Tag: trading indicators

  • How to recognize early warning signs to exit the trade

    How to recognize early warning signs to exit the trade

    recognize early warning signs to exit the trade
    What can make or destroy the trade is the right exit point. Don’t hold on to trades in the hope of making just a few more dollars when the market is moving against you.

    By Guy Avtalyon

    As a trader, you’ll often consider possible profit when you have to decide about exits, but can you recognize early warning signs to exit the trade? Traders Paradise wrote many times about the importance of exit strategies in trading stocks, forex, or currency. And I have to repeat if you think about the level where you enter the trade without thinking about your exits, it’s more likely you’ll end up in losses.

    Some early indicators can warn you it’s time to exit the trade.

    I know it’s sexier to buy stocks. We all like it. The feeling is wonderful after you spent so much time examining stock, analyzing it to find the perfect one. How would you feel if your stock is not performing well? What about your attitudes? Do you feel like a loser?  No one likes to watch the stock go down. Even if it is obvious that the stock is performing badly, most of us would hold it and wait for better times. What is behind this attitude? We want to avoid the feeling of loss, the experience of losing something. Contrary, when the stock price increases, most traders will sell the stock to lock-in profit and lose the possibility of further gains.

    Anyway, it’s important to sell stock at a specific moment to prevent further losses, and you have to recognize early warning signs to exit the trade. But what they are and how to recognize them?

    Recognize early warning signs to exit the trade

    Getting out of the trade isn’t complicated, but it requires research of price action, finding and noticing signs that could predict a reversal or changes in trend. 

    You have to know that markets tend to trend between 15 and 20 percent of the time. Strong trends are helping in the consolidation of recent price changes. They are helping in taking profits, lower the volatility. But what if a trading range becomes bottom or top and exits in the opposite direction of the previous trend swing?

    This could be one of the early warning signs to exit the trade. When you’re watching the price action and notice a failed breakout or breakdown, the best strategy is to exit the trade.

    Failed breakouts or breakdowns are signs to exit the trade with profit or loss. You can re-enter the trade when the price surpasses the breakout high or low of the breakdown. That could be a logical move after recovery because the possibility of the underlying trend to resume is great. It’s also possible the price moves to the other side of the trading range and forms a strong trend in the opposite direction.

    High-volume days as an early warning sign 

    Well, to notice these kinds of early warning signs to exit the trade, you’ll need to track the average daily volume. For example, observe the last 50 sessions. It’s easy to notice trading days with four times or higher volumes. That’s a good sign if it happens in the direction of the position you are holding but take it as a warning sign if it is opposite from your position. This is exceptionally valid if the opposing swing breaks an important support or resistance level.

    High-volumes that oppose the direction of your position could ruin patterns. They are often a signal to exit the trade and to take the profit in an uptrend.

    Also, pay attention to peak days that can stop trends. They could show four or five times average daily volume in price bars that reach new highs in an uptrend or new lows in a downtrend. The top bar shows up at the end of a price swing after RSI indicators scored uptrend or downtrend levels.

    Moving average and trends can help to recognize early warning signs

    Take a look at these three lines: 20-day EMA, 50-day, and 200-day EMA. It could be a difficult position if, for example, 20-day EMA descends through the 200-day EMA. Also, when 20-day EMA ascends through the 200-day EMA. The first example signals the danger for long positions, while the second is important for short sales.

    Price actions are also early warning signs to exit the trade when the intermediate moving average is higher to sideways on long positions. The change from lower to sideways on short sales also is a warning. Don’t hold or wait for the moving average to change the slope. Exit the trade.

    Be adaptable, not emotional. 

    The market isn’t always moving in your favor. So, never force your initial targets further away. This could lead you to loss or fewer profits than you awaited. But before you exit the trade, you have to understand whether your decision is a product of emotions or logic. If you move your target far away from your initial plan, you’re actually showing greed. Don’t do that. You must have a strategy and stick to it. Your strategy must be well pre-planned. If the market moves against your stop-losses, you have to exit the trade. Move your stop-losses only to reduce possible loss. If you exit the trade before the stop-loss target, you’ll probably miss the possibility of making a profit when the market shifts and starts to move in your favor.

    When you enter the trade, make adjustments only if necessary. The most important is to keep the balance and reduce the risk.

    Honestly, there is no best strategy to exit a trade. One strategy could work properly for some trades but lead to a great loss in others. But one thing is true, so many researches showed that you’d end up in losses more often if you fail to stick to your strategy.

