Trading For Beginners » Techniques Learn to trade Tue, 18 Dec 2012 12:23:48 +0000 en hourly 1 Range Signal Filter Mon, 07 Feb 2011 07:39:46 +0000 admin In this lesson I am going to disclose a really useful technique to use with moving averages.

Although I am not a big fan of moving averages as a sole method of trading: if used correctly with another indictor you can greatly increase the accuracy of their use.

The main problem as I am sure you are aware by now is, if you use any kind of moving average as a signal generator the whipsaw kill’s you.

The secret of course is how do you use a moving average and not get whipsawed as frequently?

I have found that if I use a filter with the moving average to help identify a true break;  it keeps you in the trade longer and stops you entering on false break.

I have constructed my own little filter which, I find very useful. I first take note of the open, high, low and close of the time period I am following. Although I take note of the open and close we wont use them in our calculations.

Next I calculate the difference between the high and the low (range) of that period. From there we can make a simple 3 period moving average of the last 3 range calculations. The last part is to subtract the 3 period average of the ranges from the moving average we are using – in this case a 10 period moving average.

So how do we use this information? Well, let’s assume that you are using a moving average: any moving average e.g. a 10 period moving average of the closing price.

Normally a signal would be generated if the closing price were either above or below the moving average. By adding a little filter of the 3 period average of the ranges we can better determine whether the moving average has in fact been breached.

Have a look at the table below.

signal 1 Range Signal Filter

First column
Second column
Third column
Forth column
Fifth column
Sixth column
Difference between the high and low
Seventh column
The 3 day average of the range (High – Low)
Eighth column
An average of the last 10 closing prices.
Ninth column Signal – the10 no prescription online pharmacy period MA minus the
3 period MA of the ranges.

signal 2 Range Signal Filter

As you can see from the chart above of the British Pound versus the Us Dollar: on the 7th May the close of the daily bar was 1.5967. The 10-day moving average of the closing price was 1.6000. A close below the average would normally indicate that you should either close or tighten your position. If we apply the 3-day filter of the ranges then the signal would actually be a close below 1.5843, which it closed above.

The next occurrence of closes below the moving average happened on the 2nd, 3rd and 4th of June. Of the 3 days, the only day that would have been of concern would have been the 3rd June. On that day the Moving Average was 1.6378 and the close of the day was 1.6285. After we applied the range signal of 1.6189 it is simple to see that we were in no danger of a reversal on that day.

Don’t complicate this. The example above is for a long trade. All you are doing is subtracting the average of the last 3 ranges from the 10 period moving average (if that is what you are using). Once there is a close below that number the trend is assumed to have changed to down. On the short side, all you are doing is adding the average of the last 3 ranges to the 10 period average (if that is what you are using) and if the close is above that number then the trend is assumed to have changed to long.

You can experiment with the different moving averages and the average of the ranges looked at. The point is, if you are applying basic technical analysis such as trend lines or indicators: you can use this range average as a confirming signal.

You can also build it into an existing method to help improve results. You might also want to look at constructing a system based on this filter.

Good Trading

Best Regards
Mark McRae

Posted by Admin

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Master The Channel Projection Tue, 18 Jan 2011 13:00:05 +0000 admin Most traders know how to draw a channel but not many know you can use the information used to create the channel to find possible turning points in the market.

First lets look at the traditional channel. You would first identify a trend and draw a trend line. Next you duplicate the exact angle of that trend line and move it to a recent high in an up trend or a recent low in a down trend. This produces a channel. The idea is that as price approaches the upper channel line in an up trend we would expect to find sellers there and this would either reverse the trend or at least pause the trend for a time.

In a down trend you would expect the same thing. As price approaches the lower channel line you would expect to find buyers and for the trend to stop or temporarily pause for a time.

If price overshoots the channel line this can often signify an overbought situation in an up trend or an oversold condition in a down trend. This overshooting of the channel line signifies an exhaust of momentum in the market.

