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Trading 101: Trend Analysis with Basic Charting Tools

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In our previous post dealing with swing trading we laid off the basics off trends in financial markets, and now we are going one step further. Getting to know the simplest charting tools will help you in analyzing trends, refining entries and exits, and building more sophisticated strategies. What’s more, these easy-to-use tools will be helpful not just in trading, but in your long-term investment decisions as well.

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For those who hear the terms “charting” and “charting tools” first, charting is the name of the analysis of price charts which contain the price history of financial assets, while charting tools are various drawings like trend-lines, chart patterns, support and resistance levels, and other visuals that traders use for their decisions.

We will get to all the different chart types (and later the hundreds of indicators that are out there), but for now, this is more than enough to progress. In fact, as you will see, keeping your analysis simple should be one of your most important long-term goals as a trader.

The Role of Charting Tools and Indicators

Before we get into the tools themselves, it’s crucial to note that charting tools and most trading indicators have one very important thing in common; they don’t add additional information to the price (and volume) data that’s already available on a basic price chart. This means that they are not some sort of magical forecasting methods. That said, by visualizing the data in different ways, they can uncover hidden, or hard to understand tendencies in the price history of an asset, making them very useful in practice.

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OK, but why do traders need that information? Well, the basic premise of technical analysis is that by studying the price history of an asset, we can predict the probability of the direction of future price movements.

The word probability is very important here because, without it, it’s easy to misunderstand technical analysis and charting tools. The key is that these methods don’t predict the future (because that’s not possible), but they help you in taking the position with the highest probability. Indicators will also be of great help in this process, providing simple and convenient ways of discovering ongoing trends, cycles, and waves in the price action.

The Structure of Trends

As we have seen previously, prices move in advancing and declining waves (or swings) that are separated by swing highs and swing lows. The most basic tools of trend analysis are trend lines, which simply connect these swing highs and swing lows. On the chart below, you can see that these trend-lines give traders a good idea of the”angle” of a certain price movement.

Rising and falling trend-lines in the EUR/USD currency pair

The trend-lines connecting swing lows and swing highs usually form a trend-channel that defines the movement of an asset for the period of the trend.  Because trends can be broken down into smaller waves on shorter time-frames, there are most of the times several “active” trends in motion for every asset. You can see those different trends (the lower time-frame trends drawn with red) on the chart below:

Rising and falling trend-lines on different time-frames

For our example, we deliberately chose trends that are not perfect (notice the small deviations from the trend-lines), as trend-lines are rarely precise enough to base exact trading decisions on them; they are more for roughly estimating the angle of the trend and the end of the price waves.

Cycles and Trend-Lines

You might ask the question that how it’s possible to spot a meaningful swing low or swing high on a given time-frame. The answer lies in cycles, which we indicated on the next chart. The swings on a time-frame tend to be roughly similar in length, giving you a good estimate for the length of the coming cycles. Using this, when a trend is established (after you identify a higher high and a higher low, or a lower high and a lower low), you simply project the length of the first wave (Cycle 1 on the chart) to get the possible points for the next swing lows (the vertical purple lines on the chart).

Cycles and swing lows in a rising trend

Again, these tools are not 100% precise, but they can help you immensely in your timing decisions. The major swing lows in our example were roughly around the projected cycle lows, and they were confirmed by the break of the lower time-frame trend lines. This is how a larger time-frame trend develops from shorter time-frame trends and major swings. In a rising trend, swing lows are more important, but the same logic can be applied for swing highs as well.

Trend-Line Signals

Trend-lines provide great value in several swing trading and other types of strategies as secondary signals. Secondary trading signals are signals that are less reliable but often come earlier, than primary signals, such as higher highs or higher lows. If the price reaches a trend-line it often means that the lower time-frame trend is close to its end, while a trend-line break is often a sign of the weakening the prevailing trend. These might provide the perfect opportunities for profit taking, switching to a more aggressive stop-loss level, or conversely, re-entering into a full position.

Let’s look at this in practice on the next chart:

Secondary trend-line signals in a rising trend

For this example let’s assume that you are already bought the asset in question, so we can fully understand the role of secondary signals. As soon as we established the trend-lines by identifying the higher high and the higher low, we can start using those for trading.

