pullbacks in a strong bull trend, where the breakout
usually quickly tests the old high). They will buy low, sell
high, and most will scalp. They will look for high 1 and
high 2 buy setups near the top of the range and will short
above the signal bars, instead of buying up there. At
first, they will only look for scalps, like pullbacks to the
moving average, the bottom of the trading range, or the
bottom of the bull channel. Once they see increasing
selling pressure, they will begin to swing some and
eventually all of their shorts, and will only look to buy
deep pullbacks, lasting 10 or more bars and having 2 or
more legs.
After there have been one or more pullbacks where the
selling was strong enough to break below the trend line
and below the moving average, some bears will look to
short the test of the bull trend high, expecting a major
trend reversal. They will short a reversal setup at a lower
high, a double top, or a higher high, even though they
realize that the chance of a swing down might be 40% or
less. As long as the reward is much larger than the risk,
they have a positive trader’s equation, even though the
chance of success is relatively low. Bulls will buy
reasonable setups at the bottom of the
trading range, like on larger high 2 buy setups, wedge
bull flags, higher timeframe trend lines, and measured
move targets. Traders realize that a trading range is
simply a pullback on a higher timeframe chart. When the
spike and channel are steep on a 5-minute chart, they
together form a simple spike on a higher timeframe
chart, like a 15–60-minute chart. The trading range on
the 5- minute chart is usually just a pullback on a 15–60-
minute chart. When bulls buy near the bottom of a 5-
minute trading range, many will hold for a swing up, a
breakout to a new high, and a measured move up, even
though the probability may be less than 50%. This
relatively low-probability swing long has a positive
trader’s equation because the reward is much larger
than the risk.
While in the trading range phase, signals are often
unclear, and there is a sense of uncertainty. Most of the
signals will be micro double bottoms and tops, and small
final flag reversals. This is lower probability trading, and
traders have to be careful and quick to take profits
(scalp). They must force themselves to buy low and sell
high, not buy strong bull spikes near the top of the range
and short strong bear spikes near the bottom. Invariably,
the spikes look strong, but don’t overlook all of the bars
before them—in a trading range, most breakout
attempts fail. Once the market has entered a trading
range, if a leg is in a strong microchannel, lasting 4 or
more bars, don’t enter on the breakout. Wait to see if the
breakout is strong. If so, enter on the pullback from the
breakout. If there is a bear microchannel down to the
bottom of the range, wait for the bull breakout and look
to buy the pullback, whether it forms a higher low, a
micro double bottom, or a lower low. If there is a bull
microchannel up to the top of the range, wait to sell a
lower high, micro double top, or higher high pullback. As
with all trades, always make sure that there is an
appropriate signal bar.
If the market enters a tight trading range, wait for the
breakout, because tight trading ranges trump everything,
including every logical reason to take a trade. Using stop
entries in a tight trading range is a losing strategy, but
the setups always look worthwhile. Instead, patiently
wait for the breakout and then decide if it is likely to
succeed or fail.
If there is a successful breakout of the top of the entire
trading range, the process starts all over again. Traders
will see the breakout as a spike and they will look for at
least a measured move up.
If there is an upside breakout, but it fails and the market
reverses, traders will view the trading range as the final
flag in the bull trend. If there is then a breakout below
the trading range, traders will evaluate the strength of
the breakout, and if it is strong, they will repeat the
entire process in the opposite direction. The downside
breakout from the trading range can occur without first
having a failed upside breakout. Instead of a final flag
reversal, the trading range can be some other kind of
reversal setup, like a double top, a triple top, a head and
shoulders top, or a triangle. All that matters is that there
is a strong downside breakout, and traders will then
expect pullbacks and a bear channel to follow the bear
breakout, and then the market to evolve into a trading
range, which can be then followed by a bull or bear
breakout.