Now lets look at a slightly more unique way to use the channel. In the first chart the line labeled T1 is the original trend line. The line labeled T2 is this same line duplicated and moved forward to touch a high and containing all if not 95% of price action.

Now this is where it begins to get interesting. Most charting software will allow you to draw lines of varying length so if you draw a line connecting T1 to T2 this will give you the width of the channel. We will call this line T3.

If you duplicate T3 and in an up trend move it so that it is touching and below T1 you have a projection of where a retracement might halt. This line we shall call T4. You can then duplicate T1 and connect it to the lower part of T4 giving you a new line, which we will call T5.

It will amaze you how often price will stop at T5. At the very least you have an estimate of where price may retrace too.

See Chart Below

master 1 Master The Channel Projection

On the second chart we have an established down trend with little retracement continuation patterns. By using the same process as above we can use the channel width as projected target points. In this way you can use the channel projection not only as a possible retracement level but all as a possible target level.

See Chart

master 2 Master The Channel Projection

Good Trading

Best Regards
Mark McRae

Posted by Admin

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Enormous Profits Small Risk Tue, 28 Dec 2010 14:00:09 +0000 admin This particular technique requires a little practice and it is something that is well worth looking out for. I call it roofing and flooring. It is best done using a large time scale like a weekly or monthly chart and then lowering the time scale for entry.

It works like this. First bring up a weekly chart of the market you are following.

We are only looking at two bars, any two bars which, we shall call bar 1 and bar 2. You then draw a trend line connecting the bottom of bar 1 and bar 2. From there you extend the trend line into the future (the week coming) and that shall be know as bar 3.

The idea is that in an up trend price will often come back to that very short trend line. As it approaches the trend line of bar 3 you can enter the market with very little risk and massive potential.

In the example of the Japanese Yen/US Dollar the low of the bar was 122.57. The trend line came in around 122.60. You could either have entered long at the trend line of 122.60 with a top loss below the trend line at say 122.40 or you could have dropped down to a 5 minute or 15 minute intraday chart to watch price action at this level. The idea is you are only in the trade for 1 bar so you would close out at the end of business on the Friday. In this case the close was 124.50 which, was a gain of 190 pips (Approximately $1526).

The reverse of this is true for a down trend. Draw a trend line along the highs of bar 1 and bar 2. Extend the line one week forward to find an entry level. The trend line in this case was around 123.00 and the actual high of bar 3 was 123.19. A stop could have been placed at around 123.40 or you could have dropped down to an intraday chart to look for an entry. The actual close of bar 3 in this example was 120.24 if you had entered at 123.00 you would have made 276 pips (Approximately $2295).

If you drop down your time frame you can wait for price to hit the trend line on bar 3 and when it starts to move in your direction jump on board. In an uptrend once you are in you can place your stop below the low of bar 3 and in a down trend you can place your stop above the high of bar 3.

See chart below.

enormous Enormous Profits Small Risk

Good Trading

Mark McRae

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High Probability Spikes Mon, 29 Nov 2010 09:13:55 +0000 admin Trading spikes in any time frame can be a very high probability trade with low risk relative to reward if our unique set up is followed.

Spikes fall under exhaust patterns and signal that the market is ready to reverse. Traditionally the spike or ”V pattern” as it is sometimes known will reverse very quickly and is difficult to trade because by the time you identify that it is a Spike it is normally to late.

The type of Spikes we will trade will allow us sufficient time to identify the pattern and enter the market with relatively low risk. This requires some patience to let the pattern develop but it will be worth it once you see the results.

As with all trades the first thing you are going to do is figure out where you will get out of the trade before you put the trade on. You must always have some kind of money management in place when trading.

If you refer to the charts below you will see that there is 4 parts to the spike trade. At point 1 you may or may not see an extended trading range. At point two you may have identified the pattern as a spike. We however wait to confirm that we have a spike until we see the retracement to point 3. This is the set up and we are now ready to trade.

