Fundamental Analysis Training

 Liquidity. A security that's liquid allows you to buy and sell it easily, and, hopefully, at a good price. Liquidity is an advantage with tight spreads, or the difference between the bid and ask price of a stock, and for low slippage, or the difference between the expected price of a trade and the actual price.

 Volatility. This is a measure of the daily price range—the range in which a day trader operates. More volatility means greater potential for profit or loss.

 Trading volume. This is a measure of the number of times a stock is bought and sold in a given time period. It's commonly known as the average daily trading volume. A high degree of volume indicates a lot of interest in a stock. An increase in a stock's volume is often a harbinger of a price jump, either up or down.

 Once you know the stocks (or other assets) you want to trade, you need to identify entry points for your trades. Tools that can help you do this include:

 Real-time news services: News moves stocks, so it's important to subscribe to services that alert you when potentially market-moving news breaks.

 ECN/Level 2 quotes: ECNs, or electronic communication networks, are computer-based systems that display the best available bid and ask quotes from multiple market participants and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the Nasdaq order book. The Nasdaq order book has price quotes from market makers in every Nasdaq-listed and OTC Bulletin Board security.

 Intraday candlestick charts: Candlesticks provide a raw analysis of price action. More on these later.

 Define and write down the specific conditions in which you'll enter a position. For instance, buy during uptrend isn't specific enough. Instead, try something more specific and testable: buy when the price breaks above the upper trendline of a triangle pattern, where the triangle is preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on the two-minute chart in the first two hours of the trading day.

 Once you have a specific set of entry rules, scan more charts to see if your conditions are generated each day. For instance, determine whether a candlestick chart pattern signals price moves in the direction you anticipate. If so, you have a potential entry point for a strategy.

 Next, you'll need to determine how to exit your trades.

 There are multiple ways to exit a winning position, including trailing stops and profit targets. Profit targets are the most common exit method. They refer to taking a profit at a predetermined price level. Some common profit target strategies are:

 In many cases, you will want to sell an asset when there is decreased interest in the stock as indicated by the ECN/Level 2 and volume. The profit target should also allow for more money to be made on winning trades than is lost on losing trades. If your stop-loss is $0.05 away from your entry price, your target should be more than $0.05 away.

 Just as with your entry point, define exactly how you will exit your trades before you enter them. The exit criteria must be specific enough to be repeatable and testable.

 Day Trading Charts and Patterns

 Three common tools day traders use to help them determine opportune buying points are:

 Candlestick chart patterns, including engulfing candles and dojis

 Other technical analysis, including trendlines and triangles

 There are many candlestick setups a day trader can look for to find an entry point. If followed properly, the doji reversal pattern (highlighted in yellow in the chart below) is one of the most reliable ones.

 A volume spike on the doji candle or the candles immediately following it, which can indicate that traders are supporting the price at this level

Price Action Training

 Prior support at this price level such as the prior low of day (LOD) or high of day (HOD)

 Level 2 activity, which will show all the open orders and order sizes

 If you use these three confirmation steps, you may determine whether or not the doji is signaling an actual turnaround and a potential entry point.

 Chart patterns also provide profit targets for exits. For example, the height of a triangle at the widest part is added to the breakout point of the triangle (for an upside breakout), providing a price at which to take profits.

 It's important to define exactly how you'll limit your trade risk. A stop-loss order is designed to limit losses on a position in a security.

  For long positions, a stop-loss can be placed below a recent low and for short positions, above a recent high. It can also be based on volatility.

 For example, if a stock price is moving about $0.05 a minute, then you might place a stop-loss order $0.15 away from your entry to give the price some space to fluctuate before it moves in your anticipated direction.

 For example, if a stock price is moving about $0.05 a minute, then you might place a stop-loss order $0.15 away from your entry to give the price some space to fluctuate before it moves in your anticipated direction.

 In the case of a triangle pattern, a stop-loss order can be placed $0.02 below a recent swing low if buying a breakout, or $0.02 below the pattern.

 You could also set two stop-loss orders:

 Place an actual stop-loss order at a price level that suits your risk tolerance. Essentially, this level would represent the most money that you can stand to lose.

 Set a mental stop-loss order at the point where your entry criteria would be violated. If the trade takes an unexpected turn, you'll immediately exit your position.

 However you decide to exit your trades, the exit criteria must be specific enough to be testable and repeatable.

 Set a Financial Loss Limit

 It's smart to set a maximum loss per day that you can afford. Whenever you hit this point, exit your trade and take the rest of the day off. Stick to your plan. After all, tomorrow is another (trading) day.

 You've defined how you enter trades and where you'll place a stop-loss order. Now, you can assess whether the potential strategy fits within your risk limit. If the strategy exposes you to too much risk, you need to alter it in some way to reduce the risk.

 If the strategy is within your risk limit, then testing begins. Manually go through historical charts to find entry points that match yours. Note whether your stop-loss order or price target would have been hit. Paper trade in this way for at least 50 to 100 trades. Determine whether the strategy would have been profitable and if the results meet your expectations.

Errei

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