Examples of Best Trades

Opening reversals where the setup is strong

Swing for a reward that is at least twice the risk: The
probability of success is 50–60%.
Scalp for a reward that is at least as large as the risk:
The probability is about 60–70%.
Strong reversals, where the reward is at least twice the
risk and the probability is 50–60%.
Major trend reversal: Following a strong break of the
trend line, look for a weak trend resumption to fail
on a test of the trend’s extreme; the reversal signal
bar should be strong. After a bear trend, look to buy
a higher low, double bottom, or lower low. After a bull
trend, look to short a higher high, double top, or
lower high.
Strong final flag reversal after a swing up or down in a
trading range or weak channel.
Buying a third or fourth push down in a bear stairs
pattern for a test of the low of the prior push down.
Selling a third or fourth push-up in a bull stairs
pattern for a test of the high of the prior push-up.
Trading when the channel in a spike and channel
day or the breakout in a trending trading range day
reaches a measured move target and the move is
weakening.
 Buying a high 2 pullback to the moving average in a
bull trend.
Selling a low 2 pullback to the moving average in a
bear trend.
Buying a wedge bull flag pullback in a bull trend.
Selling a wedge bear flag pullback in a bear trend.
Buying a breakout pullback after a breakout from a
bull flag in a bull trend.
Selling a breakout pullback after a breakout from a
bear flag in a bear trend.
Buying a high 1 pullback in a strong bull spike in a
bull trend, but not after a strong buy climax.
Selling a low 1 pullback in a strong bear spike in a
bear trend, but not after a strong sell climax.
Shorting at the top of a trading range, especially if it
is a second entry.
Buying at the bottom of a trading range, especially if
it is a second entry.

Entering using limit orders requires more experience

reading charts because the traders are entering a market
that is going in the opposite direction to their trade.
Traders should only use the limit orders to trade in the
direction of the trend. For example, if a trader is thinking
about using a limit order to buy at the low of the prior
bar, they should only do so if the market is always in
long, or they think that it is likely to immediately switch
to always in long. They should never buy with the
intention of scalping the long and then shorting once the
low 2 sell setup forms if they believe that the market is
still always in short and is likely to have only one smaller
push-up. The probability of success is simply too low
when using limit orders to trade countertrend. The low
probability results in a losing trader’s equation and you
will lose money unless you are an exceptionally profitable
and experienced scalper.
Surprises in trends are usually in the direction of the
trend, so when you think that the low 1 in a bear trend is
weak and that the market should have one more push-
up, the odds are too great that it will not. However,
experienced traders can reliably use limit or market
orders with these potential best trade setups:
Buying a bull spike in a strong bull breakout at the
market or on a limit order at or below the low of the
prior bar (entering in spikes requires a wider stop
and the spike happens quickly; this combination is
difficult for many traders).
Selling a bear spike in a strong bear breakout at the
market or on a limit order at or above the high of the
prior bar (entering in spikes requires a wider stop
and the spike happens quickly; this combination is
difficult for many traders).
Buying at or below a low 1–2 weak signal bar on a
limit order in a possible new bull trend after a strong
reversal up or at the bottom of a trading range.
Shorting at or above a high 1–2 weak signal bar on a
limit order in a possible new bear trend after a strong
reversal down or at the top of a trading range.
Buying at or below the prior bar on a limit order in a
quiet bull flag at the moving average.
Shorting at or above the prior bar on a limit order in a
quiet bear flag at the moving average.
Buying below a bull bar that breaks above a bull flag,
anticipating a breakout pullback.
Selling above a bear bar that breaks below a bear flag,
anticipating a breakout pullback.
When trying for a swing in a bull trend, buying or
buying more on a breakout test, which is an attempt
to run breakeven stops from an earlier long entry.
When trying for a swing in a bear trend, selling or
selling more on a breakout test, which is an attempt
to hit breakeven stops from an earlier short entry.
Buying a pullback in a strong bull trend at a fixed
number of ticks down equal to or slightly less than
the average prior pullbacks.
Selling a pullback in a strong bear trend at a fixed
number of ticks up equal to or slightly less than the
average prior pullbacks.
When a bear trend is about to break into a bull trend
and needs one more bull trend bar to confirm the
always in reversal, and the breakout does not look
strong, sell the close of the bull breakout bar,
expecting the follow-through bar not to confirm the
always in flip and the bear trend to resume.
 When a bull trend is about to break into a bear trend
and needs one more bear trend bar to confirm the
always in reversal, and the breakout does not look
strong, buy the close of the bear breakout bar,
expecting the follow-through bar not to confirm the
always in flip and the bull trend to resume.