The breakout happens at point 4. Once we have identified that we have a spike at point 3 we place a sell stop order just below point 4. As soon as the order is hit at point 4 we place our stop loss order just above point 3. This immediately limits your risk. The reverse is true for long trades.

The minimum target I would expect to see would be the distance from point 2 to point 3 extended up or down depending on the direction you are trading. If traded in this manner you can expect as high 75% winners.

You will also notice that this type of trade tends to work quickly.

If it is taking a long time to get going (more than three or four bars) after you have entered at point 4 you may wish to lock in any profits and close the trade. Another technique you cam employ is to use a trailing stop and at the first sign that the market might reverse, you can close the position.

high probability 1 High Probability Spikes

high probability 2 High Probability Spikes

Good Trading

Mark McRae

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Double Tops & Bottoms Thu, 25 Nov 2010 08:53:49 +0000 admin Double tops and double bottoms appear frequently in nearly every market and time frame and are great indicators of a potential trend reversal.

I like this type of patterns as it offers a logical entry and exit point and often reaches the price objective quickly. As the name implies this pattern consists of two peaks of roughly equal height for the double top formation and two troughs of roughly equal depth for the double bottom formation.

Double tops are sometimes called ”M’s” and double bottoms ”W’s”, as the pattern resembles each of these letters. Both are reversal patterns and the stronger the preceding trend the more important the reversal when it happens. My research indicated that double tops tend to be shorter in duration and the break down more pronounced. Double bottoms on the other hand tend to be longer in duration and the price action tends to be in a smaller range.

In the first example of a double top (see chart) a trend preceded the formation. The trend met resistance at point A and then declined to point B. From point B a new attempt at the resistance line was made and failed, this is the set up. The next and most important part of the pattern is that it breaks the neckline and closes below the neckline.

It is important that the neckline is broken on a closing basis as up until this point the market might merely be in consolidation. Once the neckline is broken you now have two choices. You can enter the market straight away or wait to see if the market returns to the neckline and test the newly formed resistance. I like to enter the market on a break and add to my position if the market does return to the neckline.

So now we have a break in the neckline and enter the market. Depending on the distance between B and C you can either place your stop loss order somewhere between B and C or above C if its not to expensive.

Now that the stop loss is in place, we need a target. The best way to project a price objective for this pattern is to measure the distance between B the neckline that has just been broken and C the previous resistance. As an example we will assume B was 85 and C was 115. If you subtract B from C you get 30. Now take 30 from the original neckline of 85 and your target is 55. The same rules apply to the double bottom only in the opposite direction. You simply add the difference between B and C to find your price objective.

In the example of the double bottom on the daily cash Euro/Dollar (see last chart), B was .9197 and C was .8843. If you subtract C from B you get .0354. Add this to the break of the neckline of .9197 and you get a target of .9551, which was easily reached.

In this example there was no pullback.

double bottom 1 Double Tops & Bottoms

double bottom 2 Double Tops & Bottoms

Good Trading

Mark McRae

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Symmetrical Triangles Wed, 24 Nov 2010 08:48:28 +0000 admin Symmetrical chart patterns can be found in almost any market and any time frame. They normally signify some indecision in the market and as the pattern develops it is common to see a decrease in volume. The pattern forms as the bar’s highs and lows inside the triangle converge so as to outline the shape of a triangle.

Symmetrical triangles have a tendency to break in the direction of the preceding trend and are often accompanied by heavy volume. Although this is often the case it is not a given and regardless of the direction of the break there are normally good opportunities to trade the breakout.

The fast way to tell if it’s a bullish or bearish triangle is to find the first point of contact farthest to the left inside the triangle (see chart example). If the first point of the triangle is at the top left then it is a bullish triangle. If the first point in the triangle is in the bottom left then it is a bearish triangle.

