... read more
As day traders say, “The trend is your friend.” Of course, finding that trendy friend requires familiarity with day trading trend analysis and how to find the trend in day trading. Day traders rely on technical analysis, using various indicators to determine the trend of any particular security. One caveat: While these indicators are the lifeblood of day traders, it’s crucial to have a thorough understanding of each indicator before making monetary trades. Without preparation, it’s easy to misinterpret some indicators, causing chaos in your trading operations.
How to Find the Trend in Day Trading
First, let’s define the trend. Basically, it’s a stock or other security price that continues to move in a particular direction. Trends can only go three ways: an uptrend means the price is moving higher, a downtrend means the price is moving lower and a sideways trend indicates sideways movement. While all trends move in one of these directions, prices almost never move in a straight line. That’s where a moving average comes in, as this technical tool allows day traders to see where the trend is heading.
A moving average is a security’s average price during a specific time period. Moving averages are key indicators for trend day trading, as they are an effective and simple way to gauge trends in a fast-paced market. These indicators let you know whether your move is short or long. The type of moving average most valuable for a trader depends on the trader’s time frame. While long-term investors and traders may rely on the 200, 100 or 50-day simple moving average, day traders usually prefer the 10-day moving average. You want to place these moving averages on a five-minute chart, which you can do with shorter moving averages but not those going long-term. Day traders can also use intraday moving averages, showing the price trends for that day.
The simple moving average allows day traders to identify and trade the trend, but also provides direction for exiting a trade. If you are trading breakouts, a trend can only move in one direction. Should the moving average you use go flat, or the security breaches the moving average in late morning trading, that’s a red flag. For best overall results, choose a profit percentage target beforehand and exit when you meet it, even if the trend still looks promising. Odds are your trades will end up more consistently profitable when you “know when to fold them.”
Moving Average Divergence Convergence
The moving average divergence convergence (MACD) is another top indicator for ascertaining trends. This oscillator will also indicate momentum. The MACD calculates the difference between a security’s 26 and 12-day exponential moving average (EMA). The EMA reacts more quickly to price changes than a simple moving average.
As an oscillator, the MACD line fluctuates above and below zero. When the line is above zero the trend is upward, and a trend is downward when the line is below zero. Day traders look for buy signals when the line rises above zero and sell signals when the line falls below. The MACD also has a slow and fast line. Buy when the fast line moves above the slow line, and sell when the fast line moves below the slow line.
Relative Strength Index
The Relative Strength Index (RSI) is an oscillator moving between zero and 100, measuring the changing and speed of price movements. It can help determine a trend, as well as entry and exit points for traders. Traders usually consider the RSI overbought when it is over 70, and oversold when it goes below 30. When overbought, a correction is pending, while when oversold, the security may soon experience a bounce. In either condition, the RSI may remain overbought or oversold for an extended period. In uptrends, the RSI ranges between 40 and 100, while in downtrends it moves between 10 and 60.
On Balance Volume
As its name implies, the On Balance Volume (OBV) indicator considers volume – but it also shows whether that volume is forcing prices upward or downward. Day traders use the OBV as a confirmation indicator for price trends. Rising prices should show a rising OBV, and vice versa. If the OBV rises but the price hasn’t, it is likely the price will start to trend upward. If the OBV and a security’s price are moving in opposite directions – the OBV rising and the price falling – that indicates a possible trend reversal.
Combine Indicators for Trend Trading
There’s no reason to rely on just one indicator for day trading trend analysis. Combine the indicators you prefer for trend confirmation and for entry and exit strategies. Use the RSI, for example, for trend isolation and entry points. Then apply a simple moving average as a chart overlay to identify exit points. For example, when the trend is up, plan to exit as the stock price falls below the line.
While combining indicators can help you make profitable trades, you also don’t want to overdo it. More than three is too many, and can give your conflicting signals. That’s another point – know the strengths and weaknesses of each of the technical tools you use. With that familiarity, you’ll have a better than average chance of identifying trends and earning money on your trades.
