Smarter Trader Playbook Jeff Bishop.pdf

 

 

About Jeff Bishop    Jeff Bishop is a millionaire trader and CEO of the stock trading education business,  RagingBull.com. While Jeff is now a world-renowned options trader and educator, Jeff’s early  days were littered with failed ventures and financial hardship. To this day, Jeff attributes much  of his drive and persistence to the character that was formed in those years of struggling to  find success.   As a trained economist and a widely followed Wall Street veteran, Jeff often shares his insights  on the stock market with different media networks and financial news outlets. But Jeff’s  primary forum for educating developing traders is through his online training programs.   It was Jeff’s passion for educating people about the opportunities in the stock market that  ultimately led him to establish RagingBull.com. Jeff’s success in the stock market, combined  with his academic background in economics and his status as a MENSA verified genius have  afforded him the credibility to educate thousands of traders all over the world.  Jeff Bishop, along with his team of elite traders at Raging Bull, pride themselves on their ability  to successfully teach traders from all experience levels how to take control of their own  financial future.    “I don’t have to say a word. I sit back and let my customers do the talking for me. Week after  week. Month after month. Year after year. They write in and share their success stories. If you  really want to know whether a system works, then just ask the people who use it!”  -

Jeff Bishop 

  “I am up $10,000 on the trade so far and sold some already! $36,000 on day! Thanks!”​- Brian “I got the alert from Jeff Bishop yesterday afternoon. This morning, the market popped...I put in my limit order and BOOM! I was out with $3000 in my pocket.”​ - Timothy “On vacation with my family, I used Jeff’s crossover strategy, and in that day of trading...I double my account...from the beach!”​ - Brent “First option trade, left premature but in @ 6.70 and out at 12”​ - Ryan “I learned more from you free in the last hour than I did with a coach for $5,000​ - Jeff 

 

Part 1  THE SMART TRADER’S FOUNDATION  Every trader gets into the game for their own reasons. Some want to build wealth, create a  secondary income stream, or simply pad their retirement. Most traders don’t sit down one day  and just turn a profit. The best ones I know spent years honing their skills, sometimes blowing  up multiple accounts along the way.  But almost every trader seems to go through three different stages:    1) Can’t turn a profit and always trying just to stem losses  2) Barely turning a profit but not earning enough for your time  3) Turning a nice profit, but not enough to really build substantial wealth    Most of us languish between stages one and two. We struggle to collect enough good trades  to develop our own style. But the truth is that it all boils down to one fundamental problem – a  lack of ​high probability trades.​   You need a consistent flow of trade ideas to build your book, so to speak. Everyone’s trade  journal tells a story. The journal doesn’t lie. It identifies where the true opportunities and  obstacles exist. But where the overwhelming majority of traders are challenged is in their lack  of data.  Without enough trades, you’re left guessing what works and what doesn’t.  Here’s the secret no one will tell you – You get high win-rates out of any strategy!  It sounds astounding. But believe me, it’s much simpler than it seems. Anyone can trade off  their risk/reward ratio to achieve high win-rates. With most strategies, if you expand your stop  loss relative to your target, the win-rate automatically goes up. Tighten them up and the  win-rate goes down.       

 

CONCEPTS DEFINED    Stop Loss​ - A predetermined level that a trader will exit a position for a loss. This limits total  exposure and establishes a signal for when a trade has failed.  Consistently profitable trading balances the two. You want to find the intersection where you  achieve the maximum possible payout.  This ebook covers only a fraction of the ideas I’ve come across for creating a stream of  high-probability trades. But the fundamentals I am laying out are crucial for success. Once you  understand them and their reasoning, the market will open up before you.  Then you will begin to grasp what it means to be a truly smart trader. 

