1. Leading indicators

This type of indicators tend to give traders buy or sell signals before market makes its turn. the leading indicators predict a top or a bottom of a market but they do not predict specific price levels or duration of a move. Although there are so many leading indicators in theory, it is hardly to find ones that truly lead the markets.

The Leading indicators are considered to be the most useful for the beginning traders since they allow ample time for traders to prepare their trades.

One thing to remember when applying leading indicators in trading is they are just telling that a move is going to happen but it has not begun yet.

While it seems like leading indicators offer traders the best of all worlds, there are drawbacks when using such indicators.

One major problem occurs because it may point traders to enter a trade too early. Exposure to price fluctuations that occur before the beginning of the indicated up or down trend may cause traders to bail out early. When traders are limiting risk in a particular trade but have bought early according to a leading indicator, they may be stopped out and lose all potential for profit.

2. Time current indicators

This type of indicators tend to turn higher or lower at about the same time that a market does. They can be very helpful in long-term trading, and are considered such indicators practically as useful as leading indicators.

Though, the time current indicator does not expose to pre-move price fluctuations as much as the leading indicator does. However, traders have to make their decisions about buying and selling quickly with indicators, as the price should be making its move at the same time they are taking a position.

3. Lagging indicators

This type of indicators are those that lag behind market movements. The market moves,and the lagging indicator moves after it. These indicators are also referred to as trend-following indicators because they just follow trends and do not attempt to predict them.

Using lagging indicators to make decisions about buying and selling gives traders disadvantage since this will results in buying and selling after the tops and bottoms of market trends.

The goal in using a lagging indicator is that traders will be able to profitably grab a significant portion of a trend before the indicator changes direction again.

So how do you go about choosing your indicator? The answer is not as hard to find as it may seem.

There are literally thousands of indicators to choose from. The place to begin is to first make a decision as to the type of strategy that you are going to trade. This will probably eliminate half of the alternatives. The indicator you choose should be designed for the type of strategy you are going to trade. This decision will also force you to decide what type of trader you will be. It is very important that you make some decisions on the big picture, the overall strategy, before you get to the details.

The indicator should not be totally derived from price. Traders, particularly novice traders, that lose money consistently are inevitably using price-derived indicators. The more removed you can be from direct price correlation, the more reliable and profitable your indicator is going to be. If you can use volume, range, advances and declines, new highs or new lows or open interest to modify the price-based indicator, it should become more effective.

Another way to deal with this issue is to combine non-price indicators with those that are price derived. This way you can start to filter your price-derived indicators with other types of data.

If you decide to use a standard indicator, its performance will improve if you use it in a different manner than it was originally intended. Since that if 95% of all traders lose money. If you want to trade profitably, you must trade differently than the other 95%. That means using standard indicators in unique ways.

The indicator and the way it is calculated should make sense. Study the formula and see if it is logical. Try to understand why this indicator is supposed to work and what market
action it is supposed to represent.

The indicator you choose should be profitable or close to break-even in its pure state without optimization or money management improvements. Starting with an indicator that loses money and trying to fix it is a much more difficult task than starting with a profitable indicator. If you start with a profitable base indicator, the chances of developing something that you would actually want to trade are greatly increased.

Become an expert on this indicator. Learn its personality and its little quirks.

Since day traders have to keep their losses small, hence, they will get stopped out often. This causes their win/loss ratio of their trades to be low because it is hard to maintain a high percentage of profitable trades.

Therefore, the trading plan for day traders is to pick the most promising opportunities. Simply stated, enter a trade while the price is most likely to move in the direction of the trend with maximum range.

In order to accomplish this, the security we look for must have room to run. Before enter a trade, consider if there is a good portion of the range available for making profit.

Most traders tend to take their profits prematurely because they get nervous when the price makes its normal pullback. Letting your profit runs by staying frozen and watching the price pulls back before it makes new high is harder than it seems. The emotions get in the way when you start thinking about the money.

So, you have to understand the normal characteristics of price movement. The more proficient in this will help in maximizing your profit per trade in price movement.