As your day trading skills improve, you’ll want to familiarize yourself with and use more sophisticated trading tools. That’s where the Gann square comes in. You’ll need a high comfort level with charting before immersing yourself in the Gann system. Once you’ve educated yourself, you’ll find day trading with the Gann square to be an effective new tool in your trading arsenal.
History of the Gann Square
The Gann square has a long history, as it was developed by trader William Delbert Gann back in the 1930s. Gann, a Texas native, was a widely read, religious man who became a 33rd degree Freemason of the Scottish Rite Order, an interest that may have introduced him to ancient mathematic principles, including Sacred Geometry. He was also well-acquainted with the classical cultures of Egypt and Rome. When using the Gann system, you are delving back into the “technical indicators” of antiquity, now available via computer. Gann’s masterwork, The Basis of My Forecasting Method, was published in 1935. He describes his methods as “allegories,” and it’s safe to say the Gann system is not the most straightforward. It’s also safe to say that the trader will not encounter a stock market theorist quite as mystical as the legendary W.D. Gann.
How the Gann System Works
The Gann system measures important elements, including time, price and pattern. The Gann system has an esoteric quality, in that past, present, and future all exist simultaneously on a Gann angle. Analysis in any type of market requires the day trader to consider the market’s past performance, its current position as to its top and bottom, and forecasting future price movement by using that information.
The Gann system also focuses on geometric elements, especially square, triangles and circles, with the former considered the most compelling aspect. The circle is used to connect the square’s four corners, bringing the angles into sharper focus. In essence, it “squares the circle.”
Gann angles form a straight line on a price chart, providing a fixed point between time and price. In his system, the primary angle is the line representing 1 price unit for 1 time unit. It’s known as the 1×1, or the 45- degree angle.
When following this primary angle, a stock’s value increases by 1 point per day. Other critical Gann angles are the 2×1, which move two points daily, and angles with similar criteria – 3×1, 4×1, 8×1, and 16×1. While the values increase, it’s important to note corresponding value decreasing angles. A Gann fan occurs when various angles are drawn in a group. This is generally drawn from the price’s top or bottom.
Gann Square Types
The essential Gann square is the square of 9, also known as the square root calculator. It involves a spiral, more often referred to as a wheel, of numbers. Gann didn’t invent the square of 9 for day trading purposes. In his wide travels, he found it inscribed on both the Great Pyramid of Egypt and an Indian temple. There’s an astrological foundation to the square of 9, as the ancient inscriptions, he found referred specifically to the summer solstice, on June 22. In Gann trading, this date represents a potential shift in direction or trend. Just as everyone has their own birthday – and the date and time supposedly foretell their future path – so does every stock and/or market has their own “vibration” reacting to the square of 9. In fact, if you’re familiar with astrological charting, you may have an easier time picking up Gann system methodology. Symbols such as the Cardinal Cross and the Ordinal Cross, which correspond to some astrological charting figures, also appear in the Gann system. It is on these crosses that support and resistance levels are determined. The Gann’s square of 9 even takes planetary movements into consideration, so think of it as astrological charting for a particular security. If your only knowledge of astrology is that of the basic sun signs, it’s easy to scoff at this methodology. If you’re more aware of the mathematical calculations involved in this ancient practice, you won’t dismiss it. Gann’s method is a type of forecasting, based on these trends. Not only does Gann forecast support and resistance levels, but also the timing of the breakout.
The Gann square revolves around the square root of numbers. Thus, the numbers to look at in the Gann square are those representing 0 to 360 degrees, or 2, 11, 28, 53 and so on. Also important are those numbers representing 45 degrees, or 3, 13, 31, 57, etc.; the numbers representing 90 degrees, or 4, 15, 31, 61, etc. and numbers representing 180 degrees, or 6,9, 40, 69, etc.
While trading with the Gann square has stood the test of time, it’s not foolproof. You can certainly lose money at times by using the square of 9, but even with that caveat, the system retains remarkable accuracy.