 

 

 

Key Concepts 

  Balancing Win Rate & Risk  Imagine I came up to you one day with a proposition. Every day that goes by without a  tornado, I’ll give you a hundred dollars. However, if a tornado appears, you owe me $1,000.   Seems pretty straightforward, right? As long as tornadoes show up less than 10% of the time,  you stand to make money.  Now, let’s change up the situation a little bit. Instead of you paying $1,000 for every day a  tornado appears, you give me everything you own, and you go live in a canoe in the middle of  the ocean.  All of a sudden, that sounds like a crappy deal. Even if you lived in Alaska, who has seen four  tornadoes since 1950, you’d still hesitate to take that deal. Why? Because the downside is  catastrophic.  This example illustrates the tradeoff between win-rate and risk. Most traders can easily  manipulate their win-rate by taking on more risk. But that doesn't necessarily make it a good  decision.  Let’s consider a basic trading setup. Using any time frame, I’m going to search out a bullish  engulfing candle reversal pattern, looking something like this: 

 

 

Every time I see this pattern, I’m going to buy the stock at a 50% retracement from the high to  the low. My target will be the top of the candle, and my stop will be the low of the candle.    CONCEPTS DEFINED    Bullish​ - A trend or signal that prices are heading higher.    “​Candle​” - Candlesticks are visual representations of a defined time period. They draw out  the following prices: open, close, high, and low. The area between the open and the close is  known as the ‘body’. Areas between the open or close and the high or low are known as the  ‘wicks.’    Retracement​ - When reverses from an established direction, the amount it pulls back is  known as the retracement.    When I set up the parameters like this, I risk one to make one. As long as I win more than 50%  of my trades, I’ll make money over time on average. At 50%, I break even, and below I lose  money.  Simple enough, right?   Now, let’s say I want to boost my win-rate, which right now is 50% exactly. How would I do  that?   The easiest approach would be to lower my target from the top of the candle. That makes the  trade more likely to win than lose. However, I’m giving up some reward to do it.  Naturally, we want to know how we can figure out that sweet spot where I get the most reward  for my risk and the highest win rate. That comes from a concept known as ‘Expected Value.’  Expected Value​ is a critical concept in finding high probability trades. It tells you what the  outcome should be for a setup on average over time.  That doesn’t mean you achieve that outcome every time. Rather, if you repeat the trade often  enough, your results should trend toward the average.  The formula for expected value is as follows:  Expected Value = (Probability of Winning x Potential Win) – ((1 – Probability of Winning) x  Potential Loss) 

 

Consider a coin flip. The odds of heads or tails are 50%. If you win $1 for every heads and lose  $1 for every tails, you would breakeven over time. The expected value comes out as follows:  Expected value = (50% x $1) – (50% x $1) = 0  Now, let’s say that I have a trick coin that comes up with heads 75% of the time. Using the  same bet structure, my expected value comes out as follows:  Expected value = (75% x $1) – (25% x $1) = $0.75 - $0.25 = $0.50  With this trick coin, I expect to make $0.50 on average over time. Keep in mind, each time I flip  it, I only win or lose $1. However, it’s the change in the odds that delivers a positive outcome.  Trading generally works the same way. Going back to the engulfing candle setup, I could buy  at a 50% retracement with a target at the high of the candle and a stop at the bottom. That  gives me a risk/reward of 1 to 1, where the profits are determined entirely by the win-rate.  In summary, by adjusting your entries and exits, you change the risk to reward ratio. All things  being equal, this will alter the win-rate. Your goal is to find that sweet spot that gives you the  highest expected value.     

 

 

Take Trades With Multiple Signals  Imagine that you had two groups of traders - those that played moving averages and those  that worked with price zones. You are an outsider looking in. When you see a chart, you know  that when there is a price zone and a moving average, the odds are much greater the stock will  stop. Why? Because more traders are playing it that way. It’s a way of increasing your probabilities  of success. Let’s take a look at a chart of Amazon (AMZN) as an example. 

 

AMZN Daily Chart

Inside the orange box, we have a common bullish chart pattern. Assume I wanted to take a  shot at the long side here. What tells me this is a good idea?  For starters, I have the 13-period moving average crossing over the 30-period moving average  – also known as my ‘money-pattern.’ We already noted that there is a chart consolidation  pattern.  [NOTE - I break down my Money Pattern strategy in much greater detail in my ​Total Alpha  Training Series​. Click below to secure your free access to an upcoming training session. 

