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Taking Day Trading
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Get into the basics on how to become a Professional Day Trader!

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Trading the Trend
Trading the Trend

Various so called charting trends tend to lead the way for many day traders and investors. Knowing how they are referenced by traders is a helpful tool to anyone trading the markets. We created several explanations to assist traders delving into the markets, regardless of how frequent.

Break-Outs: Traders playing break-outs look for key levels of support and resistance (S&R levels). A candle that breaks through a consolidation pattern - candles in a tight range - generally indicates the direction of the trend – long or short. Trades are placed by traders when positions price passes through these S&R levels. When a price breaks below a level of ‘support’, traders will move toward a short position. When a price of a position breaks through a level of ‘resistance’, traders will move toward a long position. S&R level trading can be used with stocks, futures and forex trading. Day traders generally play S&R levels every day, even if they don’t know it. Support levels can generally be recognized by a ‘higher low’ position on candlestick charts. Resistance levels are generally recognized by striking a ‘higher high’. Playing the pair has been a good rule of thumb for any trader although one must remember; no trend is foolproof to sudden change.

Retracements: Retracements are temporary price reversals that take place within a larger trend. Key to successful trading of retracements involves distinguishing a retracement from a reversal. A few guides for retracements: Volume: Profit taking by retail traders (small block trades); Money Flow: Buying interest during decline; Candlesticks: Indecisive candles - these typically have long tops and bottoms.

Shake-out:
All wise traders utilize a stop loss – notice I said all ‘wise’ traders. Any trader who fails to utilize a stop loss is foolish and downright stupid. Traders set their stop losses, just like they know they should and their position is taken out by at their stop and as soon as their position is cleared, the trend continues into what would have been their favor. Veteran experienced traders also refer ‘shake-outs’ as shaking the weak hands. Shaking the weak hands is when price manipulation appears evident which forces nervous traders to clear a position as their stop is neared. Again, the weak hands are shaken out. Another angle for a shake-out is when traders see repeated, significant retracements which result in a trader exiting a position too soon, letting profits on the table. Emotions tend to take precedence during a shake-out and are cause for a trader being shaken out of a potentially profitable position.

Whipsaw: Referred to this name because, if you watch a chart that has been known to provide a ‘whipsaw’ action, one would agree to the term since traders experience a ‘whip’ movement generally accompanied by a ‘whipsaw’ – sharp painful action. A ‘whipsaw’ trading action is a positive signal for either a long or short selling position immediately followed by a reversal. In other words a trader no sooner is stopped out of their position – long or short - when they see yet another setup implying a long or short selling signal. Whipsaw action is very frustrating and detrimental to ones trading account. Getting caught with a ‘whipsaw’ trade tends to weaken the nerves of a trader, which is understandable.
 

December 2012


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