Using the Gann System
There’s no way to simplify the Gann system. It requires serious study on the part of the day trader. Once mastered, the Gann system is most useful for swing trading, a longer-term type of trading that usually requires several days to come to its intended fruition. When day trading with the Gann system, traders don’t have to concentrate on the system’s time alignment but use its support and resistance levels to make their trades. One strategy involves buying at a certain price and making your exit based on an important Gann value. Another advantage of the Gann system is that it’s useful for trading any type of security, from stocks to commodities.
The Sure Trader Advantage
SureTrader’s state-of-the-art platform offers top technical analysis tools, including the Gann system, for clients. While the Gann system is geared toward the more experienced day trader, we have top technical and charting tools for all trading levels. Along with 6:1 leverage, low fees and low minimum balance, these technical tools are just another part of the SureTrader advantage.
Day traders use technical and fundamental analysis when trading securities. While technical analysis is used much more than fundamental analysis, both play a role in successful day trading. As traders hone their trading strategies they will discover which type of stock analysis best suites their purpose. The bottom line is that stock analysis, whether technical or fundamental, seeks to reveal future stock and market activity.
What is Technical Stock Analysis?
Day traders don’t focus on stock price per se with technical analysis. It’s a matter of focusing on the statistical analysis of the stock’s price movements. In essence, technical analysis involves predicting a stock price’s future direction by examining past data. Technical analysis requires a thorough understanding of technical charts. The use of technical charts and the examination of price and volume history reveal long-term patterns. Technical stock analysis looks at the way market factors affect a stock but not necessarily factors affecting the market. The latter is more the purview of fundamental analysis.
What is Fundamental Stock Analysis?
Unlike technical analysis, price is the primary focus with fundamental analysis making it nearly an opposite system. You want to find the fundamental, or intrinsic, value of the security. Anything that affects a company’s value is a component of fundamental analysis, whether that concerns major influences such as the overall economy or specific factors such as company management, revenue, earnings growth and profit margins. Rather than using technical charts, traders look for hard data for security evaluation. A company’s financial statements are the starting point.
Because day traders are interested in very short-term – 24 hours or less – gains and losses, fundamental analysis is not as crucial a tool. However, for longer-term traders, it’s an absolute necessity. Market legend, Warren Buffett relies heavily on fundamental analysis when choosing stocks.
Technical Analysis Tools
There’s no shortage of technical tools for day traders, therefore, the tools used boil down to experience and personal preference. Some technical tools will show basically the same information, so there is no need to use redundant indicators. For best results, rely on one of the indicators in each of these four sectors:
Oscillators – among the common tools, oscillators generally range from 0 to 100 with the former showing oversold conditions and the latter overbought conditions. The most popular oscillators include:
- Commodity Channel Index (CCI) – despite the name, this indicator works with any type of security, not just commodities. It measures a security’s current price level compared to the average price level over a specific period. When prices are above average, the CCI is high. When the prices are below its average, the CCI is low. This allows the trader to clearly ascertain overbought and oversold levels.
- Moving Average Convergence Divergence (MACD) – this tool consists of a fast and slow line, comparing two different moving averages. The exponential moving average (EMA) is compared at 26 days and 12 days with the latter subtracted from the former to calculate the MACD- that’s the bottom line. The top line, called the signal line, consists of an EMA nine-day average functioning as the signal for buying and selling.
- Relative Strength Index (RSI) – this oscillator measures a price’s movement, change, and speed. Generally, an RSI above 70 indicates overbought conditions while below 30 is considered oversold. In an up market, the RSI usually ranges from 40 to 90 with 50 as the support base. In a downward market, the RSI predominately stays between 10 and 60 with 50 serving as the resistance.
- Stochastic – this momentum indicator compares a security’s closing price to its price range over a certain time frame. When the market trends upward, closing prices are near the high and when trending downward, closing prices are near the low.