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  CONCEPTS DEFINED 

  Moving Averages​ - See chapter on ​Moving Averages​ for more details    Price Zone​ - Areas on a chart where a trader expects price to run into resistance (if it’s  moving higher) or support (if it’s moving lower).    My last reason for looking into this setup was the relative strength in Amazon. As Amazon  made a bullish pattern, the overall market was still trying to find a bottom. That’s a sign of  strength and enough to give me my third signal.  No matter the trade, a smart trader is always looking for several signs flashing at them that say,  “Yes, you are clear to take this trade.”   

   

 

 

Part 2  THE SMART TRADER’S STRATEGIES    Mean-Reversion Strategies  One of the highest probability trading strategies out there is ​mean-reversion​.  What happens every time you stretch a rubber band and let it go? It snaps back, of course!  Mean-reversion trades work the same way. No matter how much a stock runs or falls, prices  always oscillate inside of a range. Sometimes it can be only a few pennies. Other times it’s  hundreds of dollars.   Let’s use the S&P 500 ETF SPY as an example. Imagine you had a strategy that worked off the  daily chart. You added in a 5-period moving average.   

  SPY Daily Chart 

 

  You decide that every time the SPY falls to the moving average you would buy the SPY. Once  it trades back above it, you sell your position. You stop out only if the market falls by 20 points  or more.  If you put this strategy into place through all of 2019, not only would you have had 100%  winners, you would have had several trades per month. Sounds amazing!  Here’s the drawback to these strategies. Remember how we talked about ones with very high  win-rates but poor risk/reward ratios? Well, imagine using that same strategy in the first part of  2020. 

  SPY Daily Chart    Unfortunately, the strategy stopped working once the trend was broken. If you started the  strategy later in 2019, chances are that you wouldn’t have accumulated enough profits to  offset the steep losses in 2020.   

 

VWAP  Imagine you were a top dog on the floor of the New York Stock Exchange. You are in charge of  executing massive client orders. We’re talking hundreds of thousands of shares. They tell you  to buy X or sell Y, millions of dollars to move around!  How would you go about it? Try doing it all at once, and you’d end up paying through the  nose. Breaking it up over time seems attractive. Now the question is how do you measure your  success?  Intuitively, paying below the average price for the day is one way to do it. That’s where the  VWAP comes in.  Volume-Weighted-Average-Price​ (VWAP) tells you the average price for a stock based on all  the transactions for the day up to that point. Throughout the day, VWAP will change as more  transactions occur.  In this intraday chart of the SPY, you can see how the VWAP (blue line) changes throughout the  day.   

  SPY 5-Minute Chart    Early in the day, the VWAP tends to move around more than it does toward the close. With so  few transactions first thing in the morning, the average price takes time to settle down.  Generally, you start to see it find it’s spot after a couple hours of trading. 

 

VWAP is a fantastic indicator to use for trading. A simple way to trade using VWAP is by  making it ​support​ or ​resistance​ for intraday trades.  First, I like to establish the trend in a chart. For that, I’ll turn to the hourly chart to get an idea.  Here’s an example with Zoom Media (ZM). 

  ZM Hourly Chart  Zoom’s hourly chart looks incredibly bearish here. I don’t need to overcomplicate it any more  than noting how price moved lower as time went on.  With a bearish bias, I like to bet against the stock every time it gets at or above VWAP once  we’re beyond the first couple hours of the day. That gives me a reasonably high probability  trade that happens frequently.  This illustrates how that would look at a lower timeframe.   

 

  ZM 10-Minute Chart      The orange boxes highlight where potential trade setups formed. Obviously, not all of them  worked. But, if you tweak the parameters as I discussed earlier, you could create a winning  strategy.    CONCEPTS DEFINED 

  Support​ - An area on the chart that should stop a stock’s downward trend.      Resistance​ - Opposite support, resistance is a place on the chart that should stop a stock’s  upward trend.    Note: These areas only have a higher probability of stopping trends than others. They are not  guaranteed.    Here’s a quick example. I only want to short the stock against VWAP if it closed at least one  hourly candle below VWAP. I would short the stock with a target of $1.00 and a stop of $1.00.  Doing that, I would likely have won every day, or at least won the majority of the time. As long  as I knew that the trend ended on April 2​nd​, I would have walked away with a tidy profit. 

