Have you ever gotten in a trade and immediately after, watch that position move against you like the markets were playing an evil trick?

Now, if it has, don’t worry, it happens to everyone. However, if you are always getting stopped out, or if your risk vs. reward ratios are off, then you’ve got a problem that needs correcting.

You are either setting your stops too tight, and not giving the trade enough room to work…

Or, you’re not entering trades with high-probability setups.

What does that mean?

Well, before I enter a trade, there are a few things I outline.

For example, I already know my stock entry price… where my stop will be…and my profit targets.

This process has helped me amass millions in trading profits over the last decade.

But that’s just my trading plan. What do I use to find my entry points, targets, and stop levels?

Moving Averages.

Now, there are two types of moving averages… keep reading to learn more.

These Lines Could Help You Spot Trends and Reversals

There is one indicator that many chartists, including myself, use to spot trends and potential reversals: moving averages.

Now, if you don’t know… there are two types of moving averages: exponential and simple.

Basically, exponential moving averages (EMA) place more weight on recent price action using a mathematical formula. On the other hand, the simple moving averages (SMA) place equal weight on price action.

We’re only going to be focused on simple moving averages today.

Short-Term vs. Long-Term SMAs

That said, moving averages are a great tool to spot the overall trend.

How?

Well, here’s a look at the daily chart in Roku Inc. (ROKU) with the 20-day SMA plotted.

Notice the line in the chart?

Well the 20-day SMA is considered a “fast” or short term moving average. In other words, the 20-day SMA follows prices more closely than a longer-term SMA.

As you can see, the 20-day SMA gives us an idea of the overall short-term trend and acts as support and resistance at times.

Now, if you’re swing trading (only holding a stock for a few days or weeks), then you’ll want to look at short-term SMAs, like the 10-, 20-, 30- or 50-day SMAs.

On the other hand, if you’re more of a longer-term trader (buy and hold), then the longer-term SMAs, like the 50,- 100- and 200-day SMAs may be more beneficial. You see, slow-moving averages give us an idea of the longer-term trend.

However, when you’re just looking at longer-term SMAs, it’s often hard to spot clear entries.

For example, take a look at the 100-day SMA plotted in ROKU.

It’s going to be a while before there is a clear signal there.

The problem that many traders have is the fact that they stick to just one indicator and ignore the others… some traders might just look at the 20-day SMA and ignore the 200-day SMA… but as traders, that’s the wrong mindset to have.

Just because you swing trade, that doesn’t mean you should ignore long-term SMAs… or ignore short-term SMAs if we’re buying and holding stocks for the long term.

In fact, sometimes it’s helpful to know both the short- and long-term trends.

How is this beneficial to our trading?

Well, you can look for price breaks above short-term moving averages to signal entries, and longer-term SMAs to spot key support levels.

For example, here’s a look at the chart in ROKU again.

Notice how ROKU held above the 200-day SMA, which acted as a support line. Shortly after, the stock broke above the 20-day SMA… and just started to run higher.

That said, you could’ve bought shares on the break above the 20-day SMA… and used a break below the 200-day SMA to stop out of the position. Thereafter, you could hold your shares and wait for a clear signal to sell your shares (like a break below the 20-day SMA).

Now, that’s not the only way you can use moving averages.

You see, there’s actually something known as bullish and bearish crossovers.

Combining Short-term and Long-term SMAs

Now, a bullish crossover occurs when the short-term SMA (say the 20-day SMA) crosses above a longer-term SMA (this could be either the 50-, 100-, or 200-day SMA).

You see, when the shorter-term SMA crosses above a longer-term SMA… that lets us know that a potential shift in trend is happening.

Remember, the shorter-term SMA will react faster to price changes than the slow SMA.

So what happens when a stock moves higher?

Well, the 20-day SMA will react faster than say the 50-day SMA.

For example, take a look at the daily chart in ROKU again. This time, the 20-, 50- and 200-day SMAs are plotted.

Notice in the chart above, you’ll see the red line cross above the green line. Prior to that, you can see that ROKU was actually making lower highs, and consolidating… and there was no clear trend.

That’s what we call a bullish crossover because the shorter-term SMA (the 20-day SMA, or the red line) crossed above the 50-day SMA (the green line).

Once those two lines cross… you can see how the stock just starts to run higher.

As you can see, short-term (fast) moving averages react to price changes more quickly than long-term (slow) moving averages. Both have their place… but when you combine the two types, then you can find clear entries and exits.