Top 10 Rules for Successful Trading

Here are some guidelines that beginners should consider

following until they are consistently profitable (at that
point, they can expand their repertoire):
1. Take a trade only where you are going for a reward
that is at least as large as your risk. When starting
out, focus on trades where the reward is at least
twice as large as the risk.
2. Take trades only if you think they probably will work.
Don’t even worry about how far the move might go.
You have to simply ask yourself if the setup looks
good. If so, you should assume that the probability is
at least 60%. With the potential reward at least as
large as the risk, this creates a positive trader’s
equation.
3. Enter only on stops.
4. Always have a protective stop in the market,
because belief and hope will not protect against a
 premise that is failing.
5. Have a profit-taking limit order in the market so that
you will not get greedy and watch your profit
disappear as you hope for more.
6. Buy only above bull bars and short below bear bars.
7. Trade only a small position size. If you think that you
can trade 300 shares, you should trade only 100
shares so that you are in “I don’t care” mode. This
will allow you to be more objective and less easily
swayed by emotions.
8. Look for only 3–5 reasonable trades a day. If in
doubt, stay out.
9. Look for simple strategies. If something is not clear,
wait.
 10. The best choices for a trader starting out are
trends that develop in the opening range, strong
trend reversals, and pullbacks in strong trends.

How Much Do You Buy or Sell?

Many traders try as much as possible to avoid the reality

of this question. This question clearly explains money
management. It’s quite critical to the success of a trader.
Let’s explain the concept better using an example:
Hypothetically, you’ve got a certain amount of cash, at
this point, you get to ask yourself the question of “how
much is best to trade?” being more practical, let’s say
you’ve $10,000, how much of this total amount would
you want to trade? Will you be smart to ask yourself this
question or you will just decide to trade all you’ve? If you
decide to trade all you’ve, what if you lose all $10,000?
Well, making the best decisions in this kind of situation
means investing only about 2% of your capital. 2% of
$10,000 means investing only $200. At the point of
making this decision, you might as well say to yourself
“What is the deal? I have got $10,000 why invest $200?
Isn’t that too small?” Well, that’s not the point.
 Conclusion

Technical analysis (TA) is a method of trading based on

patterns and trends that emerges from charting stocks
and other assets over time. These patterns form trends
which are then used to make predictions about stock
prices.
Technical traders do this through what are called
indicators. An indicator is a mathematical calculation
based on price and volume which generates a signal
which can be used to determine trends. Indicators are by
no means a modern invention but the use of indicators
such as the MACD is relatively new to mainstream
traders, having been developed in the 1960s.
This method of trading has become increasingly popular
as computers have become more advanced and more
people have started using them to look at charts and
make decisions about when they should buy/sell assets.
This is known as algorithmic trading where traders
program computer algorithms to automatically make
trades for them based on conditions they have specified
in their algorithm. Computer trading is also known as
high-frequency trading where traders use computer
algorithms to buy and sell assets within nanoseconds,
separated by fractions of a second.
Traders do this by using indicators on their charts in
order to decide when things are likely to change or
whether there will be a big change in direction at all.
These changes in direction can either be stops or targets
and these are decided based on how well the traders'
indicators are performing. Traders can then use the
information they have gained from this method to make
decisions about what to buy and how to sell, if at all.
The idea behind technical analysis is that the stronger
the asset's performance is over a longer time period, the
more likely it is to continue that movement for a little
while longer and vice versa. So, if an asset has been
going up for a long time, traders will want to take
advantage of what they think
will happen next and vice versa. Over time, this method
can make profits from the stock market if things pan out
as traders expect them to.
However, just because there is a strong uptrend in place
doesn't mean that this uptrend will end tomorrow.
Traders can take advantage of this by buying an asset
and selling it when its price reaches their target or stop
loss. Some traders may even wait until the price goes
higher, taking profit along the way. Technical analysis
does not guarantee that you will make a profit, though,
so traders need to be careful when they use it and must
expect to need to take losses if things do not go as
planned.
Technical analysis is also known as charting or technical
trading because traders rely on charts of assets in order
to make their decisions. These charts track changes in
prices over time and can give valuable information about
how well indicators are performing which can be used to
decide on targets or stops.
Technical analysis can also be used to help traders plan
for future events in the market such as news or a
company announcing its earnings. Technical traders
would then try to read through the news and understand
how it might affect the asset they are trading. This could
then be added to their charts and used as a reference for
what is likely to happen next. As a result of this, some
traders will chart up-to-date news events and use them
as indicators by which they will make their decisions
about what to buy or sell.
Technical analysis is not always successful, however. If a
trader's analysis is wrong or the asset moves in an
unexpected way, the price may move up and down
before moving back in the direction of the trader's
analysis. This can either cause a loss or make a trader
miss out on profits that they could get if they weren't
trading based on their analysis.
There are also many different indicators and ways to use
technical analysis which can cause traders problems such
as getting too caught up in the analysis rather than
trading. Trading is important because you need to move
fast when prices are changing, but you also need to
have a plan first so
you know what your next move will be when an
opportunity arises. There are so many different aspects
to trading that you need to have a plan for what your
next move will be before you start. Otherwise, it can be
hard to make good decisions.
 Glossary

