2 Factors To Look Out For That Support Your Trade

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2 Factors To Look Out For That Support Your Trade

November 7, 2020

I’ve been backed up with outside work lately and haven’t been keeping pace with trading and updating my blog regularly so I do apologize for that.

Today, I’ll be sharing a trade that I took way back on October 25 on the EUR/USD.

The pair was directionless that day and trend wasn’t a factor in determining whether it would be safer to stick exclusively with call or put options. As can be determined from the screenshot above, there were two major price levels that price respected throughout the European session. The main support existed notably around 1.29885, where I placed a red line for visual reference. The main resistance, where I wasn’t able to catch a trade due to being away from the computer, occurred around 1.3020.

My trade, as designated by the green arrow on the screenshot, occurred at the support level on the 7:55 candle for an 8:15AM expiration. Price was finding early resistance around 1.29885 during early European trading (1:10AM-1:40AM EST) before breaking through to form new highs for the day. However, we saw a retracement back toward the level at around 3:00AM, before bouncing twice and going back to the northside. To me, this was confirmation of a strong intraday support level and would provide the potential for a trade opportunity should price get back there in the near-term.

Also, as previously mentioned, the EUR/USD was forming a strong price resistance along the 1.3020 level. The 5:15 and 5:35 candles (both green candles with wicks bouncing off 1.3020) would have presented strong put options trades, both of which would have worked out for essentially any type of expiry (e.g., 10-minute, 15-minute, 30-minute, hourly) that day.

The trade I took occurred later on the 7:55 candle specified by the green candle for a call option. I was actually quite patient with this trade. I didn’t take the trade on the previously candle despite the 1.29885 level proving itself to be a strong support earlier. The trend had been mostly down for nearly two-and-a-half hours, plus the 7:50 candle had been showing significant downward momentum. It had been down six pips in a span of two minutes. When momentum is that substantial, it’s always best to remain careful by being patient and watching out for a potential break.

Nevertheless, although the 1.29885 price level was breached, it wicked back above on the 7:50 candle. Based on this rejection, I decided that taking a trade on the 7:55 candle would be relatively safe and have a pretty good chance of working out. It didn’t turn out to be the most perfect trade, in that it didn’t constantly stay in my favor throughout. In fact, I was down almost three pips less than ten minutes before expiration. But the price support expectedly did hold and eventually close out at about a four-pip winner.

Also note during this trading day, price had little sensitivity to the 1.3000 level, a significant whole number on the pair that often serves as a notable price distinction. Looking at the chart, one could argue that it did form some minor support and resistance, but it never reliably held for more than 5-10 minutes. Sometimes these whole numbers can be great areas to trade, but on some days they can be rather unimportant, especially when price has been testing and breaching it repeatedly.

When trading, it’s always best to look for at least two factors that support your trade. For me, a clearly defined price level is the most important, followed by how price is acting around that level. As subsidiary factors, I might consider short-term trend followed by long-term trend, if either are applicable. If you have any comments or questions just leave a message below and I’ll get back to ya.

How Strong Is Your Trade Idea? 7 Factors That Can Tell You (Pt. 2)

By Robert Colville on November 25, 2020

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This is the continuation of our two-part article series, How Strong Is Your Trade Idea? 7 Factors That Can Tell You. Last week, in Part 1, we discussed a trio of (mostly) technically inspired factors including the market’s prevailing trend, the unique reward/risk profile, and the nature of the chart pattern being traded, and explored how each can be used to validate (or even invalidate) a specific trade idea.

While each of the prior factors could be examined using just a current price chart, this week, we’ll profile additional methods for confirming a particular trade idea that may require you going beyond your existing chart. From time-tested indicators, to the higher time frames, and even fundamental and intermarket analysis, these methods are straightforward and reliable, and can add a degree of confidence to any trade idea whenever they act in agreement.

Think about these factors during the analysis process and you may create a more thorough picture of the trade idea in question without creating confusion or blurred signals.

Is There Confirmation from the RSI or Moving Averages?

