The Basics of Trading

Video Lectures

Displaying all 77 video lectures.
Lecture 1
Intro to Technical Analysis
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Intro to Technical Analysis
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Lecture 2
Introduction to Dow Theory
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Introduction to Dow Theory
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An overview of the first three tenets of Dow Theory. The second in a series on technical analysis for active traders of the stock, futures and forex markets.

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VIDEO TRANSCRIPTION (to see this transcription with links, and images of charts, go here: http://www.informedtrades.com/1964-dow-theory.html)

In the last lesson on technical analysis we talked a bit about the different ways that traders analyze the markets. In this lesson we will look at the history of technical analysis and something known as Dow Theory.

Most consider the father of technical analysis to be Charles Dow, the founder of Dow Jones and Company which publishes the Wall Street Journal. Around 1900 he wrote a series of papers which looked at the way prices of the Dow Jones Industrial Average and the Dow Jones Transportation Index moved. After analyzing the Indexes he outlined his belief that markets tend to move in similar ways over time. These papers, which were expanded on by other traders in the years that followed, became known as "Dow Theory".

Although Dow Theory was written over 100 years ago most of its points are still relevant today. Dow focused on stock indexes in his writings but the basic principles are relevant to any market.

Dow Theory is broken down into 6 basic tenets. In this lesson we are going to take a look at the first 3 and then finish up our conversation of Dow Theory in the next lesson by looking at the last three.

The first tenet of Dow Theory is that The Markets Have 3 Trends.

• Up Trends which are defined as a time when successive rallies in a security price close at levels higher than those achieved in previous rallies and when lows occur at levels higher than previous lows.
• Down Trends which are defined as when the market makes successive lower lows and lower highs.
• Corrections which are defined as a move after the market makes a move sharply in one direction where the market recedes in the opposite direction before continuing in its original direction.

The second tenet of Dow Theory is that Trends Have 3 Phases:

• The accumulation phase which is when the "expert" traders are actively taking positions which are against the majority of people in the market. Price does not change much during this phase as the "experts" are in the minority so they are not a large enough group to move the market.
• The public participation phase which is when the public at large catches on to what the "experts" know and begin to trade in the same direction. Rapid price change can occur during this phase as everyone piles onto one side of a trade.
• The Excess Phase where rampant speculation occurs and the "smart money" starts to exit their positions.

Here you can start to see how the psychology of investors and traders comes into play an important concept which we will delver deeper into in later lessons.

The third tenet of Dow Theory is that The Markets Discount All News, meaning that once news is released it is quickly reflected in the price of an asset. On this point Dow Theory is in line with the efficient market hypothesis which states that:

"the efficient market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or property, already reflect all known information and therefore are unbiased in the sense that they reflect the collective beliefs of all investors about future prospects."

Source: Wikipedia

This concept that the markets discount all news is one that is sited in arguments in favor of using technical analysis as a tool to profit from the markets as if it is true that markets already discount all fundamental factors then the only way to beat the market would be through technical analysis.

So now you should have a good understanding of the first three tenets of Dow Theory including the different types of trends, the different phases of trends, and Dow's concept that the price of an asset already reflects all known news. In our next lesson on Dow theory we are going to look at the second three tenents.
Lecture 3
Second 3 Tenets of Dow Theory
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Second 3 Tenets of Dow Theory
This is the third video in our free introductory course on the basics of trading and technical analysis. The video covers the second three tenets of the Dow Theory. See the full course for free at http://www.informedtrades.com/trades.php?page=freetradingcou...

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VIDEO TRANSCRIPTION (to see this transcription with links, and images of charts, go here: http://www.informedtrades.com/2144-dow-theory-last-3-tenets-...

In yesterday's lesson we gave an introduction of Dow Theory and looked at the first three tenets which are: markets have three trends, trends have three phases, and the markets discount all news. In today's lesson we are going to take a look at the second 3 tenets which will finish up our discussion of Dow Theory and give us a strong basis which we can then use to analyze trends and eventually place some trades.