 

Patience and practice separate winning and losing in this strategy. You can see how just tiny  tweaks to the parameters drastically changes the outcomes.  What’s cool about this strategy is that it applies to all charts on all stocks. If you have a tough  time finding one with a clear trend, that’s ok. Move on. There are plenty of choices and should  always be one that is ripe for the picking.     

 

 

Bollinger Bands  Named after John Bollinger, Bollinger bands create statistical limits of how far a price should  move based on a lookback period and number of standard deviations.  A ​standard deviation​ is a statistics term for the bell curves you’ve probably seen in math class  (or hope to have forgotten). For one standard deviation, it says 68.2% of the time, you should  expect the out come to fall in that range. Two standard deviations is 95%, and so on. You can  see how it lays out on this chart below.   Notice how the higher the number of standard deviations, the wider the range. It only makes  sense that the wider a range, the more likely the outcome falls within the boundaries. 

  Plotting them in your chart presents a range that says, “based on the data you gave me, there  is X% chance it will fall within these bounds.”  For our purposes, we’ll use the most common settings: two standard deviations (95%  probability range), closing prices, and a 20-period lookback. Let’s take a look at how this looks  on a stock like Apple (AAPL).   

 

  AAPL Hourly Chart    Bollinger Bands work really well as countertrend indicators. When price hits the upper band,  you sell. As it touches the lower band, you buy. The discretion comes in…you guessed it – risk  management.  How would I create a strategy around Bollinger Bands with Apple’s stock?   I could say that every time the price crossed below the lower Bollinger Band, I would buy Apple  and sell it either at the end of the day or at the midpoint (black dotted line). For the upper band,  I would do the opposite.  That strategy would certainly have yielded a bunch of fantastic trades with juicy payouts. So  why doesn’t everyone do this?  One word – ​trends​.  Look again at the chart. See how on multiple occasions you would have bought first thing in  the morning and then sold it for a tiny profit? Then, when it didn’t work out, you would have  taken much bigger losses.   Doesn’t sound too appetizing, does it?  As with most high probability trades, it comes down to looking at the trade through multiple  lenses. 

 

With Apple in a downtrend, the best trades would be off the upper Bollinger Band. That would  put both mean-reversion and the trend in my favor. It’s exactly the same idea as using VWAP.   

 

 

Relative Strength  For those of you who don’t know, I grew up in Texas. So yes, I’m a huge Dallas Cowboys fan.  Throughout most of my life, the Cowboys dominated the NFL.   Then we entered the 21st century and things changed. All of a sudden, my beloved Cowboys  could barely muster a winning season. It’s been year after year of disappointment.  One day, I happened across a Cleveland Browns fan. He was ecstatic that Baker Mayfield  broke a multi-year winless streak. The guy nearly cried when the Browns almost made the  playoffs.  His sad allegiance to the Browns put things in perspective for me. While I was used to winning,  he’d barely seen one. Heck, at one point his team left the city entirely, became a new franchise  that then went on to win the Superbowl multiple times.  Coincidentally, stocks work the same way. What someone considers a value others might see  as garbage. When Tesla tacks on an extra $30 in share price over three days, it doesn’t seem  that impressive when they ran $200 the five days prior.  This brings me to a key concept - ​Relative Strength.​   Relative strength is both an indicator and a qualitative measure. I’ll describe both to you so you  get a complete picture.  For starters, any stock that outperforms the broader market, whether intraday or over time is  considered to have ‘relative strength.’ When you have the S&P 500 up 2% on the day and  Tesla is up 10%, it’s not a stretch to say Tesla has relative strength compared to the market.  On the flip side, you get relative weakness. That’s a stock that underperforms in a similar  fashion.  I apply the concept by trading stocks with relative strength during bull runs and relative  weakness on pullbacks. That way I’m going with the broader trend.  Second, relative strength is also an indicator used for technical analysis. This operates very  differently as it fits into the mean-reversion category.  Here’s an example with Amazon (AMZN) we’ll use for reference.   

