Okay to get things off the ground here I’m going to share some basic technical analysis concepts that are widely used by institutional traders when charting. But before I do, I want everyone to understand that when it comes to institutional trading, there are many factors that lead to a position being taken, its not always based on ‘technical factors’. Market profiling , fundamentals, clearing, reserves, interest and bond rates and order books are all factors that can lead to positions within the market. But those are beyond the scope of this thread which is dedicated to technical analysis.
The time frames that I’m going to use for the swing/day trading analysis are the Weekly - Daily - 4Hr - 1Hr.
The technical tools that will be used are 200SMA - 100SMA - 60EMA - RSI(5)
Other technical tools used, Support/Resistance - Fibs - Trend Lines - Occasional Candles Patterns(I don’t use candle patterns much as they are mostly manipulated by market makers).
What we are not going to use is custom indicators, cheesy looking charts with lots of squiggles and lines plastered all over it and saturated with multiple indicators.
All we need is simple tools to do a simple job in order to earn a simple crust, leave everything else at the door.
There are some simple guides I want to outline when using these free available tools to analyze the market.
First of all, if you are going to counter trend trade a particular market, then have a solid technical reason at the absolute minimum, don’t base counter trend trading positions on fundamentals as this leads to many false and short lived moves that are rejected and reversed sooner rather than later for preparation for the technical timing set-ups - fundamental moves are mostly knee-jerk reactions in response to breaking news, scheduled news or meetings from central banks ect. There is nothing wrong with counter trend trading and many good trading opportunities will be presented that produce the goods, but do have a solid technical reason for doing so.
Around 50% of the analysis will lead to trend trading, while 25% will lead to counter trend trading, the other 25% will leave you out of the market flat or range trading.
So I don’t want you thinking that the only way to trade profitably is via trend trading as that is far from the truth, profitable trading comes from the ability one has to analyze markets and and produce compatible analysis that has a solid foundation behind it. Do you think Citi only trade the trend? don’t kid yourself!
The markets will produce profitable moves time and time again, may that be with the trend, against the trend, or ranging. All 3 scenarios should be viewed as potential trading opportunities and not feared because you have read many times that the trend is your friend.
As things progress on this thread some of the methods and analysis will get a little more advanced, but lets start things of slowly and build on it.
Clarifying A Trend & It’s Strength - When you are looking to clarify a trend in the purpose of a technical viewpoint for swing/day trading, we should prefer to see price trading above or below the 200SMA on 2 high time frames - but overall the daily chart is our trend identification chart. I’m going to make it as simple as possible here, the more time frames that are in agreement the stronger the trend, the less that are in agreement, the weaker the trend. Now thats not to say that when we are in a good strong trend that you can’t take short term counter trend trade moves, but its better to counter trend trade when its a weaker trend.
For example I would classify a strong bearish trend if the weekly and daily charts had price trading below the 200SMA, I would be very less likely to counter trend trade in this situation. But if the weekly chart is showing price above the 200SMA and the daily chart is showing price below the 200SMA, then this would still be a trend, but a little weaker and may be prone to tasty counter trend moves.
Another example would be the daily chart trading below the 200SMA while the 4Hr chart trades above its 200SMA, the overall trend is down (daily chart) but the 4Hr is currently counter.
Counter Trend Trading - So the basic concepts to start with are when counter trend trading, make sure price is attacking a strong support/resistance zone and has diverged/pushed away from the 200SMA by a good margin, we should also like to see some divergence on the RSI - relative to the price action, counter trend trading should require tight stops as most of the moves will be on the back of market tops and bottoms or off strong support/resistance points.
The 3 counter trend trading technical rules
[B]1: Price has diverged/pushed away from the 200SMA by a good distance
2: Price should be attacking a strong support/resistance zone
3: We prefer to see RSI divergence[/B]
[B]
Example Chart - Counter Trend Trading[/B]
On the chart above I have marked points where price has pushed away from the 200SMA by a good amount in a short space of time on a trend extension. Price is above the 200SMA, but as the trend progresses, price pushes away from the 200SMA creating gaps, these can offer possible counter trend opportunities once full analysis is done from top-down.
Trading With The Trend & Market Timing
Trading with the trend or at least trying to trade with the trend is actually where most retail traders lose their money, did you know that?
The reason being is that they clarify or analyze trend identification wrongly or to late. Most traders tend to use moving average crossovers as trend identification, or price action such as higher highs higher lows, lower highs and lower lows. Most of the time when one of these situations arise, price has already moved and the trend is finished or at least close to finishing, this leads most traders to BUY or SELL into trends late as they are about maximized.
The simple process of trend clarifying as I described early on is a simple one. We use the daily charts 200SMA, price above it is positive, price below it is negative, we can however trade trends on intraday time frames as long as we remember that the overall trend is the daily and should over rule the longer term.
Also keeping an eye out for new trends developing is a profitable situation. This occurs when we see price cross over the 200SMA, at this point market timing is required and can be done using the RSI.
For example, if we see price cross over the 200SMA to the upside, then we would wait for the RSI to hit the over bought readings and monitor the price, 3 things can happen,
1: After the RSI reads over bought, price can pull back to or near to the recently crossed 200SMA allowing us a possible entry long in the new trend.
2: After the RSI reads over bought, price can consolidate, allowing us to BUY the breakout in the direction of the new trend.
3: After the RSI reads over bought, price can pullback below the 200SMA, in this case we would stand aside and wait to see what happens next in order to make a decision.
Example - Trend Changing
On the chart above we can see price first of all crossing below the 200SMA, the RSI dips into the oversold levels early in the move and price pulls-back the the 200SMA and rejects. The next 2 moves we see are when price pulls-back to the 200SMA and holds as resistance, we can see RSI divergence in both occasions. The 4th move is a breakout of the triangle and above the 200SMA, we can see the RSI over bought and price pulls-back to the 200SMA and holds as support just above it. The 5th and last move which happened a few days ago recently, is when price pulled-back to the 200SMA and holds as support, during this time we see RSI in the oversold zone.
More to follow soon.