    Risk is an integral part of trading. You have to watch market movements and set proper risk management strategies. The exit strategy is an important part of them. Moreover, the exit strategy can decide your profitability in the market.

  • How to Use Technical Indicators to Analyze Stocks?

    How to Use Technical Indicators to Analyze Stocks?

    How to Use Technical Indicators to Analyze Stocks?
    Trading indicators are a component of every technical trading strategy. They help traders to get full insight into price trends.

    After you learn the basics of technical analysis, it’s time to learn how to use technical indicators to analyze stocks. This will be something very concrete because we’ll discuss their real implementation. After we debunk all myths about technical analysis it’s time to go forward. Everyone who wants to trade stocks should know how to use technical indicators to analyze stocks. 

    Traders use technical analysis to examine past market data in the hope to determine future price movements. They use indicators, charts, and other tools to recognize price patterns and trends for that purpose. Future performance of the stock price is maybe the biggest mystery in the stock market, and there is no such a trader or investor that wouldn’t like to unveil where the price will go. By using tools, the chances are bigger, without them we are just guessing, and instead of trading, we are simply betting. So it is very important to know how to use technical indicators to analyze stocks.

    Technical analysis is based on the belief that price movement would repeat, so the patterns can be recognized and used to determine a market’s trend.

    Technical analysis of stocks

    To put it simply, when analyzing stocks you have to look for patterns that appear in the chart. Patterns could be similar or exact as some previous one and based on this similarity you might have some clues of how the stock’s price will act in the future. But to have a clear picture of that you’ll need to use qualitative and quantitative techniques commonly named as technical indicators. Both techniques or types of indicators have their specific purposes. You’ll use qualitative indicators to find support and resistance levels, changes in polarity, or chart patterns but quantitative indicators will tell you if the stock is in an upward or downward trend. Quantitative indicators which are market trends, moving averages, and momentum indicators will show you the pattern in stock price actions. Based on this info you’ll decide if you will buy the stock. 

    Let’s break down each of these techniques separately.

    How to use qualitative indicators

    Important qualitative indicators are 

    Support and Resistance

    The technical analysis method assumes that stock charts will show you the bottom and top levels. In most cases, the stock price is moving between these two levels. We said “in most cases” because when there is a breakout the price could break one of these levels.

    The resistance level is also seen as a ceiling. When this level is reached the stock will not rise further, and you should consider selling the stock you own and to do so as soon as possible. You will not get a better price for it. So, that is the highest price, and you’ll profit.

    The support level represents the lowest price. To explain this, when the stock price is going down, demand for the stock will increase and form the support line below which the stock price will not fall. This means the stock will bounce back and rise in price after this level is reached. That is a great time to buy a stock at that lower price.

    This is how to use technical indicators when you want to buy or sell the stock you own. To tell that briefly, buy the stock when it is near to its support level and sell when it is nearing its resistance level.

    But there is one thing you have to keep in mind. 

    These levels are not fixed. 

    They are changing during the long term. These levels can be higher or lower. That depends on how investors look at the stock. If they think the stock is a great player they will massively buy it but if they think the stock isn’t good they’ll start to sell it. 

    You should find support and resistance levels in the stock chart. Also, an important point is where prices have paused or reversed after rising or falling. That might show you what will happen in the future, once when these price points are touched.

    When a zone of support or resistance is known, use those levels as potential entry or exit points. That could be a smart decision. When the price hits one of those levels it has only two possibilities – to bounce back from the levels or to break the levels and proceed in its direction. If that direction isn’t in your favor you can close your position with a minimum loss, of course, if you do it immediately.

    Change in the polarity principle

    So, what happens when the price breaks support and resistance? Investors are very active at these levels. But a break indicates that they are not interested in buying and selling stock further. That causes the price to move violently to find new support and resistance levels. 

    When the support level is broken, the stock could enter a freefall area and form new support. It is the same when the resistance level is broken, the stock will increase in price and find a new resistance level.

    The polarity principle means that whenever the stock price breaks through the support level that point becomes new resistance.

    Hence, the resistance is broken, it becomes a support level. 

    It is very important to know how to use technical indicators and notice when the price is near support or resistance levels. That will give you a chance to react in your favor to protect your investment.

    How to use patterns as technical indicators?

    You have to watch out the other relevant chart patterns that show where the stock price will go next. These chart patterns are grouped as reversal and continuation patterns. Reversal patterns show that a trend that was leading the stock price has expired. The stock will run in the opposite direction. This means if the stock was greatly valued, it would drop. If the stocks were undervalued, they would rise in price.

