Sunday, 23 June 2013
Friday, 14 June 2013
Sunday, 9 June 2013
Sunday, 2 June 2013
Wednesday, 22 May 2013
Day Trading Strategies
Most Common Day Trading Strategies:
| Strategy | Description |
| Scalping | Scalping is one of the most popular strategies, which involves selling almost immediately after a trade becomes profitable. Here the price target is obviously just after profitability is attained. |
| Fading | Fading involves shorting stocks after rapid moves upwards. This is based on the assumption that (1) they are overbought, (2) early buyers are ready to begin taking profits and (3) existing buyers may be scared out. Although risky, this strategy can be extremely rewarding. Here the price target is when buyers begin stepping in again. |
| Daily Pivots | This strategy involves profiting from a stock's daily volatility. This is done by attempting to buy at the low of the day (LOD) and sell at the high of the day (HOD). Here the price target is simply at the next sign of a reversal, using the same patterns as above. |
| Momentum | This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. The other type will fade the price surge. Here the price target is when volume begins to decrease and bearish candles start appearing. |
Divergence Trading
Trading in the downtrend or reversals are considered as riskiest technique in Technical Analysis. But reversals can also be detected in a less risky way. Divergence is a very good technique to trade reversals in a less risky way and to pull out good chunk of money from trend reversals. Trend continuation can also be detected by Divergence.
When the price of an asset or security and an indicator index or other related asset move in opposite direction in the same range of time, then it is called divergence.
There are two types of divergence,
1. Regular Divergence
2. Hidden Divergence
3. Exaggerated Divergence
1. Regular Divergence:
This type of divergence detects trend reversals. Regular divergence can be Bullish or Bearish.When the price is creating Lower Low (LL) but indicator is creating Higher Low (HL) then it is Regular Bullish Divergence, indicates a strong possibility of trend reversal from downtrend to uptrend. It happens when a security or assets price is in downtrend but indicator is going upward as indicators have specific range for which it can not react with extreme falls so it react against the price trend which is a divergence.
Here is an example chart of Regular Bullish Divergence,
In the chart above, we can see that Price created Lower Low (LL) while indicator (MACD crossovers) created Higher Low (HL) which is a Regular Bullish Divergence. MACD bullish crossover after detecting divergence is a very good entry opportunity for buying.
When the price creates Higher High (HH) but indicator creates Lower High (LH) then it is Regular Bearish Divergence indicating trend reversal from uptrend to downtrend.
Here is an example chart of Regular Bearish Divergence,
In the chart above (BEXIMCO), price has created Higher High (HH) but MACD indicator created Lower High (LH) in its crossovers which is a Regular Bearish Divergence. After detecting divergence 2nd MACD bearish crossover can be treated as a strong sell signal.
2. Hidden Divergence:
Divergences not only detect a potential trend reversal but also the continuation of current trend. Hidden divergences can detect the continuation of the trend. When the price is making Higher Low (HL) but indicator is showing Lower Low (LL) then it is Hidden Bullish Divergence.
Here is an example chart of Hidden Bullish Divergence,
In the chart above, we can see that price created Higher Low (HL) while MACD indicator created Lower Low (LL) in its crossovers which is a Hidden Bullish Divergence which indicates that the uptrend will continue.When the price is making Lower High (LH) but indicator is showing Higher High (HH), then it is Hidden Bearish Divergence.
Here is an example chart of Hidden Bearish Divergence,
\
In the chart above, we can see that price created Lower High (LH) but MACD indicator created Higher High (HH) between its crossovers which is a Hidden Bearish Divergence, indicates that the downtrend will continue.
3. Exaggerated Divergence:
It is similar to Regular Divergence. The difference between these two divergences is, in Exaggerated Divergence price creates double tops/bottoms or Similar High/Low (SH/SL).Exaggerated Bullish Divergence occurs, when the price is creating double bottom or similar lows (SL) but indicator is showing Higher Low (HL).
Here is an example chart of Exaggerated Bullish Divergence,
In
the chart above, price created Similar Low (SL) or double bottom but MACD indicator is showing Higher Low (HL) between its crossovers which is Exaggerated Bullish Divergence indicates the flat trend will turn into uptrend soon.Exaggerated Bearish Divergence occurs, when the price is creating double top/Similar High (SH) but indicator is showing Lower High (LH).
Here is an example chart of Exaggerated Bearish Divergence,
In the chart above, we can see that price created double top/Similar High (SH) while MACD indicator created Lower High (LH) between its crossovers which is Exaggerated Bearish Divergence indicating a strong possibility of downtrend.