In the name of simplicity and not littering your price chart with multiple indicators, adding in the Relative Strength Index (RSI) to the bottom of the chart can provide a level of perspective you won’t get from looking at price alone. In addition to extreme high (70+) or low (20-) readings in the RSI, which could act as buy or sell signals, respectively, checking for RSI divergence is also a reliable way to validate a particular trade idea.

RSI divergence is present, for example, whenever the asset or currency pair in question is making new highs or lows, but the RSI is not. This might suggest that traders and investors have yet to pile into a momentum move at full force, leaving additional room for said move to continue to either the upside (if bullish divergence) or downside (if bearish).

Yet another simple way to validate the potential strength of a trade idea is to check the 20-, 50-, and 200-period exponential moving averages (EMAs), which can be easily overlaid on any price chart by your trading software. Proper order, angle, and separation between the moving averages suggests the likelihood for continuation of the current trend, which can help validate any trade idea for which the “Trend is your friend.”

Is There Agreement on Higher Time Frames?

Particularly for those who trade predominantly off of daily charts, analysing price action on higher time frames like the weekly and monthly can be quite useful. Often times, a clear and more decisive trend exists on the higher time frames that isn’t as obvious when looking at price action on just the daily or intraday charts. And for long-term traders inclined to stay with their trades for weeks or even months, it seems both proper and justified to understand the behaviour of price on the long-term charts as well.

More than just looking for confirmation signals, though, we’ll sometimes even take trades on the weekly chart if it offers a more favourable entry point or better reward/risk profile than the daily. Regardless, a qualifying chart pattern on the daily time frame, coupled with a clear trend working in its favour on the weekly and/or monthly charts makes for a nice trading opportunity, the kind most traders could take with confidence. So for confirmation, and even for new and perhaps better ways to approach a trade idea, take a moment to “zoom out” and examine the merits and risk factors of the position on the higher time frames.

How Is the Fundamental & Interest Rate Environment?

Even for technical traders, important trade considerations existing beyond the scope of the charts mustn’t go ignored. So once you’ve assessed a trade idea from a technical perspective, it’s wise to also consider the fundamental backdrop impacting the assets or currencies you’re trading, as quite often, there will be both head and tailwinds from such things as geopolitical tensions, central bank monetary policies and interest rates, the economic outlook for the respective nations, and their overall competitive position in the global economy at the time of trading.

Now, rest easier, because a fundamental mastery of the markets and news isn’t required. But for traders with even mainstream knowledge, a look at the fundamentals may yield valuable confirmation when analysing a trade idea, as we received recently when buying SGDJPY.

You see, beyond the chart pattern and technical backdrop, fundamental factors including Japan’s current account deficit, recent comments from US President-elect Trump regarding US/Japanese trade agreements, and the Bank of Japan (BoJ) being handcuffed to ultra-easy monetary policies all suggest a likelihood for continued Japanese yen (JPY) weakness and add a degree of confidence to our trade idea.

I even joked in a recent Market Insider Webinar (subscription required) that “Japan is basically screwed” when it comes to its economic and policy stance, and with so many fundamental factors aligned against the yen, it only helps further validate any technically inspired trade idea that aims to sell JPY versus currency counterparts like the US dollar (USD), Australian dollar (AUD), or as we did recently, the Singapore dollar (SGD).

Do Intermarket Factors Help Validate Your Trade Idea?

To truly understand the assets and/or currency pairs you trade, you must also gain an historical perspective as to how said assets and pairs tend to react in response to outside markets or events. Long-standing relationships like seasonal cycles, correlations, and even inverse correlations have been in play for decades or longer in the markets, and can go a long way toward validating a trade idea in any number of assets or currencies.

Think, for example, about the close-knit relationship among commodity currencies like the AUD, Canadian dollar (CAD), and New Zealand dollar (NZD), where price action in the oil and agricultural commodity markets tend to be reflected in some, if not all of these currencies. Also consider gold, the US dollar, and the Swiss franc (CHF) as well-known “safe havens” that tend to see increased inflows during times of volatility in world equity markets. Whenever forex trading switches from “risk-on” to “risk-off,” it’s all the more reason to trust any trade idea that’s built upon buying those safe-haven currencies against riskier counterparts.