    Major reversal patterns are head and shoulders, inverse head and shoulders and, double bottoms and double tops.

    Continuation patterns represent confirmation that the current trend will stay. So, the suggestion is to hold your stock if the price is rising, or to sell it if the price is dropping.

    Significant continuation patterns are rectangle pattern and flags, triangle pattern, and pennants.

    How to use quantitative indicators

    Quantitative indicators are used in combination with other indicators for predicting the stock price movements. They can be trend-following indicators, for example, moving average will give you an insight into the current trend by smoothing out price movement.

    The other quantitative indicator is the oscillator as a momentum indicator. It measures the speed of how the stock price is changing. The oscillator will signal you when the stock is overbought or oversold. Overbought stock means that the stock price is probably dropping, and oversold means that the stock price is low. 

    How to use technical indicators – Moving averages

    Moving averages are a popular indicator, especially simple moving average or SMA and exponential moving average or EMA. Calculating SMA is quite simple but the calculation is more complicated. If you draft a 50-day SMA and a 50-day EMA on the same chart, you’ll see that the EMA acts promptly to price changes than the SMA does. But there is no need to calculate them manually since you can find charting software or trading platforms that can do that for you.

    How to use technical indicators – Oscillators

    Oscillators are extremely helpful when the stock is overbought or oversold.

    When using oscillators you can see when the stock is going upside. That is the level at which the stock turns into the overbought status. This indicates that the buying volume has been decreasing and traders will begin to sell their stocks. And vice versa, when the stock is oversold that means a great number of traders are selling their stocks consistently.

    Use oscillators when your charts are not displaying a clear trend no matter in which direction.

    Bottom line

    The way of how to use technical indicators to analyze stocks and predict market trends could determine how successful an investor you are. Technical indicators will help you to decide when is the right time to buy or sell the stocks you hold. Some will aid traders to identify and confirm a trend direction. For example, trend lines are helpful to predict support and resistance levels. Oscillators will measure the strength and speed of a price movement and help you to recognize overbought or oversold zones, potential entry, and exit points. 

    By knowing how to use technical indicators you’ll be able to make more profits and reduce your losses.

  • Open Interest Strategy And How To Use It

    Open Interest Strategy And How To Use It

    Open Interest Strategy And How To Use It
    Open interest strategy is based on indicators that traders use to confirm trends and trend reversals for the stock futures and stock options markets. 

    Do you use an open interest strategy in trading options? What? No? Maybe that is the reason behind your losses. Well,  you are not alone, to be honest. Many traders don’t use open interest strategy while trading options. Yes, if you want to be a profitable trader you have to analyze open interest. It is a very important momentum indicator. So, let’s see how you could have better chances to reach profitable trading by using an open interest strategy in trading options. But first, we have to understand open interest. 

    What is the open interest?

    Open interest represents the number of active contracts. It shows how many contracts for options and futures are for the given market. This important indicator shows the strength of the market and measures how actively traded the market is. Someone could say we have the volume for that estimation. Wait! It isn’t the same as volume. There are some differences. 

    You can notice this data along with current prices, volume, and volatility. But still, so many options traders overlook active contracts, so that can lead to shocking results. They are losing too much money and have too many lost trades.

    So, open interest shows the cumulative number of options or futures contracts that are currently traded but not yet cashed by an exercise, offsetting trade or assignment.

    How to calculate?

    There is simple math to do that when running an open interest strategy. The calculation is: add all contracts connected with opening trades and subtract all contracts connected with closing trades. For example, let’s assume we have 3 traders. Okay, we will give them the names: Anna, Bob, and Connie.

    Assume they are trading the same futures contract, in our case study. When Anna buys one contract and enters the long trade, open interest will increase by 1. When Bob buys 5 contracts and goes long too, the open interest will increase to 6. Connie picks to short the market and decides to sell 4 contracts, open interest will increase to ten. Open interest will stay the same until one of them or all exit their positions. In such a case open interest will decline. For example, Anna sold 1 contract and open interest declined to 9. Also, Bob decided to exit his position, he buys back his five contracts, so open interest will be down to 4 and will remain at 4 until Connie decides to sell her 4 contracts. 