To find a potential target of a triangle you can measure the base of the triangle and then add or subtract cheap ritalin that from the breakout point. Lets assume that point 1 in our bullish triangle is 95 and point 2 in the triangle is 80. If you take 80 from 95 you get 15. Now lets assume the breakout point is 88.

You add 15 to the breakout point to get 103. Therefore 103 is the target area for the breakout. The same applies to the bearish triangle. If point 1 were 80 and point 2 were 95 you would still deduct 80 from 95 to get 15.

If you get a breakout point of 85 you would now deduct 15 from 85 to get 70 as a potential target point. In the example of the Japanese Yen (see second chart) point 1 was 111.71 and point 2 was 102.00 which gave us a base of 9.71.

The breakout occurred at approximately 108.90. If we add 9.71 to 108.90 it gave us a target of 118.61. Although symmetrical triangle can often mean continuation of the trend this particular triangle (second chart) formed at the end of a downtrend and broke up.

symmetrical 1 Symmetrical Triangles

symmetrical 2 Symmetrical Triangles

Good Trading

Mark McRae

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Rectangles Tue, 23 Nov 2010 08:41:43 +0000 admin Rectangles can occur in any time frame and any market you are following. As with many chart patterns the pattern is in the eye of the beholder. I have found that some traders are better than others at identifying chart patterns. It may take some time before you can spot the most common patterns.

The rectangle contains price movement between two points in a rectangular shape to which we add lines to signify the upper boundary and lower boundary. These lines should be horizontal. Slanted rectangle will most probably fall into the realm of ”Flags”, which we will discus in another lesson.

The top line should connect at least two bars and the bottom line should connect at least two bars. As most markets are in congestion most of the time rectangles are fairly common.

It is not necessary to draw the top and lower lines at the extreme of the congestion points but rather make sure the lines contain at least 95% of the congestion area. The longer the rectangle continues the more important the breakout.

To help identify a valid breakout there should be an increase in volume on the day (or time period) of the breakout. The breakout can occur in either direction but if you are in a defined up trend then an upside breakout is favored and vise versa for a down buy provigil trend. If I am in a defined trend then I tend to view this pattern as a continuation patter unless it starts to break the other way.

There are a number of ways to trade the rectangle. You can buy or sell the breakout as it happens or you can wait to see if there is a pullback to the neckline (see charts). Once you have defined the rectangle you can also buy and sell at the boundaries of the rectangle.

I prefer to buy at the lower boundary if in an up trend and sell at the upper boundary if in a down trend. This can be a very effective trade as the risk is small. If you sell at the upper boundary then your stop loss can be close to the boundary and vise versa for the long trade at the lower boundary.

If you sell the breakout place your protective stop inside the rectangle and do the same for buying the upside breakout.

You can also measure the distance between the upper and lower boundaries and project the distance forward to get an indication of the size of the next move. If the distance from the upper to the lower boundary were 20 ticks then I would expect the next move to be at least 20 ticks.

rectangles 1 Rectangles

rectangles 2 Rectangles

Good Trading

Mark McRae

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Outside Days Mon, 22 Nov 2010 08:38:41 +0000 admin Outside days can occur frequently on daily charts. The secret of the outside day is the bigger the better and it has more meaning if found at the end of a trend.

They can be short lived and I always take my profit quickly. The outside day (OD) should completely encompass the previous day.

It must have a higher high than the previous day and a lower low than the previous day.

One of the most important things about this pattern is that the bar closes in the opposite direction of the trend. If the trend is down the close on the OD must be near the high or in the upper part of the bar. The opposite is true of the up trend. The OD may still work if this is not the case but my research show that it is more effective if it does close in the opposite direction.

A great example of this happened on the cash Dow only a few days ago (24th July 02, refer to chart). I like to trade this in two ways. First, depending on what the market has been doing prior to the outside day I will place a entry order a few ticks above the high of the OD if the trend has been down and I am looking to get long. Once I am in the market I will place my stop loss either as a dollar amount or at the .618 fibonacci retracement of the OD.

