Thursday, January 5, 2017

Basics of Trading Part 2

2nd in a series of post's on the Basics of Day Trading for beginner traders. Will be archived so can be used in conjunction with trades I post, and my trading plan which doesn't cover the basics.

Part 2:

Charting: support and resistance on a stock chart. (see pictures as a reference)

Support is an area on the chart where price has a difficult time breaking through to the downside as there are many more buyers then sellers. Support areas can be the low price of a previous day, a price point that has been touched several times and failed to penetrate through, a popular simple moving average (20sma), or a trading pivot. Support areas that have multiple support points...(example Low of yesterday met by a rising 20 simple moving average) have more strength. A basic strategy is to buy at support at multiple support areas in an uptrend - or Sell and Short if a support area is broken as the buyers have dried up and the sellers are taking over.

Resistance is an area on the chart where price has a difficult time breaking through to the upside as there are many more sellers than buyers. Resistance areas can be the high price of a previous day, an upward price point that has been touched several times and failed to penetrate through, a popular simple moving average (20sma), or a trading pivot. Resistance areas that have multiple support points...(example High of yesterday met by a declining 20 simple moving average) have more strength. A basic strategy is to SHORT trade at multiple resistance areas in a down trend - or Buy if a resistance area is broken as the sellers have dried up and the buyers are taking over.

Volume: Volume is the number of shares traded during a given period of time. For every buyer, there is a seller, and each transaction contributes to the count of total volume. Its wise to trade stocks that have a high daily volume, that average over a millions shares traded a day, as it makes it easier to find a buyer or seller when looking to enter or exit a stock. Remember that to buy a stock there must be a seller and to sell a stock there must be a buyer. Don't play around with stocks that have inconsistent or low volume, play were the action is.

3 Basic Steps to placing a trade: Entry point, Exit point and Stop point. Entry point is the price point where you want buy or short the stock. The exit point is the price point you hope to obtain to exit and profit. The stop point is the price price point where you will exit if the trade goes against you. Example: I want to buy 100 shares of DIS at 50. My exit point goal is 51.25 and my stop point is 48.75. Always stick to your stop. Live to fight another day. Without a bankroll you cant play.

Risk: Is the amount of $ you are willing to risk on a given trade. Start small at $25, as you must learn before you can earn. Some suggest paper trade (not use money, but write down your plan and see how it works without using real $). To  paper trade at first is fine but unless you have the feel for putting your $ on the line, you wont begin to gain your comfort in trading and discipline. Watching your money fluctuate can play with your mind and cause you to alter your plan. Its imperative you learn to trade and maintain discipline with money on the line and stick to your 2 exit price points. Once you have your risk amount you determine the # of shares to buy or Short. How do you determine the amount of shares to buy? I have posted a calculator at this link, http://www.howidaytrade.com/stock-day-trading-plan.html, bottom of the page in EXCEL, to help you determine how many share you will buy/short with your risk. The process is simple. Enter your Risk $ amount, the difference between Entry and Stop price (entry is 50 and stop price is 49.25 - the difference is .75) and this will then calculate your shares that you can trade within your defined risk.

Candlestick Pattern: There are many, but starting off as a new trader start learn one at a time. I suggest start with Bearish and Bullish Engulfing Candles. Look for these to develop with the trend and off support or resistance.



Bullish Engulfing Candle: This pattern consists of two candlesticks, the first one red and the second a larger green candle that engulfs the red candle. I like to consider this pattern when the stock is in an uptrend and the Green engulfing bar is bouncing off support. The more bars that are engulfed by the Green candle the better along with increased volume over the red candle.

The power from this setup comes 3 fold:
1. The trend is up
2. the bar is bouncing off support where there are buyers
3. The final trust comes from the sellers who are in the red candle or candles that have been engulfed.

In simplistic terms the sellers in the red candles think they are smart and shorting early against the trend. Then out of nowhere this green engulfing bar full of buyers over takes them, sending those sellers into a panic as they watch there gains turn into losses. They are then scrambling to get out of their position, this adds more fuel to the green candle as they are trapped. This along with the other buyers from the support area along with the stock already in a bullish trend helps drive the odds of this bullish engulfing bar continuing upward. Remember this is a game and you want the odds in your favor when making a trade.

Bearish Engulfing Candle: Same as premise as above but inverse. (see attached picture of bullish and bearish engulfing candle's off support and resistance)




Next post will talk about the story of  "Mother Market" and what happens when you disrespect her and don't follow her rules and let greed set in. Post 4 will touch on Bankroll, commissions, more on risk, time frame to trade, your health and how long it takes to obtain a feel for the markets.

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Disclaimer

I DO NOT MAKE RECOMMENDATIONS TO BUY OR SELL SECURITIES - I JUST POST TRADES I MAKE OR FIT THE RULES OF MY TRADING PLAN ON A DAILY BASIS. DO YOUR OWN DUE DILIGENCE - YOU ARE RESPONSIBLE FOR YOUR TRADES, INVESTMENTS, AND DECISIONS! ALL CHARTS COURTESY OF TRADESTATION, SCHWAb & TD AMERITRADE