AI/machine learning: Artificial intelligence or machine

learning is giving a computer the ability to reprogram
itself in the light of the information it has handled—
basically, to learn. Computers can be taught to
“recognize” chart patterns and will then refine their
definition of the pattern by the results.
Algorithm: An algorithm is a mathematical process, or
set of rules to be followed in a calculation. Algorithmic
trading uses a computer program that places trades
according to the rules that have been set.
AMA: Adaptive moving average: Different types include
KAMA, JAMA, and HMA, after their inventors Kaufman,
Jurik, and Hull. For technical analysis, they work in a
similar way to the normal moving averages and EMA.
Ascending Triangle: A formation where the highs and
lows form a triangle with the point on the top edge. The
price is expected to break out in an upwards direction.
ATR: Average true range: Average trading range, including
the averaging out of all gaps.

Backtesting: Running a test of a chart pattern against

historical data to see how often a given trade rule would
have been successful.
Bar: Shows the open, high, low, and closing price
(OHLC) of a stock for a given period in the form of a bar
(high/low) with 2 “tabs” showing the open and close.
Bear: Someone who thinks the market or a stock will go
down. They are “bearish,” that word also describes a chart
formation that is likely to lead to a downwards price move.
Behavioral economics: Looking at economics as the sum
total of individual actions, and bringing psychology to bear
on why participants in an economic market behave the way
they do.
Bollinger bands: Bands that are placed one standard
deviation above and below the moving average. They're
useful because they show the volatility of the price—how
much it's likely to swing.
Bond: A kind of security that pays a “coupon” at a given
rate of interest, issued by a government or corporation
to raise debt funding.
Breakaway gap: A movement through support or
resistance which is so strong that the stock “gaps”
through the line—that is, opening a trading session
above resistance, or below support, leaving a “gap” in
the price chart.
Breakout: When a price breaks through a support or
resistance line, or out of a chart pattern.

Bull: Someone who thinks the stock market or a

particular stock will go up. “Bullish” might describe such
a person or a chart formation that suggests the price will
go up.
Bull/bear ratio: A market indicator published each
week that shows the number of advisors who are bullish
against the number who are bearish.
Candlestick: An alternative to the bar, the candlestick
draws a box between the opening and closing prices, with
a “wick” or “shadow” to show the high and low of the
trading session. It is colored white/green if the price
went up, black/red if the price went down.
CBOE: Chicago Board Options Exchange, the largest US
options exchange.

Change momentum indicator: A technical indicator

that uses momentum to identify relative strength or
weakness in a market. Similar to the Stochastic indicator.
Channel: The band within which a stock is trading. In a
typical chart, if the stock is trading in a horizontal range,
you can draw one line joining all the “tops” and one line
joining all the “bottoms,” and this defines the channel.
Chart: A graphical representation of a stock's price
movement.

Close: The closing price of a trading session.

Confirmation bias: When we believe more strongly things
that happen to coincide with our existing beliefs.
Congestion: When a stock trades within a very narrow
range of prices, showing that buyers and sellers are evenly
balanced. It often happens after a major move in the share
price.
Consolidation: A stock or security that is neither
continuing nor reversing a larger price trend.

