That’s because traders who don’t know much about the stock market often begin with advanced techniques that can land them in hot water — and fast if they’re not careful.

I posted an article about market cycles and how they alternate between trending and range-bound.

If you missed this article, click here to check it out because it’ll help you match the correct trading cycle to your strategy, greatly increasing your odds of success.

How to Trade Support and Resistance Levels: Wait Till the Trend Ends

The first thing you want to do when learning how to trade support and resistance levels is identify the correct market conditions that lend themselves to range-bound trading.

The biggest mistake beginners make is trading range-bound techniques when markets are trending higher or lower. 

The key is to monitor trending stocks and wait till the trend ends.

Once the trending cycle ends, markets usually enter a prolonged stage of consolidation — or range-bound activity.

In other words, make sure you start out by monitoring trending markets, and don’t enter them. 

In the example below, you’ll notice I’m monitoring and waiting for the trend cycle to end.

If you continue to monitor specific stocks or other markets such as futures or commodities, you’ll notice how the trend becomes weaker. Eventually, the market enters a different type of trading cycle (also commonly referred to as a “regime”).

This is the correct time to initiate support and resistance trading tactics because the longer the market stays in one cycle, the longer it’s likely to stay in the next cycle.

In the next example, you can see how Devon Energy Corp. (NYSE: DVN) slowly transitioned from trending to range-bound cycle.

How to Take Advantage of a Range-Bound Trading Cycle

When you isolate a range-bound cycle, you want to make sure to give it a week or two to develop so you can see if there’s any directional bias.

In the simplest terms, you want to see if the range-bound cycle has a directional slope.

Even when markets are range-bound and trendless, there’s usually some degree of directional movement it has bias toward.

This bias is typically a sign that the consolidation is a reversal and, more often than not, the range-bound price action leans in the opposite direction from the previous trending cycle.

You can see in this example below how the stock favors the upside move. The previous trending cycle was downward, so it’s not surprising for the range-bound cycle to lean in the opposite direction.

After you isolate the range-bound cycle and determine which direction the market is leaning, you can begin planning your entry and exit levels.

The best opportunities tend to occur when people take trades in the direction of the slope the market is leaning toward. This tip will increase your profit-to-loss ratio as well as the size of your winners.

How to Trade Support and Resistance Levels: The Second Example 

To help you get a better understanding of how to trade support and resistance levels, and get a good idea of which direction to take your entry and exit signals, I want to provide you with another example… 

Take a look at this chart of Goldman Sachs Group Inc. (NYSE: GS)… 

You’ll notice how GS has been trending upward for an extended period of time. 

Monitoring stocks trending in one direction is a great way to begin your analysis. And market cycles tend to alternate, so you can anticipate with a high degree of certainty that a trending phase will end and consolidation cycle will begin.

Once you find the right stock to trade and notice its trend is coming to an end, you can begin looking for range-bound trading to begin.

The next step is to isolate the range-bound trading action and see which way it slopes…

You only want to take trades in the direction the market is sloping, so give it some time to show you which way to position yourself.

Once you isolate the range-bound cycle and determine which direction it favors, you can begin to plan your entry and exit.

In the next example, you can see how the slope is trending down, and my entries are always in the direction of the trend or slope.

Things to Keep in Mind 

Range-bound cycles work well with support and resistance trading patterns.

Make sure you pick stocks that exhibit substantial volatility and trading range, and don’t forget to only trade in the direction of the slope!

This will prevent many false signals. 

Let the channel develop before you enter so you can get a good idea of where support and resistance will line up.

I hope this article on how to trade support and resistance levels helps! 

And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to! 

All the best, 

Roger Scott
Senior Strategist, WealthPress

The method I’m giving away will help improve your day trading technique, as well as improve your overall success. 

The first thing I teach traders when learning how to analyze the stock market is to look at the big picture and work their way down from there. 

When analyzing markets from a long-term view, you gain insight into past trading history and, more importantly, clues as to how the market may behave in the future.

The first thing I usually pay attention to is the current conditions of the underlying market. In other words, I want to see if the market is trending or range-bound.