Tenet four of Dow Theory is that The Averages Must Confirm Each Other. The averages must confirm each other. Here Dow was referring to the Dow Jones Transportation Index and the Dow Jones Industrial Average. To understand this point it is important to remember that in Dow's time the growth in the US was coming mainly from the Industrial sector. These two indexes were made up of manufacturing companies and the rail companies which were the primary method used to ship the manufacturers goods to market. What Dow was basically saying here is that you could not have a true rally in one of the averages without a confirmation from the other because if manufacturer's profits were rising they would have to ship more goods. This meant that the profits of the transportation companies and therefore the transportation average should rise too. Dow stated that when these two averages moved in opposite directions it was a sign that the market was going to change direction.

Tenet five is Trends Are Confirmed by Volume. What Dow was saying here was that there are many reasons why price may move on low volume, but when prices move on high volume there is a greater chance that the move is representative of the overall market's view. Dow believed that if many traders were participating in a particular price move and the price moves significantly in one direction, then this was an indication of a trend developing as this was the direction the market was anticipated to continue to move.

Tenet six is that Trends Exist Until Definitive Signals Prove That They Have Ended. What Dow was saying here is that there will be market moves which are against the primary trend but this does not mean that the trend is over and the market will normally resume its prior trend. There is much debate on how to best determine when a definitive signal has been given that the trend is over and this is where our study of technical analysis in future lessons will take us.

Now that you have read this article you should have a basic understanding of the background of how prices move and what market technicians look for as the foundation of their analysis. Next we are going to look at the basics of charts and the different types of charts that traders use to analyze the market.

As always if you have any questions or comments please feel free to post them below, and have a great day!
Lecture 4
How to Read Stock Charts
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How to Read Stock Charts
This is the fourth lesson in a series on technical analysis for traders of the forex, futures, and stock markets. View this lesson InformedTrades to see more charts, links, and discussion: http://www.informedtrades.com/2229-introduction-bar-line-can...

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****

The tool of the day trader when analyzing the forex, futures, or stock markets is the price chart. Very simply a price chart is a chart showing the movement of the price of a financial instrument over a chosen time.

Most charts will allow a wide variety of time frames to be displayed and the time frame that day traders choose to use varies widely and depends on each traders trading style. In general, longer term traders will focus on daily time frames and above, and shorter term traders will focus on intraday charts such as hourly or 15 minute charts. Many traders will also use a combination of time frames in order to get a full picture of what price has been doing by, for instance, looking first at a longer term daily chart, then moving to an hourly chart, and then finally to a 15 minute chart.

Types of Charts

Although there are many different types of charts which stock, traders of the stock, futures and forex markets use, the most common, which we will review below, are the line chart, the bar chart, and the candle stick chart.

Line Charts

A line chart is the most basic type of chart as it displays the least amount of data. Very simply, line charts display only the closing price of an instrument and are used by traders who do not care about viewing the open, high, and low prices or when only the close price is available.

Bar Charts

In addition to the close price, bar charts also show the open, high, and low prices for the time period selected. The name of the chart comes from the fact that the high and low of the instrument for the time period selected is displayed as a two points connected by a vertical line or bar. The open and close are then displayed as short horizontal lines placed across the vertical lines.

Candlestick Charts

Candlestick charts (which are also sometimes referred to as Japanese candlesticks because they originated in Japan) display the most detail for the price movement of a security of the three chart types listed here. A candlestick chart is similar to a bar chart with one significant difference -- in addition to displaying the open, high, low and close prices, candlestick charts use different colors to represent when the open is higher than the close and vice versa.

In general when the open price for the time period selected is lower than the close, white or unshaded candle form and when the open is higher than the close a black or shaded candle forms. I say in general here in reference to the colors of the candles as sometimes instead of shaded and unshaded different colors such as red for down days and green for up days are used.

On a candlestick chart the thick or colored part of the data points is referred to as the body of the candle and the thin lines at the top and bottom (which represent the space between the open/close and the high/low for the time period selected are referred to as the wick.