Continuation: When a chart pattern shows the share

price should break out in the same direction as the
existing trend.
Correction: When a share price falls because it has
become overbought, but the overall uptrend is not
broken.
Crossover line: when the price and an indicator (e.g., a
moving average) or 2 indicators (e.g., 2 moving averages)
cross each other.
Dead cat bounce: A sharp bounce within a major
downtrend. Often, a market crash has a dead cat bounce
that can look like recovery but very quickly fails.
Death cross: When the 50-day moving average crosses
below the 200-day MA. A bearish indicator.

Derivative: Any security whose price depends on that

of another security (e.g., an option, whose price depends
on the underlying share).
Descending triangle: A formation where the highs and
lows form a triangle with the point at the bottom. The
price is expected to break out in a downwards direction.
Dividend: Some shares make a cash payment to their
shareholders every quarter (usual in the USA), half-year
(in the UK), or sometimes, monthly. This is paid out of
the company's profits and is called the dividend.
Calculate the dividend as a percentage of the share price
and you have the dividend yield, which you can compare
with the bank interest rate—it's the money you will be
paid on your investment. But of course, in the case of
shares, the price can also move up or down,
whereas the cash in your bank account, if you put $100
in, stays $100—it's not going to turn into $50 or $125.
Donchian rule: Buying when a stock reaches a 4-week
high and selling when it reaches a 4-week low. The
Donchian rule relies on momentum—the idea that if the
stock has reached a 4-week high it has established an
uptrend that ought to continue.
Double bottom: A chart formation where the stock in a
downtrend hits a support line twice and bounces off it
both times; a breakout into an uptrend is likely.
Elliott Wave: The Elliott Wave principle attempts to
identify long-term “waves” based on investor behavior,
sometimes using the Fibonacci series.
EMA: Exponential moving average. This attempts to
refine the ordinary moving average by giving more
weight to more recent price moves.
ETF: An exchange-traded fund, also known as a
“tracker,” is a fund that replicates an index like the
S&P500, Russell 1000, or Dow Jones Industrial Average.
It's bought and sold like a normal stock, through a
broker, and the big ETFs have tight spreads and low
costs so they're a good way to trade the market.
Exhaustion gap: When a stock that has been rising fast
gaps down. This shows that the price is no longer being
driven by buyers—they are “exhausted.”
False breakout/fakeout: When a share price crosses a
resistance or support line, but then after a very small
movement reverses the move. It's easy to fall into a trap
here so make sure your stop- losses are good.
False signal: When a chart appears to be giving a
signal, but in fact, it's just “noise.” You can help avoid
false signals by checking the signal with a second
indicator.
Flag: A short-term rectangular trading channel running
in the opposite direction to the main trend. You are
looking for a signal when the price breaks out of the flag.
FTSE: The FTSE group runs a number of indexes, of which
the best known is the FTSE 100, the UK stock market's
biggest 100 stocks.
Fundamentals: The business realities behind the
share, such as its earnings, assets, brand names, and
operations.
Gap: When a share opens a trading session above or below
the previous session's closing price and leaves a gap visible
on the chart. This can be a strong signal.
Golden cross: 50-day moving average crossing above the
200-day MA. This is a bullish signal.

Guerrilla trading: Very short-term trading which aims

for a low profit on each trade but making multiple trades
within a trading session, often closing trades within just
a few minutes.
Head and shoulders: A chart formation that forms 3
“peaks” with the largest in the middle. It is generally
completed by a breakdown from the third peak, signaled
by the price closing below the “neckline” joining the
lowest prices in the series.
Heiken Ashi bar: Heiken Ashi takes candlesticks and
uses an averaging formula to attempt to remove the
“noise” from the chart, minimizing false signals.
HFT: High-frequency trading, using computerized orders
based on algorithms; can trade many times a second.
High: The highest price reached by a share during any
particular formation. Also, 52-week highs, which are
reported on financial news pages and websites.
Ichimoku indicators: This is a relatively new technique
we have not covered, which attempts to forecast
potential price ranges as “clouds.” It's based on
candlestick charting but tries to extrapolate it forwards.
Index: A “bundle” of shares created by mathematical
means (e.g., the S&P 500). The index reflects the
aggregate performance of all the component shares.
Indicator: An indicator is based on an arithmetic
manipulation of the raw price data. Examples would be a
moving average, RSI, Stochastic, or Price by Volume.
Island reversal: A candlestick pattern in which the
stock price creates an “island” top or bottom separated
by gaps from the “mainland” trends.
Kondratieff wave: Kondratieff waves are very, very
long-term waves. Personally, I am not willing to wait 40–
60 years to see if my trades work out. Many academic
economists don't believe in these waves, either.
Limit order: An order where you state a limit above
which you are unwilling to buy, or below which you are
unwilling to sell, a stock.
Linear regression line: The “line of best fit” allows all
data points to be equally distributed around the line.
Liquidity: The ease with which a given security can be
traded. More generally, the volume of trading in the
stock market.
Long: To “go long” is to buy and hold shares.