Once I determine the current trading characteristics, I immediately look back to see when the market exhibited the opposite characteristics.

How to Analyze the Stock Market: Remember the Golden Rule 

One of the most important rules every trader should know when learning how to analyze the stock market is the longer the market trends and exhibits one-way momentum, the higher the odds a range-bound period is approaching.

The longer the market is trendless or range-bound, the higher the odds that strong directional momentum is approaching.

There are exceptions to this rule. But when you typically see a long trend that lasts for several months, you almost always see a trendless consolidation period immediately after the end of the trending cycle.

When markets are range-bound for extended periods of time, a strong breakout accompanied by volatility and momentum usually follows this pattern.

How to Analyze the Stock Market: Apply to Different Time Frames

The markets are usually driven by people, and people are driven by emotion.

This pattern tends to apply across stocks, futures, commodities, currencies and most other financial markets… 

And the pattern of alternating between range-bound and momentum tends to apply to different time frames as well.

Notice in the example below how Hyatt Hotels Corp. (NYSE: H) alternates between range-bound and trending periods. Once you start paying attention to this pattern, you’ll begin taking it into consideration when planning your entry and exit strategies.

In this example, you can also see how this pattern applies to intraday price fluctuations. You always have to keep in mind that markets are driven by emotion.

This will help you gain a better perspective of how markets really work and what’s behind each move. But also keep in mind that there’s some correlation between the length of time of each stage and the following stage.

In other words, if the range-bound stage lasted two months, odds are the trending momentum stage or cycle will also last a few months.

How Can You Benefit From Alternating Cycles

Once you become aware of alternative trading cycles, you’ll begin to look and learn how to analyze the stock market a bit differently. 

Not only will you pay attention to what the market’s doing, but you’ll also start looking at the past few cycles to gain clues to help you determine how long the current cycle will last.

When you see the markets changing from one cycle to the next, you should reconsider how you trade that market and the type of strategies that are working in the current cycle. Once the cycle changes, the techniques that worked in the previous cycle will not work in the current cycle.

Therefore, you must adjust your trading style and learn to trade both trending and range-bound trading cycles.

How to Tell If Current Cycle Is Ending

There are many clues the markets provide that can alert us to changes in market cycles. 

For example, when the stock market changes from trending to range-bound, both volume and volatility drop.

When markets are beginning the trending cycle, the lows of the day usually occur in the mornings, and the highs of the day typically occur toward the closing bell.

I hope this short tutorial on how to analyze the stock market helps!

And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to! 

All the best, 

Roger Scott
Senior Strategist, WealthPress

It makes sense for there to be a ton of market volatility right now thanks to the Federal Reserve’s decision to raise interest rates by 0.75%, the largest hike we’ve seen since 1994… And the fact that we’re still in one of the worst market shakeouts since the COVID-19 crash in March 2020. 

To help calm everyone’s nerves this week, I’d like to introduce you to my favorite and the best pullback indicator, the Williams %R…

I tend to talk about pullbacks in a lot of my videos. However, if you’re wondering exactly what they are, they’re a pause or moderate drop in the price of a stock. And they’re relatively short in terms of duration.

But the real question you should be asking is how we can gauge those pullbacks in price…

How to Use the Best Pullback Indicator in Your Own Trading

In the past, we’ve talked a lot about the Relative Strength Index and 10-day pullbacks…

Those work great when you change the settings from 14 days, which is the standard, to 10 days (which is two weeks of trading days). And again, these are both simple indicators you can use to spot pullbacks — and they work well.

But a lot of traders don’t like to look at two separate indicators…

They just want to use one simple indicator.

So I’ve gotten a lot of requests this week asking for another one of my favorite pullback indicators…

This one’s called the Williams %R…

This indicator was not designed, created or tested to use on stocks. It’s actually a commodity indicator. And as I’ve told you all plenty of times, commodities are a trendy market whereas stocks are counter-trending.

In other words, it means stocks move more up and down.

Check out the short video and I’ll show you how to use the best pullback indicator in your own trading.