Let get to another part: small losses. This is the part where you have the most control. If you are able to manage your losses, you will gain more profits even with average security selection.

The difficulty is it takes discipline and the proper mental attitude to determine your stop levels and execute it as your plan.

When it comes to real trading, what usually happens is traders determine a stop loss level but when the price gets to the stop level. They hesitate to pull the trigger. Maybe, it is because they see the price reverse and they hope that the price will start to move in the same direction as their position. However, the price move in another direction offers them a bigger loss.

This is forbidden territory for day traders. If you keep taking bigger losses, you have to increase the size of profit on your wining trades and also the win/loss trade ratio.

Controlling your profit is hard; it is easier to control your loss side. It is better to take the judgment out of your hands by placing stop order immediately after you enter a trade. It will protect you from your emotions.

As the revolution of technology, traders can now trade remotely from their homes. Every brokerage firm provides direct access and electronic execution equipments that allows traders to have the same level of execution access as if they are in trading floors.

Therefore there are many new comers enter the trading without proper training or any experience. I write this article intend provide information in day trading for those who want to join day trading business.

The simple definition of day trading is you end each day flat. It means you go home without any open position at the end of each trading session.

To be a successful day traders, you must be able to maintain a proper psychology, mental attitude and focus. In addition, you must have sound money management strategies and keep developing knowledge of the market.

One of the most important things for day traders is you must understand the risks involved in day trading.

Generally, traders who buy securities on margin do not fully understand the risks involved. Traders who open a position in volatile market buy putting up an initial margin payment may find themselves being called for margin to keep their margin at maintenance margin level if the price does not go in their desired direction. This is where amateur day traders run into problem. If they cannot maintain their margin level, they will be forced to cover their position.

To succeed at day trading, you have to take no position home overnight at the end of each trading day. If you stick with this discipline, you avoid the overnight risks. The day trading is limited by time and the average range of traded price. Therefore you have to be in the position that can control your risk and the size of your losses. It is the key of success in trading.

Typically, the average size of a day trader’s profit will be smaller than other styles of traders. It is because of the limitation of time and range as I mentioned. So, the most important things you must manage to be a winner in day trading business are to minimize the size of your loss and maximize the profit on each trade. And you have to do this as many times as you can.

While the reversal patterns usually forecast an upcoming trend reversal, the continuation patterns, in the other hand, indicate an interlude in a trend where the stock rests during its uptrend or downtrend. In other words, the stocks pullback or consolidate before breaking out resuming their prior trend.

Generally, the continuation patterns has a distinct difference with a reversal patterns in that the continuation patterns are often very short in the time that they take to setup, or more simply, its duration.
The most common continuation patterns that are well-known among traders are flags, pennants and triangles.

First, let checks out the continuation pattern known as “flag”. The flag is a tight consolidation pattern defined as a parallelogram that lines up with the current trend. In almost all cases, flags show up in a very short period in the trading. Traditionally, it lasts three days to three weeks. When it completes its action, the price resumes its previous trend.

The second pattern is the pennant. As the flag’s colleague, the pennant resembles the flag, except that it moves horizontally in the shape of small, symmetrical triangle. In the other words, the pennant is often more symmetrical in design and somewhat horizontal in shape. The pennant, too, lasts for very short period in trading. In fact it often represents as few as seven to ten trading days.

Both flags and pennants are preceded by a flagpole, one day of dramatic trading with heavy volume. They last a period of one to three weeks in time and the prevailing trend then continues. Because the setup time is so short, you will only be able to witness flags and pennants in daily chart.

The last continuation patterns discussed in this article is the triangles. Triangles appear in the following forms: ascending, descending and symmetrical.

The ascending triangle consolidates sideways between converging trend lines, with the upper line staying relatively horizontal while the lower line rising.

The descending triangle forms the same way as the ascending triangle, only upside down.

The symmetrical triangle formed as a consolidation pattern begins with a wide price range that gets squished from the bottom and the top into a tighter and tighter range. Although it is a continuation pattern, when the price can break out either way of the pattern.