 

  AMZN Hourly Chart  At the top, I circled the RSI indicator. There are two parts to its calculation that can get  cumbersome, so I won’t bother you with the wonky math. Suffice to say, it simply compares  the average gain from up days to down days and then normalizes it to fit between 0%-100%.  First, you need to input some lookback period to do the calculations. The standard (which I  use) is 14 periods. Longer time periods smooth the line but make it less responsive to price  change.  Next, you’ll notice two lines at 30% and 70%. These are the standard levels that signal  overbought and oversold conditions.   According to J.Welles Wilder Jr, who created the calculation, a stock’s movement becomes  unsustainable at a certain point. He believed you could understand this by comparing current  price action to prior actions and effectively look for a ‘capitulation’ or purge.  If you look at the RSI indicator and Amazon’s stock, it does a decent job of picking out  bottoms. For example, it nailed the low right before the end of February and signaled the real  bottom mid-March.  However, you can also see how it isn’t always 100% accurate. In April it signaled overbought  conditions, yet the stock didn’t put in a top. 

 

As I’ve highlighted with the other indicators, I use this as one piece of information in taking my  trades. I won’t go out and play a stock because the RSI says it’s overbought or oversold.  However, I will take it into consideration, and I can certainly say that it’s been the deciding  factor in many trades for me over the years.    CONCEPTS DEFINED 

  Capitulation​ - A point of excessive buying or selling where so much occurs that it sucks up  all of the potential orders leaving only the other side of the trade left. When stocks make  bottoms, they do it on a huge volume known as ‘capitulation.’ That means everyone sold and  the only ones left now are buyers.     

Chart Patterns  One of my favorite ways to trade is using chart patterns. While there are hundreds, if not  thousands of variations, most fall into two main categories: ​reversal​ and ​continuation​ patterns.  Continuation patterns take a trend that’s already in motion and basically give a stock time to  rest. Think of a stock running in one direction as a person. Eventually, it just gets tired. It needs  time to recuperate before continuing the race.  Reversal patterns take a trend and stop it dead in its tracks. Typically, these work in  conjunction with support and resistance levels that you can find on the charts. They don’t  always have to send the stock running in the other direction, but they should at least create a  bounce.  When you use these patterns in conjunction with other indicators, they become a powerful  trading tool.  Let’s go over some common ones out there.    Flag Pattern  The flag pattern is one of the most common ones out there used by traders. They’re both easy  to spot and have a high probability of success. 

 

As a continuation pattern, flags need to have a trend already in place. Commonly, we’ll see  price make an outside move and then move into a tight consolidation area.   Here’s a simple diagram that shows how it might look.   

  The first push higher (or lower) is called the ‘Flag Pole.’ That not only identifies the trend but  gives you a place to start. Then you get the green box that creates the flag. Price should trade  in a well-defined range. It doesn’t have to go straight sideways, but the range should not be  expanding.  Here’s an example with Tesla (TSLA).  

 

  TSLA Hourly Chart    Tesla jumped quite a bit overnight to create the flag pole. Then shares traded sideways for  several days. However, they remained in a tight range. Once it was ready, Tesla made an  explosive move to the upside that led to all-time highs.  Note: The flag poles don’t have to be a candlestick necessarily. If a stock jumps overnight to  gap up or down on the morning, that counts as well.  Trading this pattern is pretty straightforward. You look for a move out of the pattern like we  saw in Tesla. If the stock closes below the flag, then you exit out of the trade.    Pennant Pattern  Pennant patterns are a variation of the flag pattern. Rather than the range maintaining  consistent boundaries, one side starts to converge on the other.  This is a basic diagram of what you might be looking for. 

 

  There’s a few things to keep in mind here. First, the trendlines need to be converging. You  don’t want to see them getting wider. Second, it doesn’t matter which direction the pattern is  pointed. You can have it trending down or upward. As long as the trendlines are converging,  then you’re great.  This pattern is much more common than the flag pattern. Flag patterns require both trendlines  to remain parallel. While it does have a slightly higher probability of success, the chances of  finding it are rare.  Here’s an example you might come across in the charts.   