    Volume and open interest

    And here is where the volume is different from open interest. While the volume counts all contracts traded, open interest shows how many contracts stay open in the market. So, we can say they are related concepts but different in what is taken into account. Open interest also shows how much money is in the futures or options market. When open interest rises, more money is flowing and when open interest decreases money is going out of the options or futures contracts.

    It can be more complicated since the traders are buying or selling from other traders who are selling or buying. You will find that both sides can open their trades and increase open interest. If both sides close their trades, open interest will drop. But if one side of traders is opening the trades and the other is closing that will have no influence on open interest.

    That is another difference from the volume. The volume will increase caused by both entries or exits, open interest will increase caused by entries and decrease caused by exits.

    Analyze open interest strategy

    Open Interest is relevant for both stock futures traders and stock options traders. It displays you where the traders are allocating their money. Therefore, you must have an open interest strategy. To be able to create an open interest strategy you have to analyze the open interest data. We can find a lot of option sellers in the market. It is due to the time decay of the premium of stock options.

    Their profit is maximum the premium value of the sold option, but the possibility of losing is extremely big. The option sellers are generally very agile and ready to close their positions quickly in case of any unfavorable change. In the market, we can see the bullish traders selling their put options since they get premium if the price doesn’t run under the strike price. In the same sense, the bearish traders are selling their call options since they get premium if the price doesn’t run over the strike price. 

    If we notice a high open interest in any stock’s strike price of calls and puts, we should understand these levels as support or resistance areas. It will depend on if the option is put or call.

    So, the open interest will confirm the strength of a trend. Rising open interest is a confirmation of the trend. On the other side, reducing open interest can be a signal of a failing trend. Traders are supporting the trend when they enter the market and that raises the open interest. Hence, when traders don’t believe or when they lose confidence in the trend open interest will decrease.

    The importance of reports

    At the end of each trading day, the open interest data report is published. This report includes all details about open interest from all market players, are they holding long or short positions. These reports provide important info about what all players are doing in the market for futures and options contracts. Traders use open interest strategy to support their decisions. For example, if a trader notices a big move in the open interest he or she knows that particular market players are entering or leaving the position. That may give hints to market direction.

    Using open interest strategy

    In trading futures, for example, the initial stage of a trend, post-breakout, is not started by trend followers. It is driven by traders who had to liquidate their positions because they were on the wrong side and had to catch the direction of the old trend. The more traders on the wrong side mean the more violent the move post-breakout. Well, you have to understand, if open interest increases during a range-bound action, the transit post-breakout in any direction will be violent. So, if the open interest falls at the start of a new trend, that is the sign that losers are covering their positions.

    For example, the price is moving inside the 6 months average levels, but you notice that operating loss has started growing massively. What’s going on? Is the price still in the range? Oh, yes. Let’s examine this more. For example, the company’s average operating loss per share was $5, last week it reached $8 but the price is still in the same range. How is this possible? It is possible by creating new positions but buyers and sellers are in balance, there is no pressure from one or the other side. That’s how the price stays in the same range. For every long trade, there has to be one short trade. What will happen if the price breaks out on the upside?

    Short-side traders will hurry to cover their short trades and start the rally. Before long-side traders start the rally. When uptrend is created, comes the trend-followers.

    Bottom line

    Indicators are important. They tell you what other market players are doing and can provide you to create your trading strategy. An open interest strategy can be used to recognize trading possibilities you might miss. It allows you quickly to enter and exit a trade at the best price. Many traders don’t use this profitable strategy because when they are looking at the whole open interest of an option, they cannot know if the option is sold or bought. 

    But they fail to catch really valuable information.

    Trading means to have all the valuable data before you enter or exit the position. It isn’t gambling. There are some trading patterns and more about some profitable you can read in the “Two Fold Formula” book. Our suggestion is – test it with the our preferred trading platform.

  • Indicator Trading And How To Use It

    Indicator Trading And How To Use It

    Indicator Trading And How To Use It
    Indicators can help find some market tendencies but you must learn how to use them properly.

    Indicator trading means to use technical indicators to examine the stock price and ensure trade signals. Trading indicators handles stock price data utilizing mathematical formulas. In essence, indicators will show you an illustration of the mathematical formula and stock price data. But you have to be an experienced chart reader or elite trader to notice that indicators will not show you more than the simple price chart without indicators.

    But indicators may help to simplify it and that’s the reason why indicators are so attractive to fresh traders. Well, it is simpler to find an indicator that will define the trend or trend reversal than to learn how to examine and find a trend on the stock price chart.

    So, behind indicator trading lies the simplicity of using.