As you can see, this trend gave 3 clear profit taking points when the price touched the upper trend-line and two re-entry points when the price touched the lower boundary and broke above the declining shorter-term trend-line. It also gave an early warning to exit the whole trade before the price finally broke below a major swing low, providing a swing trading exit. This last signal is a good example when a trend-line break can serve as a primary signal—a clear break of a long-term trend often proves to be the end of a move or at least the start of a major correction.

Parabolic Trends

Some of you might already know about trends that are not exactly like the ones we discussed so far. Trends in financial markets can’t always be described by straight lines. Why? There could be several reasons for that—the cause of the trend might not be stable, the trend might attract more and more traders causing an acceleration in the trend, or conversely, a negative trend might cause a quickly spreading panic among the holders of the asset, leading to a swift collapse.

Whatever is the reason, these so-called parabolic trends are great opportunities for traders. As the moves accelerate, profits can pile up quickly if you are positioned correctly. That said, identifying these trends is not always easy, and the jump in volatility usually causes troubles for beginners, especially if they try to trade against these powerful moves.  For those reasons, we will dedicate a whole post for these trends; until then here is a recent example of a parabolic move:

A recent parabolic short-term advance in gold

What’s next?

Now that we introduced trends, the most important analysis tools for traders, in our next posts on we will take a look at some other crucial elements of charting, which complement and refine your trend analysis. Support and resistance levels, chart patterns, and special candlesticks will be on the menu.

Previous article: Trading vs. Investing

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 115 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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2 Comments

  1. sambkf

    May 4, 2017 at 9:47 pm

    Thank you for the great visual example of trend lines.

  2. dgimness

    June 11, 2017 at 5:32 pm

    Good article Mate!

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Trading 101

A Long-term Investment Strategy with the 200-Day Moving Average

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Moving average

If you are looking for a way to be invested in the stock market during good times, but at the same time have some protection in place for when the next crisis hits, then look no further. Trend-following strategies should then be your friend, and I will here share a simple yet very effective such strategy designed for long-term capital growth with low volatility.

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Aside from my crypto investments, I have long been looking for a low-maintenance investment strategy for the stock market. As I don’t have much time for short-term trading anymore, I am mainly looking to make long-term investments that I can simply buy and forget about.

However, I still want to be protected in case we hit another crisis or enter into a larger bear market. In my opinion, there are lots of risks on the horizon for the financial market. Still, a bull market is a bull market and any good trend-following investor should be invested in it regardless of his own feelings or opinions about where the market should be heading.

The 200-day moving average

The 200-day moving average is one of the most used technical indicators out there, and possibly the most popular moving average, particularly among US stock market investors.

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Because of its popularity, as well as being featured in the media whenever the market crosses it, it works in many ways as a self-fulfilling prophecy. The 200-day moving average has also been in the headlines over the last few weeks after the plunge we saw in global stock markets in the beginning of February. The line then acted as support for the S&P, but a break below it would have been a significant event that many investors would take as the beginning of a larger bear market.

To illustrate this point, let’s take a look at the table below from Bloomberg. It shows six bear markets where losses exceed 20%, broken down by the loss before the market came down through the 200-day moving average and after it crossed the line.

200-day moving average

The question now becomes if you can use the 200-day moving average as an indicator to follow in your own trading. You would buy when the market closes above the 200-day moving average and sell when it closes below.

The answer to that is that it definitely could be used to ensure you stay invested during prolonged bull markets, while avoiding deep corrections and market crashes. However, a problem with all trend-following strategies is what’s known as whipsaws – those times when the trend appears to start in one direction just as it turns again into the opposite direction. This is what kills the profitability of most trend-following trading systems.

Dealing with whipsaws

One strategy for overcoming the problem with whipsaws is to wait a certain number of days after the moving average line has been crossed before you enter your trade. This way, you would filter out a lot of the choppy price movements during times when the market is not showing any clear direction.