Now, trend lines have helped me become a consistently profitable trader with over $2M in career trading profits… and it’s allowed me to remain calm, cool and collected when I’m trading.

If you’re looking to find tranquility in your trading… then check out my latest training lesson on three simple trend lines that have helped me over the years.

I also make notes about the chart setup, which helps remind me what my plan is and to not deviate from it.

Source: PetraPicks.com | Original Link

About ten years ago, I decided to take control of my personal finances after I found out that my advisor lost nearly half of my portfolio during the financial crisis.

I decided to roll up my sleeves and get to work.

There I was… at the age of 50, ready to embark on a new journey…

And the only thing that gave me confidence was that idea that I couldn’t be as bad as my broker was.

However, it wasn’t a fairy tale start.

Sure, I can sit back and chuckle at it, now that I’ve made over $2M in trading profits…

But believe me, I was a deer in headlights when I started trading. I was overtrading and overwhelming myself.

However, that all changed once I switched up my approach.

Instead of thinking about all the money I was going to make, I started thinking about risk management and preserving capital. I also started to develop an investing plan.

Keep reading to learn how to build your plan.

The Importance of Developing A Plan

When you’re trading stocks, it helps to start out with a plan. Think about it like this, you’re going to be putting your capital at risk… so you should know exactly what you’re getting into and should have some guidelines in place.

You see, a lot of traders don’t start out with a plan… and more times than not, they end up taking a massive loss and damaging their trading accounts.

However, that doesn’t mean you can’t get back up and recover from that loss.

As I mentioned earlier, I was once in that situation before… my broker lost 50% of my account… and I knew I needed a plan in place to get my account back into positive territory.

Now, I actually have experience with developing business plans, and it’s actually not that difficult to translate those skills
into trading.

Assess the Situation

For example, the first thing to do if you’re trying to recover from losses is to assess your finances.

Basically, you want to figure out how much capital you have to trade, which will allow you to also figure out your risk tolerance. If you don’t know, the size of your account matters when it comes to brokers.

You see, in order to day trade, you must have an account of $25K+. If your account is below $25K, the Pattern Day Trader (PDT) rule will be enforced. In other words, if you buy and sell a stock in the same day, more than 3 times in a trading week… you run the risk of getting your account frozen for some time.

Basically, you want to figure out whether you’re in a financial position to trade. This will ultimately dictate your style of trading.

For example, just because you don’t have $25K+ in your account to trade with doesn’t mean you can’t still learn how to trade. In fact, there are scalable strategies out there that actually work around this and cater to those who aren’t always able to day trade.

Once you find a strategy that suits your personality, you should try to spot a setup and plan your trade around it. You can paper trade or even just write down your plan and look back at the chart later.

You see, when you’re trying to bounce back from losses, it’s all about controlling your risk.

One quick way to manage your risk is to develop a plan.

Trade the Plan

When you have a trading plan, you have “rules” to follow. Ultimately this helps with your risk management.

Think, if you’re just trading a stock… you don’t know where you’re getting in the stock, stopping out, or taking profits… you just want in.

To me, that’s reckless, and I have actually traded that way before… but not anymore, I’m calm, cool and calculated.

Planning my trades ahead of time helped me with that.

For example, here’s a look at one of my trading plans, which I sent out to my clients.

I know exactly where I’m looking to buy the stock and stop out in case things get sour. Now, I also know where my targets are.

When you have a plan like this… all you have to do is execute.

For example, let’s say you saw ATUS break above $25 (the neckline for the inverse head and shoulders pattern), and you bought shares at $25.15.

Well, here’s how the pattern works. We look for a fall in the stock price, followed by a rise to some resistance level (the blue horizontal line here). This forms the left shoulder.

Thereafter, the stock bulls back to a level lower than the right shoulder. Again, the stock bounces and reaches the resistance level. Finally, it pulls back to another level and rebounds… and then breaks above the neckline, typically.

Here’s a look at what the stock did.

Now, since there is a clear stop-loss area, you can just enter a stop-limit order, which you can read more about here.

If you take profits at any point… you may want to look to move your stop-limit price higher. Basically, this helps prevent you from turning a winner into a loser.

Once the trade is over, you should journal and note whether your plan worked or not… and whatever tweaks you should make. Now, if you’ve been stuck in the mud and looking for ways to time your entries and exits… then click here to watch the replay of my live trading session.

Source: PetraPicks.com | Original Link