Don’t forget to like and subscribe to our YouTube channel if you haven’t already so you can be notified as soon as we post our next video and see what other trade opportunities we’re paying close attention to!

P.S. If you follow the stock market like I do, then you already know it just recorded its lowest close since June 2020.

That’s not comforting to hear for most retail traders…

I first sought out to create a system that’s purpose was to thrive in bull markets… But then I noticed it ended up working better in a crash.

I’m glad that happened because even though alarms are sounding across the world right now, we can still take advantage of this strategy…

So I decided to host a live training session at 1 p.m. EDT on Tuesday, May 24, to show everyone my research and explain how this system works.

Join Me! 

Most people learning how to trade start with what I call an “indicator fascination.” They dive right into advanced analysis methods that confuse and oftentimes discourage them from continuing to trade. 

When I first started out, I was under the impression that the more difficult methods would produce a higher probability of winning trades.

I purchased several books and magazines that discussed Gann Lines, Geometric calculations and Elliot Wave Principles that required a Ph.D. in physics to understand. I can promise you the only thing I learned after following these methods was to stay as far as possible away from them.

Why Chart Patterns for Beginners Should Be Simple 

Fortunately, I met a few professional traders who mentored and showed me some simple chart patterns for beginners that got me on the right track. And more importantly, they made me understand that trading isn’t all about complex and confusing strategies…

It’s about finding methods that match our emotional make-up and risk tolerance.

So today, I’m going to show you a few basic chart patterns for beginners that should help you get started on the right track. 

Always Begin With Daily Chart Patterns

The most fundamental mistake beginners make is searching for chart patterns that use intraday time frames.

I always encourage traders to begin their analysis with a daily time frame and then move on to the intraday time frame right before they’re getting ready to enter the trade.

There are some markets, such as E-mini S&P 500 futures and Forex, that you can begin analyzing using hourly or shorter time frame bars. However, most financial instruments respond best to daily chart analysis to begin with.

You can see just that in the symmetrical chart pattern setup below… 

I want to wait for the initial breakout to occur so I can day trade if the stock’s momentum continues after the breakout.

Usually, after a tight symmetrical triangle, the stock is wound up and ready for strong momentum that can last two to five days.

You’ll also notice that I completely relied on the daily chart for my analysis, entry and exit.

I watch the intraday chart while I’m in the trade, but I mostly focus on the daily chart to make sure the pattern is developing.

In the next case, the triangle breakout continued its upward momentum and closed near the high of the day.

I would use a simple market-on-close order to liquidate the position at the end of the day.

What I like about triangles is the inherently limited risk due to lack of volatility while the pattern is setting up.

This is one of the reasons why triangles are good low-risk, high-reward chart patterns for beginners. 

The next low-risk day trading chart pattern I want to show you is the bullish flag pattern.

It’s similar to the triangle pattern, but it has a slightly wider channel range and typically slopes down a bit more.

Notice the risk level is equal to the size of the bars that make up the flag.

I would look for a strong breakout day outside of the flag for an upside entry.

Flags are congestion patterns that tend to explode with good momentum once the congestion phase comes to an end.

You’ll notice how low the risk level can be when the bars are consolidating before the breakout, and have a tight trading range. These are the type of patterns you want to isolate for day trading.

The risk is small compared to the profit potential and because you’re entering right after the consolidation stage, the market is primed for volatility.

The profit on this trade was close to $3 and the risk level was around $1.

Day trading unfortunately doesn’t provide opportunity for huge gains because you are limited to how much time your position has to develop.

You should look for setups that provide you with a 2-to1 risk opportunity at a minimum.

Things to Keep in Mind

Start out with simple chart patterns for beginners that make sense.

Avoid difficult formulas or calculations that involve geometry or statistics.

Look for opportunities that provide high-potential reward and low risk so that the size of your winners are at least twice the size of your losers.

The way I trade chart patterns now is completely different. I only focus on 5 that back testing shows work best.

And I actually use a scanner to find charts showing those patterns. If you want the details on how that works, make sure to watch this training session I just recorded.