Low: The low point in any given price pattern or

formation. 52-week lows can be informative and are
found on financial websites alongside other basic price
information.
MACD: Moving average convergence divergence
indicator. It shows the relationship between 2 moving
averages and can show changes in the momentum of the
stock price.
Margin: If you trade on margin, you are borrowing
money from your broker to buy the stock. I do not advise
you do this. It is an easy way to ruin yourself.
Market indicators: These are used to forecast trends
for the market as a whole, such as the market breadth
index (the ratio between stocks which closed up, and
stocks that closed down).
Market order: An order to buy stock “at-the-market,”
that is, at the best price your broker can get.
Market timing: Trying to buy the market at the bottom
and sell at the top. An impossible dream. Good traders
are happy with getting 80% of the price action.
Maximum adverse excursion: The largest loss a single
trade can suffer while it is open.

MBar or momentum bar (constant range bar):

These charts, unlike conventional share price charts, do
not show time. A bar is created for each move of a given
amount, e.g., 10 cents. Some traders like these because
they cut out a lot of “noise.”
Mean reversion: The statistical likelihood that eventually
extreme values will revert to the mean.

Momentum: The rate of change in prices.

NASDAQ: The second US stock exchange. It is all-

electronic trading and has a higher percentage of tech
stocks than the New York Stock Exchange.
Noise to signal: “Signal” is what we are looking for,
something that tells us when a stock is going to go up or
down. “Noise” is all the other stuff. It's like listening to
old vinyl—the music is signal, the crackle and scratches
are “noise.”
NYSE: The New York Stock Exchange.

OBV: On balance volume, an indicator that shows up

volume and down volume, giving a feel for how much of
the trading volume relates to purchasers/bullish action
and how much to sellers/bearish action.
Open: The share price at the opening of a trading session.

Option: A derivative that gives you the right to buy a

share at a given price before a given date. It could
simply be a private agreement, but most options are
standardized and traded. Options are potentially useful
because (1) they give you leverage, going up or down
more than the share price, and (2) put options enable
you to trade downtrends and breakdowns.
Oscillator: An indicator that shows values oscillating in a
band between 2 extreme values, e.g., price acceleration
between 0–100. RSI, Chaikin, and ROC are all types of
oscillators.
Overbought/oversold: When a stock is “overbought,”
all the interested buyers have already bought it, and it is
exposed if any of them decide to sell. Indicators such as
RSI and OBV attempt to show when stocks are
overbought or oversold.
Pennant: A short-term triangular formation within a
defined up or downtrend. It is a continuation pattern,
meaning that you'd expect to see the price break out in
the same direction as the main trend.
Point-and-figure chart: These charts don't take
account of the passage of time but create columns of
price rises of a certain magnitude, reversing direction
when the price direction changes. So, if a stock price
went up to $10 every day for a week, and you had a $10
unit, you would end up with a column of 5 X's (or O's if
the price were to go down). They are not much used
these days, but the MBar is a more modern version of
the same idea.
Put/call ratio: The proportion between put and call
options purchased on a given day. It's a good way to
measure whether the market is bearish (more puts) or
bullish (more calls).
Pyramiding: Involves adding to a winning position as
the price moves in the desired direction. It can be a good
way to make more profit from a really strong breakout,
but the stop-loss for the whole position needs to be
reassessed to take account of the higher average
purchase price.
Quant: Basically any individual in the investment
community who bases their work on mathematics rather
than gut feel, fundamentals, philosophy, or hype.
Range contraction: When the range within which the
share price varies becomes smaller.