Volume indicators – volume indicators aren’t absolute necessities but they can help traders make decisions. Such indicators deal not only with volume but with price data to determine trend strength. The best-known volume indicators include:
- Chaikin Money Flow (CMF) – used in conjunction with a moving average, this indicator measures a security’s buying and selling pressure over a specific period. The CMF aids a trader in figuring out future changes.
- Money Flow Index (MFI) – uses price and volume for buying and selling pressure measurement.
- On Balance Volume (OBV) – this momentum indicator predicts stock price changes via volume flow.
Overlays – these indicators are the exception to the “choose one” rule, as different overlays serve different functions. They get their name because these indicators are found on the top of price bars and use the same price scales. The most commonly used overlays include:
- Bollinger bands – this shows higher and lower limits of price movements as per the standard deviation of prices.
- Keltner channels – based on an average true range of prices, this overlay shows a price movement’s highest and lowest limits.
- Moving averages – this overlay uses either simple moving averages or exponential moving averages to provide the average price over a specified timeframe.
- Pivot points – in an uptrend, this overlay reveals reversal points and in a downtrend, shows above points.
Breadth indicators – these indicators show overall market sentiment, whether bullish or bearish. The most used breadth indicators include:
- Arms Index – also known as the Trading Index, or TRIN, this indicator is used by many day traders as its measurement of basic market supply and demand can predict very short-term price movements.
- Tick Index – based on the New York Stock Exchange data, the Tick compares upticking and downticking stocks.
- Tiki Index – basically the same as the Tick but based on the Dow Jones Industrial Average data.
Using Technical Trading Strategies
Once a trader masters technical analysis tools, it’s time to use them and learn technical trading strategies. Familiarity with the top trading strategies allows a trader to find the best-suited method for his or her individual trading style. Here are the major technical trading strategies:
Breakout Stock Trading
With breakout stock trading, traders look for each security’s price resistance and support level. The former is indicative of a price the stock can’t quite reach and the latter, a price at which the stock does not go below. Breaching of that resistance point results in high volume trading. Traders must learn certain patterns in technical charts to seize an upward trend and capitalize on the breakout. Knowing the correct exit point is critical for this strategy.
Simple Moving Averages (SMA)
Sophisticated technical charting isn’t necessary for determining simple moving averages. SMAs are easy enough to figure out on a calculator. You do need to see the SMA on a chart to quickly determine trending and whether to buy or sell based on the SMA trend signal. There are many varieties of SMAs, but most pertain to specific timeframes that may involve weeks, days, hours or minutes.
Trading with trend strategies is relatively simple, but the key is the usage of a variety of indicators and analysis. Depending on a security’s direction, traders assume long position or short positions on a stock. For trend trading, you need SMAs, RSIs and volume measurements.
An easy strategy to master, trading with swing strategies begins with identifying the trend using candlestick charting. However, this is not a day trading strategy but a longer-term strategy. Once you’ve identified the trend, patience becomes a virtue as you wait for gains.
With range strategies, traders find a security’s support and resistance level with the help of oscillators. The stock is purchased at the overbought level and sold when close to the resistance level. Range trading works as either a short or long-term strategy, depending on the trader’s preference.
Using Fundamental Analysis
Whether you day trade or take a long-term approach, understanding and using fundamental analysis is critical. Fundamental analysis is really the foundation of investing and virtually every investment strategy uses it. Much of fundamental analysis involves number crunching and learning the nitty-gritty of a particular company through examination of its assets, liabilities, expenses, and revenues. If you enjoy doing research when investing – and no one should invest without researching a security – you’ll find fundamental analysis compelling. Used correctly, fundamental analysis is the best way to pick stocks – just ask Buffett.
Get started on your fundamental analysis by accessing and dissecting a company’s financial statements, especially the balance sheet, income statement and cash flow statement. Here’s what you’ll learn from perusing these documents:
- Balance sheet – a statement of the company’s assets, liabilities, etc. at a specific time. You’ll learn what the company owns and what it owes, along with shareholder investment amounts.