For more on this topic please go to: The Best Short-Term Trading Strategy for Beginners and Why Technical Analysis Doesn’t Have to Be Complicated.

And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to! 

All the best, 

Roger Scott

Senior Strategist, WealthPress

Not to mention, the ability to create hundreds of types of spreads and combinations to take advantage of different market conditions, volatility disparity as well as seasonal tendencies.

Most options traders anticipate three types of price movements…

So I decided to separate and categorize the most common, and then select the best technical analysis methods for options trading that take advantage of each type of price movement.

Here are the three different possibilities… 

Technical Analysis Methods for Options Trading: Strong Directional Movement

One of the best technical analysis methods for options trading when trying to find candidates moving rapidly is the 20-day exponential moving average.

The 20-day EMA is more responsive than the traditional moving average, placing more weight on recent price data. Therefore, it’s the better choice to help you gauge the strength of a trend.

Another great technical filter I use is the 90-day price high. 

According to numerous backtests, assets that make 90-day price highs tend to continue moving in the same direction, often experiencing an increase in momentum. 

Many traders believe stocks are priced too high when trading above 90-day price highs… But if you take a look at major price breakouts that continue for months on end, they all start out by breaking the 90-day high.

Keep in mind that the percentage of false breakouts is also lowest near the 90-day level.

Technical Analysis Methods for Options Trading: Mild Directional Movement

The second type of price movement is a mild directional movement, which results from a bounce, pullback or a continuation in momentum after a pause. 

You’ll find these movements usually occur while a trend is already on the way and the market is pausing and re-balancing before once again continuing to move in the direction of the main trend.

One simple and effective method of spotting mild directional movements that work well with options is to identify assets that pull back while in a strong uptrend. 

One indicator that works well for this type of analysis is the Relative Strength Indicator. I typically adjust the time period from 14 days to 10 because my time frame is shorter. But otherwise, there are no other changes that need to be made to the indicator.

While there are other oscillators similar to the RSI, the majority of them are too sensitive to price data and generate too many false signals. 

So I avoid the stochastic, MACD and other momentum oscillators, relying almost exclusively on the RSI for overbought and oversold analysis.

Mild directional movement is ideal for options spreads and other combination strategies. On the other hand, if you’re trading net long or short positions and want maximum directional movement, you may want to use the momentum strategies identified in the first section.

No Directional Movement Strategies 

Most options traders — especially premium sellers — want nothing more than little to no directional movement to take advantage of premium decay. 

When option writers sell premium, they also want a higher level of volatility. This increases the amount of premium that the options writer brings in due to a sharp increase of implied volatility that expands when volatility increases.

One of the best methods of identifying a range-bound market that has substantial range expansion is to use the Bollinger Band indicator.

You can see in this example how the Bollinger Bands maintain several months of price action on the S&P 500 within the upper and lower band. Notice how the envelope expands and contracts as volatility or trading range moves higher and then lower. This is a good way to determine if volatility is increasing or decreasing.

If the Bollinger Band envelope expands, then volatility increases.

If the Bollinger Band becomes narrower, then the market is becoming more range bound and volatility is decreasing. Many professional traders sell options when the bands are widening, and buy the options back when the bands are becoming narrower.

Another way to use Bollinger Band is to use them as support and resistance levels to sell premiums outside of the upper and lower bands of the envelope… These levels offer conservative trading levels to both the up and downsides.

There are different technical analysis methods for options trading and each one works best in different market conditions. 

The type of indicator and analysis method you choose should take into account the type of price move you are anticipating, the options strategy you plan to use and the level of volatility in the underlying asset at the current time.

I hope that helps! 

And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to! 

All the best, 

Roger Scott
Senior Strategist, WealthPress

They rely on basic indicators such as moving averages and oscillators to determine if the stock market is trending, how strong the current trend is and whether or not it’s approaching overbought or oversold levels.

While these basic technical indicators provide important data about past market behavior, there are better indicators that can give you a more broad picture of what’s in store for the market in the short term…

Let’s start with learning how to use the AD Line… 

How to Use the AD Line 

The advance/decline line is a market breadth indicator that’s based on the net advancing stocks, which is the difference between the number of advancing stocks and declining stocks on a daily basis. 