For example, one strategy that often is proposed is to buy only when the market has closed above the 200-day moving average line for 5 consecutive days. Similarly, you would sell when the market has closed below the same line for 5 consecutive days. 5 days seems to be a popular choice as it filters out most of the choppy price movements that are happening right around the moving average line.

Depending on what market you test this strategy on, you may find that the absolute returns would have been higher with a simple buy-and-hold system. However, pay attention to what happened during market crashes like the one we had in 2008. If you apply it to the SPY ETF (the ETF that tracks the S&P500), you will see that the strategy then went to cash and you would have been protected against further downside. In addition, keep in mind that nobody knows how deep the next crash will be, all we know is that sooner or later it will come.

Personally, I would rather sacrifice a little bit of my returns for an insurance against a completely unknown risk to the downside. In my view, this strategy is perfect for long-term capital growth while keeping volatility very low and giving peace of mind to the investor during times of market turmoil.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.2 stars on average, based on 21 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He mainly follows the stock and forex markets, and is always looking for the next great alternative investment opportunity.




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Trading 101

How to Find Good Swing Trading Set-Ups

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swing trading

Swing trading is often the starting point for those who are looking to venture into trading, and perhaps make the move from being an investor to becoming an active trader. The reasons for this are simple; it involves trading on a medium timeframe which means it is possible to do it while you still have a day job, and it can complement other trading styles like day trading, trend trading, or scalping.

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According to Investopdia, typical holding time for a swing trader is 1-4 days. In forex, we would typically hold our trade for no more than 5 days in order to eliminate the risk of holding a position while the markets are closed over the weekend. For cryptocurrencies however, which trade 24/7, we can adapt our rules and we no longer need to be so strict about the holding period. In crypto, as long as the conditions for holding the trade are still valid, we should hold on to it.

What is a swing in a market?

The market price of a cryptocurrency can be defined as the equilibrium between supply and demand at any given time. It is the price where a buyer and a seller agree to make a trade. Over time, these equilibrium prices can move in uptrends or downtrends or even sideways in a range.

A typical market pattern is for prices to move from contracting ranges to expanding ranges. The shift between these two is called a “break-out,” and this is where we see strong and quick price movements to a new area on the chart.

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One way to look at it is to compare range contraction to a spring that is being compressed. The break-out occurs when all the energy from the spring is released, which may happen either to the upside or the downside. We now have the beginning of a “swing” in the market.

If this break-out is followed by a series of higher tops and higher bottoms in “wave movements,” the market has formed an uptrend. If the inverse is true, we have a downtrend. Each wave is considered its own swing in the market.

As swing traders, our job is to catch the most violent part of this move – the break-out. Some traders choose to hold on to the trade through several swings and thus ride the trend, while others prefer to sell once a pre-determined price target has been reached.

How to spot good potential swings?

For the majority of the time, prices of any tradable instrument move within a certain range. In the stock market, it is often said that the market is ranging as much as 80% of the time.

To scan for potential trading opportunities, one approach is to first look at your charts in one of the higher timeframes, for example the daily or the 4-hour timeframe. Once you spot a promising set-up, switch to a lower timeframe like the 1-hour to look for specific entry opportunities.

Generally speaking, there are three important factors you need to take into consideration when looking for an entry as a swing trader:

  1. Swings should happen in the same general direction as the trend that is playing out on the higher timeframes.
  2. If trading crypto, look for momentum in coins that share similar characteristics as the one you are trading. For example, if you are considering to trade a privacy-oriented coin like Dash, how are other privacy coins like Monero or Zcash doing? In the stock market, look for stocks in the same industry.
  3. Carefully evaluate the trend. Is it getting stronger or weaker? A weakening trend could mean that it is about to change direction, while a strengthening trend could mean the opposite. Is trading volume supporting the trend? Uptrends with gradually increasing volume are considered the most robust.

Timing and win rate

The best instrument to trade is the one that is exhibiting the strongest behavior in its class. So, to use the privacy coins as an example again, pick the one that is trending up in the strongest way among them. This is the coin where you want to place your trade.

In addition to this, don’t forget to adjust and tweak your strategy to the prevailing market conditions. Remember that the win rate of any trading strategy can change dramatically under changing market conditions, and make you go from being a profitable trader to a losing trader.