Range expansion: When the range within which the

share price varies becomes larger.

Range trading: Identifying the range within which the

share price trades, and aiming to buy towards the
bottom of the range and sell towards the top of it, again,
and again, and again.
Resistance: The concept that a stock will have a certain
price level that it has touched several times but never
exceeded, and that this forms a “resistance” to a move
upwards. Drawing a resistance line is often a useful way
of showing this.
Retracement: The amount that a stock “gives back” from
a rise (or fall) in the share price before the uptrend (or
downtrend) resumes.
Reversal: A change in the overall share price trend.

Risk appetite/risk aversion: A trader's desire to take

on more risk, or desire to avoid risk. Risk is a spectrum,
and not all traders have the same appetite for risk.
Risk reward ratio: The ratio between the risk you run and
the reward you expect. For an individual trade, the ratio
between the profit target and the stop-loss.
RSI: Relative strength index. An oscillator that displays
bullish and bearish price momentum.

Runaway gap: A gap in the direction of the trend, usually

associated with high volume. A bullish indicator.
Security: Any form of negotiable instrument representing
financial value (e.g., a stock, bond, or option).
Share: A security entitling the holder to a share in the
earnings and assets of a business.

Short: To “go short” is to sell shares you do not own. You

will consequently profit if the share price goes down, as
you can “cover your short” by buying the shares at a
lower price.
Slippage: When your order is executed for a worse price
than you expected.

SMA: Simple moving average. The average of the share’s

price over the last X time periods.
Spike: A sudden and large move in the share price.

Spread: When you buy stocks you pay a higher price

than you'd get if you sold—the difference is the “spread”
and it’s how market makers and specialists make their
money. Spread is one of the costs you need to allow for
as a trader.
Standard deviation: A measure of how far values differ
from the mean. For instance, a class of 10- year-olds
probably has a low standard deviation in height; they will
all be roughly as tall as each other. SD is one way to
measure the volatility of a share price.
Standard error channel: Parallel lines drawn
equidistant from the linear regression trend line to form
a channel.
Stochastic oscillator: An indicator that shows
momentum based on the price history of the asset.

Stop-limit order: An order which specifies a price at

which the order becomes valid, and a price limit after
which it is no longer valid, e.g., "Sell 100 IBM if the stock
price falls below 90 but not if it goes below 95." It's a
good way of entering a breakout or breakdown trade.
Stop-loss: The price at which you will close a trade if it
goes in the wrong direction. You should always set a
stop-loss at the same time as you make your original
trade.
Support: A line which the share price repeatedly hits and
then bounces. If a stock falls, it will usually stop at the
support line, either temporarily, or before returning to
higher levels. If a stock falls through the support line, it
may well fall all the way to the next support line.
Swing trader: Traders are aiming to make gains by
trading a stock and holding it for just a few days. They
almost always use technical analysis.
Technical analysis: Reading patterns in the movement
of the share price to ascertain the probability of the share
price behaving in a particular way in the future.
Tick bars: Tick bars show price movement only if there
has been a minimum number of trades.

Tracker: A fund that represents an index that is

automatically created and traded on a stock exchange
in the same way as a share.
Trailing stop: A stop-loss that is increased as the price of
the share goes up so that you can't lose all your gains.
Trend: The general movement in a share price, either
upwards, downwards, or sideways.
Trendline: A line that can be drawn to show the trend.

Triple top: Where the share price forms 3 peaks all

hitting the same resistance level. The third time, it is
likely to break downwards.
VIX index: An index that measures share price volatility.

Volatility: The amount of change in a share price. A

share price that tends to move 1% a day is much less
volatile than one that swings by 5–10% some days.
Volume: The amount of shares traded on a single day.

Wedge: A chart formation in which the share price

forms a wedge that is pointing up or down in the
opposite direction to the trend. The price should break
out in the direction of the trend.
Whipsaw: A sudden change in the direction of the share
price. Sometimes a whipsaw happens before a real
breakout, which can be deceptive.
WMA: Weighted moving average.
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