If you don’t know anything about fibonacci don’t worry, we will cover that in future lessons. The same applies to the short trade. If the OD occurred at the end of an up trend and I am trying to get short, I will place my entry order a few ticks below the low of the OD. Once taken short I will place my stop loss order in the same way as the long trade, either as a dollar amount or as the .618 fibonacci retracement.

The second way I like to trade this pattern is to trade it intraday. I closely monitor what happens at the high of the OD if I intend to go long and the low of the OD if I intend to go short.

Once the high or low has been taken as the case may be I will then enter the market on a 5 minute or 1 minute chart.

For long position I will buy the first retracement with a tight stop loss order under an intraday support and if trying to get short I will sell the first rally with a stop loss order above an intraday resistance. Below are two examples of Outside Days.

The first occurred at the end of a down trend (First Chart) and the second occurred at the end of an up trend (Second Chart).

outside days 1 Outside Days

outside days 2 Outside Days

Good Trading

Mark McRae

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Two Period Reversal Pattern Fri, 19 Nov 2010 13:57:24 +0000 admin The two period reversal is originally taken from the 2-day reversal pattern and as the name implies this particular pattern consists of two periods. I use two periods and I apply this pattern to all securities and time frames.

A period could be 1 minute or 1 month depending on the time frame you are looking at. I like to see this pattern after a strong move up or down. It does not work in periods of consolidation. For the two period reversal down, the first period should be at the end of a strong move up.

The close should be near the high and it is preferable that this high should be a new recent high. The second period should open near where the first period closed and should lose most if not all of the first periods gains and close near the low of the first period (see first chart).

This is the set up and you are now ready for the trade. Once the second period has closed you can enter short the market with a stop loss order just above the first or second periods high depending on which is higher. If the trade is to work is should not retrace back above the high of the two periods.

For the two period reversals up, the first period should be at the end of a strong down move. The close should be near the low of that period and it is preferable that this low is a new recent low.

The second period should open near the close of the first period and should regain most if not all of the first periods losses and close near the high of the first period (see second chart).

Once set up you can now enter the market long with a stop loss order below the low of the lowest low of the two periods.

With both the up and down reversal there may be some retracement before the trade takes off but it should not pass below the low of the two periods or the high of the two periods depending on which direction you are trading.

I have found this trade to have a high probability of success, it does not however happen that frequently in the markets I have observed. It does however happen with sufficient frequency to have it on your list of set ups to look out for.

two period1 Two Period Reversal Pattern

two period2 Two Period Reversal Pattern

Good Trading
Mark McRae

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Inside Days Thu, 18 Nov 2010 07:10:13 +0000 admin Inside days can be very profitable if traded correctly. First of all it is necessary to identify an inside day.

At the close of the market you are following take a note of the high and low for that day (day two). For it to qualify for an inside day the high must be lower than the high of the previous day (day one) and the low of the day must be higher than that of the previous day.

In other words the bar (day 2) must be inside that of the previous day (day one). This is the set up. I like to trade this in two ways.

The first method is to place a buy order a few ticks above the high of day 2 and a sell order below the low of day 2. Once your orders have been placed it doesn’t matter which direction the market goes you will have a position.

You can place your stop loss order in one of two ways. You can use a dollar cheap Valium amount or if the inside day (day 2) is not too large you can place a stop loss a few ticks above the high of the inside day. If you are taken short or a stop loss a few ticks below the low of the inside day if you are taken long.

I like this trade to work on day 3 only. If it has not worked on day 3 I cancel the trade. It may still work after day 3 but in my research it tends to make the most gains if it works in day 3.

The second method is to first identify an inside day on a daily chart and then trade it intraday.

If you are trading intraday you can monitor price action at the low or the high of day 2 and either enter the market as the high or low of day 2 is taken or enter on the first rally or dip as the case may be on a smaller time frame.

inside days 1 Inside Days

Good Trading

Mark McRae

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