The net advance is a positive number when there are more stocks advancing then declining, and negative when there’s a larger number of declining stocks compared to advancing stocks. 

The AD line rises when the net advances become positive and falls when the net advances become negative. The final daily advance and decline numbers are reported by the NYSE on a daily basis after the closing bell.

How to Use the AD Line for Market Analysis

One way professional traders use the AD line is by comparing it to an index to determine if the AD Line is confirming its price action.

There’s usually divergence between the AD line and the index, which is a good indication that a short-term correction is approaching.

Notice how the NYSE is beginning to decline while the AD line continues to move upward at a slight angle. 

The stock market continues moving higher after the bullish divergence occurs.

Now here’s an example of bearish divergence between the NYSE and the AD line. You can see how the NYSE is moving lower while the AD line begins making higher lows.

The market turns bullish a short time later and continues moving higher as well.

Examining prior divergence levels between the stock market and the AD line suggests that most divergence occurs within a short-to-medium-term time period.

Backtesting results suggest that most periods last between one and six weeks.

Why the AD Line Is Effective in Market Trend Analysis

The AD line represents the entire market equally as opposed to the index, which is capitalization weighted, meaning the large-cap stocks influence the index a lot more than smaller stocks.

Because the index is so easily influenced by a few large-cap stocks, learning how to use the AD line creates a good check-and-balance system to see how the market is behaving as a whole

Avoid Using the Nasdaq AD Line

While the NYSE AD line is a great indicator for trend analysis, the Nasdaq AD line should be avoided for several reasons.

First, the Nasdaq has a wide range of stocks including those that have been recently listed and are super speculative.

The issue is that these stocks prices can rise and fall quickly based on pure speculation.

Companies are also oftentimes removed from the Nasdaq due to not meeting capitalization requirements…

So because there are more newer companies in the Nasdaq, their influence on the market may be short-lived and less meaningful than stocks that trade on the NYSE.

You should learn how to use the AD line on the NYSE because it’s more stable and reliable on a long-term basis.

Things to Keep in Mind

The AD line is a market breadth indicator that measures broad-based market participation…  Which means if a market rally is broad across many different sectors, the AD line will move sharply higher.

If the rally is caused by a few large-cap stocks, the AD line will move slightly higher.

Conversely, if the markets drop as a result from several hundred stocks, the AD line will drop. And if the decline is limited to a few large-cap stocks, the decline will be small.

Similarly, the AD line does a great job of measuring divergence. 

If a bullish divergence occurs between the AD line and the index, the market should continue moving higher.

If a bearish divergence occurs between the market and the AD line, the market will begin to lose steam and likely experience a correction in the coming days.

For more on this topic, please go to: How to Pick Winning Stocks With Simple Market Analysis Tools and Critical Stock Market Analysis Tools You Need to Know.

And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to! 

All the best, 

Roger Scott
Senior Strategist, WealthPress

If you don’t believe me, just go online or look at a few trading magazines. Articles and advertising for entry methods that produce a high-percentage of winners tend to be the most popular. 

But having an effective exit strategy for stocks is just as important as your entry… 

Why Effective Exit Strategies for Stocks Need Control

When traders first start out, they don’t perceive the stock market like pro traders do, especially when they’re first learning day trading methods. 

Beginners often believe that with the right entry method, they will gain some control over the outcome of their actions…

If you think about this on a deeper level, you’ll find the only control traders have over their positions occurs at the time of entry. 

That is to say once the position is entered and filled, the trader loses all control over it and you’re at the mercy of whatever the market decides to do. 

So before entry, the trader had full control over everything… the position, the account and even the market. 

Yes, you control what the market will do to you by avoiding market entry.

But from a pure psychological perspective, you can see how you give up all control when you pull the trigger and enter a position.

When traders look for entry strategies, they focus on the accuracy of the method and the risk-to-reward profile of the entry method. 

This makes them feel in control over their trading account. 