A stock that is “trading in a range” means a stock that its price is bouncing up and down between a support level and a resistance level.

When a stock is traded in a range, buyers support it at the bottom of the range (support). When it rallies to the top of its range (resistance), buyers refuse to pay higher price, and some take their profits. So, the price falls again.

Congestion

In technical analysis, a stock which is in congestion area is a stock that its price fluctuates within a narrow price range. The price gets stuck moving laterally.

The congestion patterns form resistance if it falls under a ragged congestion pattern. It is because traders who bought at the high price will take their money out when price bounce near enough to what they paid. Conversely, the congestion forms support if the prices rise above the congestion area.

Because a congestion area indicates an equality of supply and demand, traders are usually told to avoid trading stocks moving in congestion area. It is better to wait until the stock breaks through the upper or lower bound before enters a trade.

Consolidation

The consolidation pattern, unlike the congestion pattern, is a traders’ best friend. It offers opportunities to traders who trade properly.

A stock in a consolidation pattern moves sideways in a very tight price range. The consolidation patterns are usually formed while stocks are building their base or resting during uptrend or downtrend. You will find that consolidations often follow uptrends or downtrends.

The resistance and support levels within the consolidation area are created through the upper and lower bounds of the stock’s price.

Finally at some points, once the price of the stock breaks through the identified areas of support or resistance, volatility quickly increases, a jolt of rising volume and so does the explosion of the stock’s price offer opportunities to generate a profit. If traders are playing in the right side, they can profit mightily when the price explodes.

The longer a stock traded in consolidation area, the more explosive the stock moves upside or downside when it breaks resistance or support level.

In this article, I am going to introduce you to another popular reversal patterns among traders; Head-and-Shoulder and Reverse Head-and-Shoulder patterns.

Head-and-Shoulder

The head-and-shoulder pattern shows up less often and also harder to detect than double top.

In an uptrend, the price goes up. Then sellers come in at the highs make the prices slow down and roll over that form the left shoulder (beginning neckline).

Buyers soon return and push the price through the left shoulder’s high which at first glance appears as a bullish new high. However, the new highs are quickly turned back and form the head (continuing neckline).

A trend line for this pattern is drawn from the beginning neckline to the continuing neckline.

Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. Ultimately, buying dries up and the market tests the downsides yet again to form the right shoulder and complete the pattern by breaking the neckline.

The key points

- It indicates that bear is coming
- If the price tumbles through neckline support, it will probably initiate a downtrend.
- If you are holding a long position, cover it now! If you are targeting to open a short position, wait for the price traded below the neckline support to confirm the pattern.

Reverse Head-and shoulder

The reverse head-and-shoulder pattern is a reverse version of head-and-shoulder as its name. Of course, it shows up less often and also harder to detect than double bottom.

The key points

- It indicates that bull is coming
- If the price rises through neckline resistance, it will probably initiate an uptrend.
- If you are holding a short position, cover it now! If you are targeting to open a long position, wait for the price traded above the neckline resistance to confirm the pattern.

In head-and-shoulder & reverse head-and-shoulder pattern, Volume has a great importance.

Generally volume follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers are not as aggressive as they once were. And on the last rallying attempt-the left shoulder-volume is even lighter than on the head, signaling that the buyers may have exhausted themselves.

These patterns take trained eyes to detect them. However, with a little practice, you will learn to locate them.

When analyzing the price, traders may look for a reversal pattern. The reversal patterns indicate a change or trend reversal is about to occur.

I’m quite sure that you have heard the most well-known reversal patterns as double top, double bottom, head and shoulders, reverse head and shoulders. They are basic reversal patterns that traders should get started with before go further to more advances.

Therefore in this article, we will discuss and review the key points the most basic and popular patterns, double top and double bottom.

Double Top

Double top happens when price is in an uptrend. The price goes up and pulls back. Then it resumes the uptrend but when it reaches the resistance established by the first peak. Traders refuse to pay higher prices. Therefore the price starts retracing to previous low.

