In this article, we are going to discuss how to pick which trades to take. It is always important to have a good selection process for taking a trade. It is even more important for small account traders trying to grow their account with minimal drawbacks so you do not blowup your account. Most new traders over trade. They feel like they need to always be in a trade. A much better way to trade is to be selective and just trade the best setups.
Starting out it is best to trade with the trend. With that said, you should look for symbols that are trending. Look for a stair step pattern with higher highs and higher lows for a long trade. If you are trading the daily chart, a trend is not just a few days. You need to zoom out and look at a much longer time frame. Adding moving averages to your charts is very helpful in identifying a trend. Some of the commonly used moving averages are 8, 21, 50 and 200.
Stocks and ETF’s do not go straight up or down in price. When the moving averages are stacked it is a strong trend. It is common during a strong trend for price to pull back to the 8 or 21 moving averages before continuing the trend. If price pulls back to the 50 moving average the trend may be pausing, but not a trend reversal at that point. If price pulls back to the 200 moving average the trend may be reversing and is reversing after the 200 moving average turns the opposite direction of the previous trend.
One trade is to look for enters the trade when price is breaking above a resistance level in a strong trend. Another entry is to wait on a pullback to the 21 moving average before entering the trade. An entry after a trend change is to wait for the 200 moving average to change direction and enter below support for a short trade.
Below is an example using the daily price bars. It shows AAPL trending up for many months, then flattening out and then starting a down trend. It shows you three long trades breaking out above resistance, stacked moving averages and one short trade breaking below support.[IMG missing]
Next we will look at the same chart that highlights several long pullback trades that pullback to the 21 and 50 moving averages in a strong trend.
In the next chart we show CL, which is a symbol that is not trending. These types of patterns are hard to swing trade, since there is no trend. You will see that the 200 moving average is mostly horizontal and not trending like on the AAPL chart. You will also see that price is range bound between 60 and 71 for over two years. Yes, you could have taken some shorter time frame trades. However, it would have been a choppy ride.
I hope this was helpful.