If they feel like they know how accurate the entry method will be, they can have even more control over the market.

Most of the time, this happens on a subconscious level and traders don’t even realize this is happening to their thought process, but it is.

So it’s important for traders to have an effective exit strategy for stocks in place. 

Effective Exit Strategies for Stocks Are Key

I always ask traders how much time they spend thinking about an effective exit strategy for stocks compared to their entry… 

The answer is usually 9 to 1. 

Now, think about your personal experience and how much time you think about your exit strategy compared to your entry.

Most traders don’t spend nearly as much time thinking about their profit target compared to their entry strategy, but your profit target is responsible for how much money you make.

Same with your stop-loss strategy… It’s responsible for your risk and loss amount, but most trading books talk about it in passing or provide simple rules that don’t always work well in all situations. 

Positive Expectancy 

The key to achieving positive expectancy is to minimize your losses and maximize your winners — both of these elements have to do with having an effective exit strategy for stocks instead of your entry. 

You minimize your losses by placing stop-loss orders that are effective without stopping you out too early. 

You also maximize your winners by implementing a profit target or a trailing exit strategy. It allows the market to maximize its momentum without exiting too early and missing out on a strong and powerful move in your direction after your position has been liquidated.

The ATR Indicator

I recently wrote an article about using the average true range indicator to equalize or balance your positions. 

The ATR indicator measures the daily or the intraday trading range based on the volatility of the stock, futures or forex contract you’re trading.

Even though the ATR indicator was created four decades ago, it remains one of the most solid indicators for measuring the current volatility. 

What I like the most about the ATR indicator is how it adjusts dynamically as volatility changes bar by bar, or day to day, depending on your time frame.

This allows the market to tell us where to place stop-loss orders and profit targets instead of us imposing our will on the market.

Things to Keep in Mind

Trading isn’t a one-size-fits-all endeavor…

Different markets produce different levels of volatility at different times. By using actual market volatility to measure our stop-loss levels and profit targets, we give our positions the breathing room they need… 

But at the same time, the protection level necessary to achieve the best risk-to-reward ratio.

Finding an effective exit strategy to use is the best way to start learning day and swing trading techniques that will work well in the long run.

For more on this topic, please go to: 5 Day Trading Rules for Beginners and The Best Ways to Improve 2 Key Aspects of Your Trading.

And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to! 

All the best, 

Roger Scott
Senior Strategist, WealthPress

But the biggest issue in this situation is figuring out how much downside protection should be in place given the risk and potential return on the trade.

I find that sometimes put options work best… 

But from a practical perspective, the position doesn’t always make sense because the option may have low liquidity, the spread may be too wide or the option that fits my requirements just doesn’t give me enough risk protection or time value.

Risk Management Techniques for Beginner Traders: Put Options 

There are two instances when put options would be a better risk management technique for beginner traders, offering more protection against downside movement than stop orders. 

The first situation is when a price gap occurs to the downside… 

In this case, the trader using a stop-loss order would get a price fill that’s much lower than the intended fill price because the gap opened below the stop-loss level… also causing the risk on the trade to increase by the amount the stock opened below the intended price level.

For example, let’s assume you purchased ABC stock at $100 per share with a stop-loss order at $90. A few days after you place your stop loss, the stock opens at $80 per share because its earnings were much lower than expected and it gaps down $20 at the open.

In this case, your sell stop would trigger and you would be filled at $80 instead of $90.

One possible way to avoid this scenario is to use stop-limit orders, and choose a limit price that’s a few points below your stop-loss order.

Risk Management Techniques for Beginner Traders: Stop-Limit Orders

Now let’s assume you placed the stop-loss order at $90 and a limit level on the trade at $85.

In this case, you could end up in a worse situation because instead of getting filled at $80, or the opening price the next day, your order would simply NOT get triggered because the opening was $5 below your limit price.

So you’d end up holding the position and risking even more to the downside unless the stock at some point during the session rallied back up to the $85 level… which may or may not happen. 

Neither of the two stop-loss examples offer a feasible solution to adequately protect your position against gaps to the downside.