The key points:

- It looks like an “M” when it’s completely form
- It indicates that bear is coming
- If the price forms the double top pattern and falls below consolidation support, it will sink lower.
- If you are holding a long position when the price is approaching the second peak in an uptrend, keep monitoring and get ready to take profits when other indicators confirm the reversal.

Double Bottom

Double bottom is the upside down version of double top. The price goes down and bounces during a down trend. Then the price resumes the downtrend but when it reaches the support established by the first sink. Traders refuse to sell lower prices. Therefore the price starts to retrace to its previous high.

The key points:

- It looks like a “W” when it’s completely form
- It indicates that bull is coming
- If the price forms the double bottom pattern and penetrate thorough consolidation resistance, it will rise higher.
- If you are holding a short position when the price is approaching the second bottom in a downtrend, keep monitoring and get ready to take profits when other signals confirm the reversal.

Whatever the time frame you trade, you can always spot the patterns. The reversal patterns (also continuation patterns) show up in chart of every time frame.

If you have ever read my articles, you may notice that I have always mentioned that a complete trading system must consist of rules for entry, exit and stop loss. The key of exit and stop loss is you have to set them before enter a trade.

There are many reasons behind this approach. One reason is it enables you to calculate your risk/reward ratio for your trade. Since you have your specific target price and stop price, you are able to measure your risk (when you are stopped out) against your reward (when the price reaches your target).

A general criterion for risk/reward ratio is to enter a trade only when your profit target (reward) is at least two or more times greater than your stop loss point (risk).

Let’s take a look at the following scenario of trading. Learn to recognize trades that are high risk and try to minimize its risk.

Let says that you follow the breakout system when you trading a stock. You are taking chance when you buy it on a breakout.

Before the breakout, the price level at breakout usually works as a resistance, therefore there is chance that the price will go down again and form the double top reversal pattern. Actually, it is often to be that way rather than the price really breaks the level out.

So the questions are:

1. Where is your stop loss point? If you place the stop at the support level before the breakout, it will be several ticks away from your entry.

2. Where is the next resistance level? How far is it when compare to the stop.

By answering these two questions, you will get the idea of your risk and reward. If you place the stop at the support level before the breakout, you are taking high risk. It is better for you to set the stop fewer ticks below the breakout level, this way you can minimize your risk and it requires lower level of target price to be at least two times greater than your possible loss.

The bottom line of the story is you must consider your risk and reward for your trade according to your entry, stop and exit! Do not take that trade if it is not worth.

There are many different approaches to set stop loss. Seek for one that most suit for your trading style and your capital, then stick with it. In this article we will discuss about some options for placing stop loss points in short-term trading.

1) When you swing trade, place stop loss few ticks under the low of the entry’s day

2) Do not risk more than two percent of your trading capital.

For example let’s say if you account total is $10,000. Two percent is equal to $200. So, if you buy 100 shares of XYZ stock at &42, you can lose only two points from this trade. Hence, the stop loss for your trade is $40.

With this approach, if you buy more shares the stop level will move closer to entry point while it will move further from entry point if you buy fewer shares.

3) Some traders place their stop point according to the cost of purchased stock.

For example, if you buy XYZ at $40, you may place stop at $38 which is 5 percent of your trading cost, if you place the stop at 10 percent it means you place the stop at $36.

4) Also use ”trailing stop”. The trailing stop is the stop loss that moves along behind the price.

For example, if you enter a trade at $40 and place initial stop loss at $36. A while later, if the price rise to $45, you may raise your stop level to $40 to get rid of losing chances. Then if the price continues to rise to $50, you may move your stop to $45 to lock your profit.

One proper option for placing trailing stop is to place the trailing stop few ticks below the closest support (if you go long) level.

The most important thing about stops is once you enter a trade, you have to place a stop immediately. Do not enter a trade without proper stop loss.

Do not enter a trade if it is too risky, place a tight stop to minimize your risk. Use trailing stop to lock your profits.