Now lets make a trading strategy based on divergence.
Trading Strategy
Indicators Used:
Moving Average Convergence Divergence (MACD)
Entry:
1. Identify the divergence
2. After identifying divergence, use MACD crossover to take final entry decision.
Exit:
1. Use MACD reverse crossover to exit.
2. Or, use fixed stop of 20% or 30% or else.
3. Or, use trailing stop.
Stop Loss:
1. Use 6-7% stop loss.
2. Or, exit when reverse crossover occurs in MACD.
Thursday, 9 May 2013
Tuesday, 23 April 2013
Sunday, 14 April 2013
Top Trading Books Every Serious Trader Should Have
There are so many trading books out there. Lots of them are not worthy of your time and money. Here is my list of ten best trading books that will help new traders to shorten their learning curves and achieve their trading goals, no matter which market they are trading, be it futures, stocks, or forex currencies, no matter what trading styles they apply, be it trend trading, swing trading, or day trading. These books are helpful to professional traders as well.
1. Reminiscences of a Stock Operator by Edwin Lefevre
There is no doubt that this book is on top of my list. The reading is both entertaining and informative. Lefevre surely has the talent to capture the mind of a great trader – Jesse Livermore and the market as well. Reminiscences is the best trading book recommended by most top traders in the world. It’s also the most quoted trading book. My favorite quote is “there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”
2. Market Wizards: Interviews with Top Traders by Jack D. Schwager
A fantastic book allows a peek into the mind of the world’s most successful traders. Million dollar traders, even billion dollar traders were interviewed in this book. Richard Dennis, the father of turtle traders, was reportedly made $200 million in about ten years started with a shoe string. Paul Tudor Jones is worth $2.8 billion, and was ranked by Forbes in 2009 as the 224th richest person in the world. Bruce Kovner is worth $3.5 billion, and was ranked by Forbes in 2009 as the 164th richest person in the world.
3. The New Market Wizards: Conversations with America's Top Traders by Jack D. Schwager
Another market wizard book by Schwager.
4. Pit Bull: Lessons from Wall Street's Champion Day Trader by Martin Schwartz
Pit Bull was written by market wizard Martin Schwartz. In this book, Schwartz shared his journey from a dead-end financial analyst to Wall Street’s champion day trader. Schwartz won the U.S. Trading Championship in 1984. Schwartz is also a Champion Horse owner. It’s obvious that Schwartz has a champion heart. One particular useful tool I learned from this book is to use 10-day EMA as barometer to gauge the daily market behavior. A must read for serious day trader.
5. The Taylor Trading Technique by George D. Taylor
This book was recommended by the only female market wizard Linda Bradford Raschke, who admitted built most of her short-term trading strategies based on the technique introduced in the book. The reading is proved very challenging, but the reward is well worth the time. Taylor divided trading days into three categories – buying day, selling day, and short sale day. Taylor trading technique captures the essence of swing trading. A must read for serious swing trader.
6. Japanese Candlestick Charting Techniques, Second Edition by Steve Nison
Nison is the first person introduced Japanese candlestick charting to the western trading community. Candlestick charting offers unique information about market price action, especially at the turning point. This is the best book on candlesticks so far. Readers will learn lots of useful candlestick patterns and how to combine candlesticks with other common technical analysis tools.
7. Technical Analysis of the Financial Markets by John J. Murphy
This is the only book you ever need to study technical analysis. Murphy did a wonderful job to drive home various technical analysis topics in a straightforward and understandable manner.
8. Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitudeby Mark Douglas
Most novice traders have spent lots of time and energy to search Holy Grail in the trading. They tried all kinds of indicators and trading systems, and overlooked themselves are the most important factor of successful trading. This is a perfect book for learning trading psychology.
9. Zen in the Art of Archery by Eugen Herrigel
This book was recommended by an anonymous market wizard. At first, it might be bizarre to associate trading with Zen and archery. Archery is only one media to express the Zen experience. Actually when you are trading in the zone, you are experiencing Zen in the art of speculation, the highest form of trading psychology.
10. The Art of War by Sun Tzu
The Art of War is the oldest book about military strategies and tactics in the history. It was written by Sun Tzu more than 2,500 years ago, during the Spring and Autumn period. There are 13 chapters to discuss every aspect of fighting a war. Although trading in the market shares much similarity with fighting in the battlefield, it is by no means more difficult than the warfare, the cruelest form of performance art. My favorite quote is “Every battle is won or lost before it is ever fought.”
If you haven’t read above books, please do yourself a favor and study them. It might be the best trading decision you have ever made.
Subscribe to:
Posts (Atom)