An ordinary stop loss will increase your risk — and in effect your loss level — beyond the level you intended. If you use a stop-limit order and the gap opens below your limit price, the trade won’t execute. And unless you’re monitoring the stock in real time, you may end up increasing your downside risk well beyond the intended level on the trade.

The other situation, and one I dislike a lot, occurs when the stock moves lower to trigger the stop-price level and then rebounds to trade higher once again.

This situation can be super frustrating because even though you picked the right direction and the stock rallied after falling, you didn’t participate in the move because you were stopped out prematurely.

Things to Keep in Mind 

Unfortunately, there’s no way to avoid these two scenarios when applying stop-loss orders to your trades for protection. 

In some situations, however, using a stop-loss order may end up being one of the better risk management techniques for beginner traders. 

For example, if you’re day trading and don’t have any overnight risk, the odds of a major gap occurring during the trading session is rather slim —  especially if you’re trading assets that have reasonable levels of liquidity.

But stop-loss orders may be a better fit than put options when you’re making a long-term investment or using a trend approach to the markets.

In these situations, there’s no way to figure out how much time the trade will be held. And buying a bunch of put options may prove to be an expensive proposition over time, especially if the asset is intended for long-term capital appreciation.

I find that put options work best when my holding period is limited to no more than a few months. 

This allows me to buy an out-of-the-money put option that has enough time value to offer me adequate protection without the high cost that comes with buying an option that’s at the money. 

It’s a great trade off between risk and reward and most of the time I end up liquidating the option before it expires and recouping some of the cost that was paid for it.

In conclusion, whether you buy a put option or use a stop-loss order is best determined by your intended holding period, the volatility or trading range of the underlying asset and whether the asset you’re holding is prone to big price gaps. 

You have to take these factors into account and consider the upside and downside of each risk management technique — especially if you’re a beginner trader — before deciding whether to use stop-loss orders or put options.

For more on topics like this, please check out: Learn to Swing Trade Options With This Beginner-Friendly Strategy and Don’t Make Simple Trading Strategies Complicated.

And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to! 

All the best, 

Roger Scott
Senior Strategist, WealthPress

I received a few emails with questions and comments asking me to show how to use these patterns to enter trades. 

Now, it’s one thing knowing how to identify a pattern that is developing. But it is another different experience trying to understand when to enter and exit the markets when using technical patterns.

The reason for this is rather simple because patterns are subjective in nature. They’re harder to interpret than things like a moving average or other technical indicators based on math or statistical formulas.

With indicators, you know exactly where to enter and exit your orders. But with chart patterns, it’s easy to misinterpret the chart and your entry and exit points.

How Basic Technical Analysis Patterns Work 

The first thing you want to do when learning how to use basic technical analysis patterns is to ignore any that are confusing or seem hard to interpret. 

There’s always another opportunity in the market. So don’t feel like you have to trade every pattern that comes along. 

Stick to basic patterns such as head and shoulders, double tops and bottoms and triangles till you get a good feel for these. Only then should you start experimenting with more advanced patterns.

Learn to Trade the Double Top And Bottom Patterns

The basic technical analysis patterns I want to focus on are classic chart patterns that have been around for over a decade: the double top and bottom patterns. 

It works with stocks, ETFs, futures and foreign currency markets. 

The double top and bottom patterns are flexible and can be used for day trading, swing trading and long-term investing. Many swing traders use this pattern with stocks, which is what I’m going to cover in this tutorial.

The Double Top And Bottom Patterns: The First Step Is to Identify the First Swing Low

You’ll want to keep track of stocks or other markets that are either making a 50-day high or low at minimum. 

I typically start looking for double tops and bottoms by going through stocks that are making yearly highs or lows.

As shown in the chart below, you’ll want to make sure that point 1 and point 3 are almost equal to each other, and that there’s sufficient horizontal distance between the second point and the first and third points. 

After you see a few patterns like this one, you will get a good visual feel for it.

Once the pattern is identified and all three points are determined, you need to find an entry point. 