And these are only a couple examples of intermarket relationships that are well worth considering whenever analysing a trade idea. So study any and all intermarket relationships for the assets and currency pairs you trade, know how price has tended to react throughout the market’s lengthy history, and always check to see if known intermarket factors are working in your favour whenever you’re weighing the strength of a new trade idea. Alongside the other technical and fundamental factors, this may help build a stronger case either for or against a given position.

Clearly, an entire host of factors—not all of which are technical in nature—can go into every trade decision. So as you continue to develop your own analysis process, follow along with us and receive full access to every video lesson, article, and new trade idea the moment it’s released! All this and more is yours when you join the Lazy Trader community, and you can get started today with a no-risk trial by clicking the banner below.

What to Look for in a Day Trading Stock

With thousands of stocks to choose from, how do you decide which ones you are going to focus on for day trading? It can get confusing trying to figure it out. Some traders find new stocks to trade every day, or hunt for stocks that are breaking out of patterns. Others watch for stocks that breakout of support or resistance levels, or are the most volatile.

Some traders look for stocks that are consistently volatile, trading a handful of those stocks for weeks on end. There are also those that simply trade the same one or two stocks consistently.

This last approach is more beneficial to day traders because they are less research-intensive—day traders don’t need to constantly find new stocks, or search for volatility and breakouts. If you are one of these traders and opt to trade one or two stocks (or ETFs) continuously, there are a few factors to look for in the stocks that can help you decide which ones to choose.

Volume

An active day trader requires adequate stock volume to enter and exit trades on demand. The higher the volume, the easier it is to enter and exit positions (relative to lower volume stocks) with little or no slippage. Slippage occurs when your market order or stop-loss price changes between the time the order occurs and the time the transaction happens. This is common when orders are bigger than the typical number of shares on the bid or offer.

While preferences vary, many day traders will trade stocks with a daily volume of at least 1 million trades (often several million). One of the most heavily traded products in the U.S. is an exchange-traded fund (ETF)—the S&P 500 SPDR (SPY)—which has a daily volume of close to 95 million. 

A stock screener can help you narrow the number of stocks down to a number that can be managed. If there are still a lot of stocks in the list, work to reduce it by only considering stocks that do 3 million (or more) in daily average volume.

Volatility

A common day trading approach is to trade stocks which have strong movement throughout the day. Each stock has a different volatility “personality.” Some stocks can average moves of 0.5% per day, some move around 1% per day, and other stocks move more than 5% a day.

What stocks you choose to trade depends on your trading style, your reflexes, your broker, and your personality. Many people find trading a stock that moves 0.5% to 2% per day tolerable while finding the big swings of a stock that move 5% per day tough to handle.

Volatile stocks require very fast reflexes and instant execution of trades.

Many people are not mentally or physically agile enough to react to a large number of volatile stocks and the price changes that they can go through. This can hinder the effective execution of trades in higher volatility stocks.

To make it more manageable, you could use a stock screener (such as Finviz) to narrow the number of stocks down to a size that works for you. If there are still a lot of stocks on the list after the reduction, try to further reduce the size of the list by only considering stocks that move in small percentages, such as 1% to 2%.

A few day traders may choose to also trade stocks on news that significantly affects a stock. These are referred to as impact stocks and can offer volatility as an advantage for profit.

Trend or Range

The trend and range of investments are other components to consider. There are range traders, trend traders, and those that do both effectively. Range refers to the difference between a stock’s low and high prices in a specific trading period, while trend refers to the general direction of a stock’s price. The prices could be continuously moving up or down, signifying an uptrend or downtrend.

If you prefer trading ranges, only trade stocks which have a tendency to range. If you utilize a trending strategy, only trade stocks that have a trending tendency.

A stock screener can help you isolate stocks that trend or range so that you always have a list of stocks to apply your day trading strategies to. Finding stocks that conform to your trading method will take some work, as the dynamics within stocks change over time. It’s time well spent though, as a strategy applied in the right context is much more effective.

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