As swing traders, we need to be aggressive when we spot good opportunities. You cannot afford to pass on good trading opportunities. Make sure that you earn enough on your good trades to make up for the inevitable losses that will come.

Similarly, a swing trader also need to know when to stay away from the market altogether. It is equally important to recognize the conditions you should stay away from, as it is to be aggressive under the right conditions.

Lastly, remember the words of the legendary trader Jesse Livermore: “There is a time to go long, a time to go short, and a time to go fishing.” These are wise words that we all should remind ourselves of from time to time.

Good luck on your swing trading journey.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.2 stars on average, based on 21 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He mainly follows the stock and forex markets, and is always looking for the next great alternative investment opportunity.




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A New Trading Strategy? Using RSI and Stoch to find Entry Points

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I started my CFD Journey on Thursday using a few rules that I created for myself. I’m now interested in trying to see if I can use RSI and Stoch in combination to create an even better trading strategy for myself. My previous rules were:

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  1. Only risk max 2% of my bank roll per trade.
  2. Have 0 active positions during the night (first of all, I lose sleep, second; you are charged an interest fee for leaving a leveraged product overnight.)
  3. Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.
  4. If one position is lost, I’ll double the amount (martingale) and do a second trade. I’ll only stop doubling after 3 consecutive losses.
  5. Do not think about lost trade opportunities.
  6. Markets to trade: Dax & Dow (minimum spread).
  7. Stay updated on economic releases prior to entering a trade.
  8. Do not have emotional ties to the money. I like to call them “points”.

Trend following has proven (historically) to be the most sound way to trade any asset. It’s indisputable. However, for CFD trading I never want to leave a trade overnight due to interest fees and sleep. It can be hard to do trend following when you have to be in and out of a trade quick. I got an idea today to try and use RSI and Stoch in combination to find the best entry points for my CFD trading. And my ultimate strategy would be to include it with my number 3 rule:

Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.

In combination with my new RSI and Stoch rule:

Only enter a position when an asset is overbought or oversold shown by both RSI & Stoch at the same time.

What is RSI and Stoch?

The relative strength index (RSI) is a momentum indicator developed by noted technical analyst Welles Wilder, that compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of a security. It is primarily used to attempt to identify overbought or oversold conditions in the trading of an asset.

Many say that an asset with an RSI above 70 is overbought (and should be sold) or if the RSI is below 30 it’s oversold (and should be bought).

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The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result.

Asset with a stoch showing above 80 is considered overbought, and if the asset is showing less than 20 it’s considered oversold.

My mini experiment with the Dax 30 Minute Timeframe

Below is the first crossover I found where RSI and Stoch is correlating going back a few days on the Dax index. Both give a buy signal when the indicators cross their lowest horizontal lines. Then I found out that if I were to sell when either one of the indicators crosses the overbought territory I would be able to Take Profit.

Looking at the Dax index back to January 17th, I would have won six trades and lost two trades based on this strategy alone (RSI and Stoch with a 30 min timeframe). If I were to implement it with my trade following rule, I would have initiated 0 trades during this period (where both the intraday trend and the monthly trend is correlating.) I’m not sure if I’m going to follow these rules by the book, but I’m definitely going to experiment with them the following week and give you an update in my posts.

Have you tried this before? Submit a comment below and let me know how it worked for you.

My trading rules are now updated to:

  1. Only risk max 2% of my bank roll per trade.
  2. Have 0 active positions during the night (first of all, I lose sleep, second; you are charged an interest fee for leaving a leveraged product overnight.)
  3. Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.
  4. If one position is lost, I’ll double the amount (martingale) and do a second trade. I’ll only stop doubling after 3 consecutive losses.
  5. Do not think about lost trade opportunities.
  6. Markets to trade: Dax & Dow (minimum spread).
  7. Stay updated on economic releases prior to entering a trade.
  8. Do not have emotional ties to the money. I like to call them “points”.
  9. Only enter a position when an asset is overbought or oversold shown by both RSI & Stoch at the same time.
Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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