I look for a gap to occur within five trading days after the third point is made on the chart. If I’m trading the double bottom pattern, I will look for a gap up within five trading days after point 3 is made. And if I’m trading the double top pattern, I will look for a gap down after point 3 is made.

In this particular case, the stock gapped immediately after the third point was made. 

You can give the market up to five days to gap up but if no gap occurs, then the trade is nullified. 

The stop-loss order is placed immediately below the third point in case the trade goes against you when you enter the order.

In this example, Netflix Inc. (Nasdaq: NFLX) rallied and never looked back. 

This is ideally what you want to see when you use basic technical analysis patterns. But keep in mind that the pattern can take anywhere from two weeks to two months to develop, assuming you are using daily charts. 

Many traders apply this pattern to five-minute bar charts when day trading.

The double top is exactly the opposite of a double bottom. 

This trade in Denarius Metals Corp. (CVE: DSLV) set up for almost two months and gapped down immediately after creating the third point. 

Now, the double top and bottom patterns have to be traded the same way. So make sure you don’t miss shorting opportunities that show promise, which is a major mistake made by many beginners.

In the chart above, you can see exactly where your entry opportunity would take place. 

DSLV gapped down after the third point was made. I typically give stocks no more than five days. So if the stock rallies above the third point before the entry is triggered, the trade would be nullified because the pattern would be invalid.

You can see the entire progression from the first point to the entry on this chart. 

Always remember to wait for a gap down in case of a double top, and a gap up for a double bottom as your pre-entry filter. This shows some additional interest in the stock or market you’re trading and makes a great entry filter.

If you’re trading double bottoms, your stop-loss level is immediately below point 3. And if you’re trading double tops, your stop-loss level is immediately above point 3. 

Make sure you remember the difference so you don’t get confused when placing orders and stops with your broker. 

If you’d like to learn more about the double top and bottom patterns and basic technical analysis patterns in general, please go to: How to Analyze Stocks Using Technical Analysis and The Ultimate Trader’s Guide to Technical Analysis.

And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to! 

All the best, 

Roger Scott
Senior Strategist, WealthPress

Learning how to find pairs trade is one of the easiest skills to learn, and it can also be the simplest way to sow the seeds of victory in a traders’ account. 

Think of pairs trading as the perfect hedge in a market that’s difficult to trade……

Sounds familiar, like 2022, maybe?

Before I dive into all the methods I use when looking for pairs trades, it’s always helpful to review the basics.

A pairs trade is when a person puts on a two-legged position. By that, I mean you’re going long one stock while also shorting another.

The strategy also involves matching the long and short positions in two stocks with a high correlation — cousin stocks, like going long Amazon and shorting the Chinese version of it, Alibaba.

The goal is to make gains when the stock goes up while also making gains on the other stock going down.

When I look for pairs trades, I don’t just want a random stock that’s going up some days at the same time as the other stock is.

I’m looking for this…

How to Find the Perfect Pairs Trades Everytime

When learning how to find pairs trades, it’s important to look for two stocks that are linked. The stocks must have an association and correlation between them — that’s the secret sauce and the recipe doesn’t work without it.

Linked trades make it more likely that the day one stock is going up, the other stock will fall — so they’re inversely correlated. 

I can almost guarantee you’re already seeing some on the market right now, you just haven’t realized it yet.

We’ll have days on Wall Street where a technology stock is up, and then that same day you’ll see defensive stocks like pharmaceuticals are down. 

However, when I’m looking for a pairs trade with stocks in the same sector, I have to do things a bit different…

Watch the video to learn more about how to find pairs trades, and which stocks make the best pairs. 

As always, send any topics you’d like me to cover to jeff@joyofthetrade.com and stay ahead of the markets, especially these choppy ones, by subscribing to our YouTube channel. 

P.S. A date is approaching… where some of the most influential people in the United States will make a big-time decision…  

And we believe the markets will move in a massive way.

Up or down, we don’t know… So how do we position ourselves to win when we don’t know the direction? 

It’s all about being long the strongest horse… And short the weakest…

Brace yourself for what could be the biggest market move of 2022. 

LFG!