Or even add a longer-term moving average as an additional trend direction filter. At point 1 , the moving averages crossed bullish. The price was trading above the moving averages before already, but you must wait for a cross of the moving averages. When the moving averages crossed, the RSI was already above the 50 level, confirming the bullish trend signal. By now you can probably already follow the system and understand how a bearish setup was created at points 3 and 4. I do not recommend to just start trading this approach blindly. Instead, try it out on a demand account and get a feeling for how the components work together.
You may want to make alternations or add different tools to this approach. Also, make sure to consult my latest article about stops , targets, and winrate when it comes to choosing the right parameters for your trading approach. I used to trade spikes a lot. For that, I set the Bollinger Bands r to 2. With a wider channel, a price spike through the channel is more meaningful and a significant event.
You could even set it to 3 standard deviations to filter out more price action and find bigger spikes. A spike alone is not enough and I recommend adding a candlestick filter on top of it. A spike that comes with an engulfing candlestick or a pinbar usually provides more robust trading scenarios. In the example below, the price made a significant spike through the upper band and immediately retracted back inside the channel.
The fact that the price closed back inside the channel is another key component. During strong trends, the price will sometimes close outside or very close to the outer bands.
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You must avoid those situations and wait for a complete rejection. In the scenario below, we can see a spike, a pinbar and also the confluence of a previous support area. The hardest part when it comes to using multiple confluence factors is passing on trades where you are missing just one. In such scenarios, you must skip the trade even though it may look very tempting. Therefore, write down your trading rules and put them where you can see them all the time during your trading.
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It is a constant reminder of what you are looking for. Divergences are one of my favorite tools and I have been using divergences for years in several of my trading strategies. I discussed the concepts of divergences at length in other articles. In the screenshot below, the price made a quadruple divergence at point 1. The price made 4 consecutive high points 2 , but the RSI made 4 consecutive lower lows.
As of writing this, the price made multiple consecutive lower lows 3 and the RSI is making higher lows 4. This indicates that the trend is losing strength. Of course, this is not enough to enter a trade because the price can keep trending for a long time even though it shows a divergence. As with all trading strategies, we need to add additional confluence factors to a divergence strategy. The screenshot below shows the same scenario from above but this time I added a period moving average and trendlines ; we will discuss trendlines as strategy 5 in this article.
The length of the moving average matters here a lot and you can see that the price violated the moving average multiple times during the uptrend on the left.
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Hence, a longer period moving average would have been a better choice for such a volatile market. As mentioned earlier, just a divergence by itself is not a strong enough signal and the trendline confluence factor works well in this scenario. Now, a trader would simply wait for a strong breakout of the trendline before looking for buying opportunities. Horizontal breakouts are among my favorite trading concepts and especially for new and struggling traders, spotting horizontal levels is usually much easier because they are very objective.
A good horizontal level is validated after the second touchpoint and with every subsequent touch, a level gets progressively weaker. In the screenshot below, the horizontal resistance level at point 1 has around 5 touchpoints. Such a level has a high likelihood of breaking. Once the price has broken out of the sideways range, a trader would wait for short consolidations that allow you to draw horizontal levels at the top. Points 2 and 3 are great examples here.
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Such consolidation phases are often used to time trend-following entries and I talked about this in the past in my pullback-strategy guide. To improve the robustness of trading signals, one could add a moving average to the chart as shown in the screenshot below.
The moving average acts as a trend direction filter and one would only look for trades into the direction of the moving average. At point 1 , the price crosses above the moving average and the trader would start looking for bullish opportunities. Such trend-following scenarios occurred at points 2 and 3 when the price made sideways consolidations where it was possible to draw a horizontal resistance leve l at the top. The price stalled shortly during those sideways phases and the breakout signaled the continuation. At point 4 , the price crossed below the moving average and it also broke out of a sideways range that market the top of the uptrend.
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Often, such top patterns also show divergence signals and one could add an RSI indicator as a third confluence factor. At point 5 , the short sideways consolidation with a horizontal support level broke and because the price was below the moving average, the trader would look for bearish opportunities. At point 6 , the market made a bottom pattern with a horizontal resistance level and the breakout happened simultaneously with the cross of the moving average. So-called gut reactions only lead to trouble. One of the reasons that emotions are bad news for day traders is that they can make you deviate from your chosen strategy.
This brings us to our second rule, which is to stick with your game plan. No matter which strategy you are following, you need to see it through.
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Persistence is key. Finally, you must be able to recognize and understand trading indicators. Otherwise, it is impossible to achieve success with any of the most effective strategies.
What is a trading strategy?
There are dozens of trading strategies! Avoid becoming overwhelmed by learning these four basic strategies first:. Day trading is all about energy. When We first started implementing trading strategies, we learned that the only way to be good at it is to find stocks that are on the move.
Thankfully, there is a stock that is making a 20 or 30 percent move every day. We have to find those stocks before they begin to move , and we have discovered that these stocks have some technical indicators in common before they begin to move. First, we must ask ourselves what we expect from strategies that are on the move.
If they are moving sideways, we cannot work with them. Therefore, the stock must be moving up or down.
Stock scanners locate these stocks very well. Then, we can trade the stocks when they are at extremes. When you use these strategies, you find that there is something similar about stocks that are moving. We can scan 5, stocks and look for similar criteria.