 

  ROKU Hourly Chart    In this case, the uptrend didn’t come from a quick move. Rather, it was a steady climb higher.  Once it topped out, the stock retraced a bit, and it bounced again. However, this time it didn’t  make it as far. Over the next couple of weeks, price began to trade in a tighter channel. That  led to the next explosive move higher.  Note: While these patterns often play out before the lines converge, the distance between them  is a good indication of when things are about to take off.  Now that we’ve covered the basic continuation patterns, let’s cover some of the reversal  patterns.    Double/Triple Bottom  You may have heard about the double bottom/top. This is a common reversal pattern that is  often learned when starting out. However, I want to give you some insights you might not have  come across. 

 

First, double tops and bottoms look like two mountains (three if it’s a triple). It’s the market  equivalent of trying and failing to make new highs or lows.   Note: They don’t work nearly as well in the middle of a chart’s range as they do at all-time  highs/lows or relative highs/lows.  As you might expect, they’re pretty easy to spot. The patterns look something like this.   

  Here’s the thing that you probably didn’t know. The peaks (or valleys) don’t have to be at the  same level. Quite often, you’ll see the second attempt break through by just a little bit while the  third attempt often falls just shy.  This happens because market makers know there are stop loss orders underneath those  points. They’ll push price past them just to trigger those orders. This is what’s known as  ‘stop-hunting.’  Double/triple bottom reversal patterns can be found on multiple time frames like any chart  pattern. These tend to work best when they’re accompanied by heavy volume.  Here’s a great example from back in 2015-2016 using the SPY ETF. 

 

  SPY Daily Chart    With this reversal, we have three bottoms. The second one came nearly six months after the  first, while the third was only a month after the second. Now, you could have looked at this as  just the double bottom in 2016 as well.  Notice how the bottoms were accompanied by significant volume. The second bottom was  about $1.38 lower than the first, while the third was actually higher than the second by $0.07!    Head & Shoulders  Another great reversal pattern is the head and shoulders. This chart pattern has a little more  subtly to it and can take some time to find.   Let me start with the basic outline of what it looks like.   

 

    The head and shoulders looks a little bit like a triple bottom. However, there’s some notable  differences. First, the middle peak needs to be markedly higher/lower than the other two.  Second, there should be some equivalence to where the shoulder blades sit (these are the two  points the yellow line refers to). This creates what’s known as the ‘neckline.’  When you look for a profit target, a common way is using the distance between the head  (middle peak) and the neckline. Then you extend that same distance beyond the neckline. This  is what the blue line represents.  Now, here’s what you can expect when you look for one of these in the charts.   

 

    This chart of Beyond Meat (BYND) shows you how you can have a little subjectivity in both  drawing the pattern and how it plays out.  In this example, we don’t get huge pullbacks on the shoulders. Instead, they’re more flat.  However, the pattern still is pretty clear. Once the chart starts to make its way lower, price  takes a while to get to the target. However, you can see how the distance between the neckline  and the peak worked perfectly to create a target.   

Trend Trading  I previously mentioned that trading with the trend is ideal. It’s like swimming with a strong  current. Sure, you can go the opposite direction, but it’s much harder.  Trends appear in stocks across multiple timeframes. You can find them on everything from a  1-minute chart to a yearly chart. Longer timeframe trends hold more sway than shorter  timeframe ones. However, take that with a grain of salt. The yearly trend won’t matter much on  an intraday chart. 

 

Earlier, we talked about how continuation patterns work with trends and reversal patterns go  against them. I want to revisit that for a moment. Those statements are true. However, they are  relative.  For example, you can find a reversal pattern that creates a bottom in a stock on an hourly  chart, while the daily timeframe is still in an uptrend. In fact, that’s somewhat ideal because  your trade premise aligns with the larger move in the stock.  So, to start, you need to be able to identify the trends.    Identifying The Trend  Picking out a trend isn’t hard, but it does require some practice. I will say this - if the trend isn’t  obvious, there probably isn’t one.  We can always resize our charts to look a thousand different ways. However, uptrends  generally move higher as time goes on while downtrends move lower.  Here’s an example of an uptrend... 