- Income statement – a company’s financial performance during a particular time period and also known as a profit and loss statement. This document reveals a company’s profitability – or lack of it – over a year or quarter.
- Cash flow statement – the overall incoming and outgoing cash amounts for a certain time period. Compare the cash flow from its operating activities to the company’s net income.
Learn how to perform fundamental analysis by tracking a few stocks over two or three months. Do your homework and decide on the direction of the stock based on its fundamentals. After careful tracking for the three-month period, see how each stock fared compared with your analysis.
The SureTrader Advantage
SureTrader’s state-of-the-art platform offers top technical analysis tools for clients. Whether you’re a novice investor or have decades of experience, you’ll find our technical and charting tools second to none. Along with our low minimum balance and 6:1 leverage, our technical offerings are just another part of the SureTrader advantage.
Not many people develop a top technical indicator to which their name is permanently attached, but that was the situation with Richard W. “Dick” Arms Jr. back in the 1960s. Half a century later, this indicator is still going strong. It’s an index with which everyday trader should become familiar.
The Trading Index
The Arms index is formally known as the Trading Index, or TRIN. It’s a valuable indicator for the day trader, providing information on intraday market strength. Because Arms created his index specifically for short-term trading, it remains one of the best tools for day traders gauging market sentiment. It’s especially useful for stock trading, rather than the trading of other securities. The Arms Index is applicable to longer term trading if the investor wants to use it for that purpose.
Moving Averages and the Arms Index
Day traders should use a four day moving average with the Arms Index, while a mid-term trader should use a three week, or 21-day, moving average. For those who want to use the Arms Index for long-term trading, a 55-day average is recommended. These recommendations come from Dick Arms himself.
Reading the Arms Index
With the Arms Index, a 1.0 reading is neutral, or zero-line, and the index level rises above or drops below it. When the greater volume of stocks is advancing, the level drops beneath the zero line. If there is more volume among declining stocks, the level is above the zero line. When the volume is just at the zero line, it’s static and not a time to trade.
When the market is very bullish or bearish, that triggers an extreme reading in the Arms Index. Expect the reading to return to the mean in the near future. Such extreme readings generally indicate a major price reversal is on the way. Keep in mind the Arms Index is opposite to the market, in that a rising index denotes bearishness and a falling index is bullish.
Oversold or Overbought
It’s in the realm of whether securities are overbought or oversold that the Arms Index is most accurate. With the ARMS index, determining whether the market is oversold or overbought is simply a matter of viewing the indicator and its relationship to the zero line. This is probably the most effective use of the Arms index for day traders, as it confirms other indicators. If the indicator plummets to extreme levels of overbuying, it’s an opportunity to sell. When the level ratchets up to extreme overselling, then is the time to do some buying. However, the market may remain in an overbought or oversold condition for considerable periods of time.
Using the Arms Index
Use the Arms index as one tool in your trading toolbox, but keep track of overall trend analysis. The Arms index shows stock advancement and decline, but also gives traders supporting volume data. That allows you, as the trader, to have more confidence in the signals. The four important variables for the Arms Index consist of:
- Advancing stocks – those closing higher on a particular day
- Declining stocks – those closing lower
- Advancing volume – total volume for all stocks advancing that day
- Declining volume – total volume for all stocks declining that day.
From this information, you can calculate the pertinent data you need for trading.
One caveat: The Arms Index shows fairly accurate turning points for prices, but it does not give traders the best timing for taking profits. Your own trading strategy and other indicators can guide you through those critical points.
Calculating the Arms Index
Let Dick Arms explain the way his namesake index is calculated: “First, divide the number of stocks that advanced in price by the number of stocks that declined in price to determine the Advance/Decline Ratio. Next, the volume of advancing stocks is divided by the volume of declining stocks to determine the Upside/Downside Ratio. Finally, the Advance/Decline Ratio is divided by the Upside/Downside Ratio.”