    Indicators will provide you a particular trade signal and alert you that is the time to enter a trade.

    We can say that technical indicators are primarily formulas that help to examine chart data. They are accurate, they are simple, also, they request less time and give direction to price charts. But here is the tricky part. Indicator trading doesn’t mean that you will have 100% successful trades.

    What are indicator trading strategies? 

    The main problem is that you can find numerous indicators and new indicators appear almost every day. But you can combine them and create an indicator trading strategy.

    For example, a crossover strategy which means that price or an indicator crosses way with different indicator. Let’s say that price crossing a moving average is one of the simplest indicator trading strategies.

    One of the variants of this strategy is when a shorter-term moving average crosses a longer-term moving average and it is so-called a moving average crossover.

    Some crossover signals combine an RSI moving above 70, for example, and then go back under. When you see this signal you can be sure that there is the overbought condition and a pullback will occur. Thus, when you see a drop under let’s say 20 or 30, and it is accompanied by a rally back over 20 or 30, it is an indication that the rally will come. 

    Also, you can use indicators as a tool to confirm your opinion in trading since they will show you reversals and downtrends. There is one thing you have to keep in mind, a lot of indicator trading strategies will not result in profit.

    What are the disadvantages of indicator trading?

    So, it is obvious that indicators have their flaws. The problem is that they make calculations based on historical prices, so they don’t provide any outside insights. If you practice indicator trading in the stock trading, technical indicators will never give you actual data about the company.

    Moreover, indicators usually come after the price chart. So, the following situation may occur. Let’s say the current price is changed for a short time and got back, but your indicators will be changed according to the previous price but you entered the trade based on them. What is likely to happen? Your entry point is wrong and you could end up with a loss.

    Lastly, indicators may oppose each other. Also, the same indicator may display different things at different times. And you have to recognize when they are accurate. 

    This is the reason why many traders have doubts about indicators. Yes, you can find various indicators or develop your own by using software but you have to use them properly.

    How to use indicators properly?

    Firstly, don’t expect a miracle from indicators. All you can expect is that your estimation will be a bit more accurate. But your decision shouldn’t be based on one particular indicator. The reason behind is that all indicators are not the same. Each of them has its own philosophy and mission, to be said.

    You can find many types of indicators, for example, trend indicators,  volatility indicators, oscillators, etc. But indicators are useful only if you use them in line with their design. For example, the trend indicator is adjusted to recognize and follow a trend. You cannot use it for the price in a range because you will miss its full potential. Another thing is very very important. Indicators may provide you faulty information if you don’t use them in a proper way.

    The benefit of indicator trading

    As we said above, they can simplify price moves. For newbies in the stock market indicators are easier to understand than the complicated price chart. But easy isn’t always profitable, you should know that and keep that in mind. 

    Indicators are outstanding tools for mastering how to find gaps or strengths in the stock price when trends are weakening. They can be very helpful for new traders that still have a problem to guess on a price chart. With the help of indicators, they could recognize the fine tunes they have not yet qualified themselves to notice on the price chart.

    How many trading indicators to use?

    In indicator trading, you will need several indicators to know when and how to enter the trade. If you use only one indicator it is possible to get false signals. A lot of them.

    For example, the MACD provides crossover signals and it is smart to sell when the MACD graph goes under the signal line. But if you are a really smart trader, you will not sell every single time when MACD shows that or you’ll have a lot of losing trades. So, you will need to use some other indicators as control or filter in order to recognize the trend. For example, the moving average can be useful. In this way, you’ll increase the number of valuable signals. Simple as that.

    But be cautious, if you use too many indicators you may overanalysis your chart. That can have a bad influence on your trade. 

    The experts’ recommendation is to use up to 5 indicators per trade. Actually, 3 indicators are quite good enough for a solid trading strategy.

    Bottom line

    The indicators are a key part of technical analysis, after all. But do you really need indicators for profitable trading? Actually, no. Surely, they can give you strongly aid and improve the results of your trading and they are worth using. On the other hand, never observe indicators as only and the most important part of trading. The truth is they can simplify your trading more than price action trading. But keep in mind, as we said, the simple isn’t always more profitable. 

    Use indicator trading to recognize occasions when to get in or out of the trade since it isn’t always visible in the price charts.
    In most cases, indicators will not tell you what the price chart is not telling you. Hence, use indicators if required. If you see they are not raising your profit, give up. 

    Is there any other reason you may have to use them? No.