  TDOC Hourly Chart 

 

...a downtrend... 

  BA Hourly Chart  ...and no trend at all. 

 

  CAT Hourly Chart    You can think of trends this way - uptrends should have a series of higher highs and higher  lows. Downtrends have lower highs and lower lows. Trendless stocks often trade in a range,  sweeping back and forth.  Note: With trendless stocks, if you have a good handle on the range, you can always trade back  and forth between the bounds (similar to the way Bollinger Band trading works).  Now, trends can and do change direction. This is always something you need to keep in the  back of your mind. While the odds favor it continuing, you need to remain vigilant.   Typically, reversals don’t happen out of nowhere. They’ll often occur at significant support and  resistance points.​ ​You should always take a look at a larger picture to make sure you’re not  about to hit any of those. In between is where you want to play the game.    Moving Averages 

 

One way I like to determine trend is through moving averages. There’s two major types of  moving averages - exponential and simple. Both have their merits. Exponential averages add  more weight to recent periods while simple averages treat them all equally. Neither is better or  worse, so use the one you feel most comfortable with.  How you set up moving averages is critical. The smaller the number of periods your average  uses, the more responsive it will be to price change. While this is great if the movements are  important, it can also bring in a lot of ‘noise’ to your data.  On the other hand, longer period moving averages are slower to react. But, they filter out a lot  of the nonsense in between.  One of the most common indicators out there is the 200-period simple moving average.  Traders use this on all timeframes as level to trade against and an indication of bullish or  bearish behavior.  Here’s a great example using GOOGL. 

  GOOGL Daily Chart   

 

The first orange box shows how the stock came into the 200-period moving average on the  daily chart and initially found support. However, once it broke through, that same moving  average became resistance again.  Another way you can read this is that when Google was trading above the 200-period moving  average it was in a bullish trend. However, once it fell below it became bearish.  One of my favorite ways to trade with moving averages is the 13-period and 30-period simple  moving averages on the hourly chart. When I see one cross over or under the other after not  touching for a long time, I know that’s a signal a trend has changed.  Here’s a perfect example with Tesla (TSLA).   

  TSLA Hourly Chart    In the orange box you can see the 13-period simple moving average (blue line) cross below the  30-period moving average (red line). That told me the stock was rolling over and was a perfect  candidate to bet on it heading lower.

 

 

  Final Thoughts  Think of trading as a library that you build over time. Each setup you learn writes a new  chapter. The setup doesn’t need to happen often. What’s important is that you become  proficient at it.   As you learn more trades, you fill out the book. Eventually you create a library of trades to pull  from that work across multiple situations in different environments.  Here’s to you and your “smart” trading career! 

 

 

 

Summary of Concepts Defined    Stop Loss​ - A predetermined level that a trader will exit a position for a loss. This limits total  exposure and establishes a signal for when a trade has failed.    Bullish​ - A trend or signal that prices are heading higher.    Candle​ - Candlesticks are visual representations of a defined time period. They draw out the  following prices: open, close, high, and low. The area between the open and the close is  known as the ‘body’. Areas between the open or close and the high or low are known as the  ‘wicks.’    Retracement​ - When reverses from an established direction, the amount it pulls back is known  as the retracement.    Price Zone​ - Areas on a chart where a trader expects price to run into resistance (if it’s moving  higher) or support (if it’s moving lower).  Support​ - An area on the chart that should stop a stock’s downward trend.    Resistance​ - Opposite support, resistance is a place on the chart that should stop a stock’s  upward trend.

 

Capitulation​ - A point of excessive buying or selling where so much occurs that it sucks up all  of the potential orders leaving only the other side of the trade left. When stocks make bottoms,  they do it on a huge volume known as ‘capitulation.’ That means everyone sold and the only  ones left now are buyers.   

To learn more about trading using these concepts, get your pass to the  Total Alpha Bootcamp Training Today 

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