TRIN and TRINQ
The indicator appears in two formats. The TRIN is used for New York Stock Exchange data, while the TRINQ deals with NASDAQ or Russell 2000 data. Use the appropriate format depending on which exchange you are trading. Remember that oversold and overbought levels may vary somewhat by index.
Since the Arms Index has been around so long, many traders use it in ways differing from Dick Arms’ original purpose. He conceived it as a contrarian indicator, based on overbought or oversold status. Arms’ considered the market overbought when the TRIN’s 10-day moving average falls below .8. Oversold conditions arise when the TRIN rises above 1.2. That is not the view of other traders, who use TRIN direction and level to establish whether the market belongs to the bulls or bears at any given time.
Arms Index Variables
There is a downside to trading with the Arms Index, and that occurs when less volume is going into advancing stocks as anticipated. On these occasions – which are relatively infrequent – the Arms Index isn’t as reliable as is typically the case. When this scenario plays out, look to other indicators to confirm the Arms Index. It’s always wise to rely on more than one indicator and confirm price via market data. The Arms Index is best used in conjunction with overall trend analysis. It’s not an indicator that often gives a clear exit signal, so you must rely on other indicators and use a stop/loss for this purpose. Successful day trading with the Arms Index necessitates knowledge of this indicator’s strengths and weaknesses.
The SureTrader Advantage
At SureTrader, clients have access to top technical indicators such as TRIN and TRINQ. We provide clients with all the charts, analysis, and tools they need to make well-informed trading decisions. Along with our state-of-the-art platform and low fees, that’s just part of the SureTrader advantage.
Successful day trading involves learning about the various aspects of technical analysis, especially stock charts. Your initial glance at a stock chart may prove daunting, but it doesn’t take long to learn all the components – and how to use them when trading. There’s no more crucial visual aid in stock trading than a stock chart. All stock chart components include labeling, so it’s just a matter of learning what these labels mean and what they indicate to become a stock chart master.
Stock Chart Basics
Think of stock charts as akin to maps. They tell you where the stock has been, where it is now, and can identify its general future direction, if history is any indication. If you’re new to reading stock charts, here is basic information found in stock charts:
- Symbol – the chart shows the trading symbol for the particular stock, i.e. FB for Facebook
- Support and resistance levels – the prices at which the security stays during a specific time period. When the security “breaks through” these levels, the lines change.
- Trading volume – these volume trends can change rapidly – up or down – depending on news affecting the security
- Trend lines – these straightforward lines show a security’s general direction. Straightforward is not synonymous with simple, as prices don’t tend to move straight up or down. Instead, traders look for a security’s “highest highs” and “lowest lows” when making trading decisions.
Charts use various methods to indicate price information. While the simple line format is the most obviously understood, most traders prefer the candlestick method. This involves one “candlestick” formation for each trading day, so a 10-day candlestick chart shows 10 days worth of price data. All the crucial price information for a security is there, including:
Candlestick charts make analysis of trading periods over a specific time period easy. They’ve been in use for centuries, originally developed by Japanese futures traders. However, candlestick charts make the most sense for shorter-term trading, for day or weeks rather than months.
Point and figure charts consist of columns of Xs and Os. The former indicates rising prices, while the latter shows falling prices. Once familiar with this type of chart, the trader can instantly see a security’s support and resistance levels. When the price moves beyond these support and resistance levels, it’s time to trade.
Once you become accustomed to reading charts and price data, common price patterns – and rare ones – immediately stand out. You then have the opportunity to make an informed trade, maximizing your potential for success.
The SureTrader Advantage
SureTrader offers clients top charting and technical analysis. As you educate yourself as a day trader, you will find the type of charting that works best for your investing strategy. Technical analysis is the use of a variety of tools, including charts, to predict the future movements of individual securities. The more information there is at your disposal, the better your trading choices. Information is power, and SureTrader delivers with a state-of-the-art platform and software. That’s just part of the SureTrader advantage.