Monday,26 December 2016
As U.S. and European markets are holidaying, let us polish our trading plans and methods to make trading easy, simple and generate profits almost every time.
You must have heard the usual stock market adage- “plan your trades and trade your plan”.
That is very true and here is a simple way of planning your trades, then trading your plan. It is a very effective – and simplest method and if you follow it, you’ll cut down your over trading and increase profitable trades.
Many traders call it “trading system”; I prefer to name it “trading map” for two reasons; first, “trading system” can be confused with trading software or platforms, and secondly, going for a treasure hunt requires a map to show you where the treasure is hidden!
Here is an example of a trading map of Dow Jones (don’t get confused, explanations follow):
To trade successfully; you need to know:
1) Right trade entry points
2) Right trade exit point.
Fibonacci levels and Moving Averages help you in identifying these important points, both in range bound markets and in trending ones.
Fibonacci levels are usually drawn on daily charts, from top most to lowest points which stretch between many month.
Here, we are taking example of Dow Jones as U.S. markets present a unique problem. How to draw Fib levels when indexes have been rallying so much that they have crossed their highest points and have become range bound?
In such a situation, we draw Fib levels on hourly charts. Here, in this chart, Fib levels are drawn between the top most and lowest points of hourly charts:
You will notice, this index is range bound with a broader range between point 1 and 2 (daily range) and a shorter range of point 3 and 4 (intra day range).
The intra day range becomes clearer if you change chart setting to 15 minutes. Notice, we have added 20-Day Moving Average and RSI indicators too, for better understanding of what can happen in next session.
Now, this chart is giving one positive signal (Price jumping above 20- DMA) and two negative signals ( RSI turning flat even though price moving up & price closing near a resistance level).
To finalize how to trade this chart, we note down our observations, possible trading actions, what kind of trade can be initiated at what level, trade entry/ exit points, how many lots you can buy/sell at what level and how much capital you will require. Thus, our final chart will be like this:
You can add more notes/ observation to your chart and when markets open, and the price moves, you will already know what you can do at that stage- and at any other stage through the session!
You will not have to guess any more which way market is going to move, because you already have all moves mapped on your chart!
Give markets 15-30 minutes after the opening bell (patience is the key) and the price movement on your chart will tell you what is happening and how you take take advantage of its movements to trade profitably.
Remember two things to use this method successfully:
1) Have patience. Wait till the price reaches a definite trade entry point. Only then start trading. If you follow this rule, you will need to trade only once or twice a day and get the full length of that day’s trend; from top to bottom (sell) or bottom to top (buy). This will also cut down you over trading and bring down your brokerage charges.
2) Don’t be greedy. One small successful trade a day will help you accumulate huge profits over the month. You don’t need to trade heavily, in too many lots or put in too much capital in your trading. Small but consistently successful trading is the magic formula of profits in stock markets.
Keep experimenting with different time frames and in a few sessions, you’ll realize how markets move within same levels while going up and going down. Same support, same resistance and same trading pattern between those levels.
And then, trading will become easy and profits more frequent. (That will be the perfect Christmas and New Year gift to our readers 🙂 )
Good luck and see you in trading rings when global markets reopen after a few hours !