You should now have a good understanding of price charts and the main types of charts available to you as a trader. In future lessons we will go into more detail of how to utilize a chart to analyze and place trades. In our next lesson we are going to go over the basics of support and resistance and how we can use these levels to spot potential trading opportunities.
Lecture 5
How to Trade Support and Resistance
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How to Trade Support and Resistance
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This is the fifth video in our free introductory course on the basics of trading and technical analysis. The video covers support and resistance -- arguably the most fundamental and important concepts in technical analysis. See the full course for free at http://www.informedtrades.com/trades.php?page=freetradingcou...

If you enjoyed this video, you may also appreciate our section on on price action trading -- http://www.informedtrades.com/f386/ -- and our page dedicated to support and resistance: http://www.informedtrades.com/f427/

While watching the videos, be sure to free the concepts presented using a free practice trading account here: http://bit.ly/IT-forex-demo

And of course, don't forget to check out our huge (and growing!) collection of organized material to help traders learn. Visit, register as a member, and participate in our learning community at http://www.informedtrades.com.

VIDEO TRANSCRIPTION (to see this transcription with links, and images of charts, go here: http://www.informedtrades.com/2325-support-resistance.html)

Just as anything where market forces are at play, the price of a financial instrument in the stock, futures or forex markets is ultimately determined by supply and demand. Very simply, if demand is increasing in relation to supply then price will rise, and if demand is decreasing in relation to supply then price will fall.

As we have learned in previous lessons, what you are basically looking at when you see an uptrend on a chart is an extended period of time where demand has continued to increase in relation to supply. Similarly when looking at a downtrend you are seeing an extended period of time where demand has decreased in relation to supply for an extended period of time, causing price to fall. Similarly, in a downtrend, demand is continuously falling in relation to supply which causes the price of an instrument in the stock, futures or forex market to fall.

In this lesson we are going to look at something known as support and resistance which are price levels where the supply demand equation is expected to change, and price is then expected to stop moving in the direction it was moving previously, or reverse direction.
Lecture 6
Multi Time Frame Analysis
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Multi Time Frame Analysis
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The sixth lesson in a series on technical analysis for active traders of the forex market, futures market, and stock market.

We should now have a good understanding of how to spot trends in the forex market, stock market, and futures market. Now lets tie everything together we have learned thus far with the final concept of this series, Multi Time frame analysis.

No matter what time frame you end up using as a trader or what time frame a particular strategy calls for, it is important always to have a big picture overview of what is happening in the market. Although there are exceptions, in general most traders will tell you that if your trade setup or analysis lines up on multiple time frames, then the odds of being correct are greatly increased.
Lecture 7
Introduction to the Double Top and Double Bottom Charting Pattern
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Introduction to the Double Top and Double Bottom Charting Pattern
The first lesson in a series on chart patterns for traders and investors in the stock market, futures market, and forex market. To view the full lesson with charts, go here: http://www.informedtrades.com/2587-double-top-double-bottom-...

Remember that practice makes perfect! :) So be sure to register for a free practice trading account here: http://bit.ly/forex-demo1

VIDEO TRANSCRIPTION

A double top is a reversal chart pattern which is defined by a chart where a financial instrument makes a run up to a particular level, then drops back from that level, then makes a second run at that level, and then finally drops back off again.

In its most basic sense what the double top pattern is saying about supply and demand forces is that demand is out pacing supply (buyers are winning) up to the first top causing prices to rise, and then the equation flips and demand is no longer out pacing supply (sellers are winning) causing prices to fall. After then falling back the buyers make another run at the same price and then after failing to break that level for a second time, sellers take control and keep the upper hand causing prices to sell of even more dramatically after the second top than they did after the first. For double bottoms the reverse is true.


A double bottom is also a reversal pattern in the futures, forex, or stock markets which is the exact opposite of a double top. To form a double bottom a financial instrument makes a run down to a particular level, then trades up from that level then makes a second run down to at or near the same level as the first bottom, and then finally trades back up again.
Lecture 8
How to Trade Double Tops Like a Pro
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How to Trade Double Tops Like a Pro
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The 2nd lesson in a series on charting patterns for traders and investors in which goes into specific strategies which can be used to trade double tops and double bottoms in the forex market, stock market, and futures market. See the full lesson with images, links, and discussion here: http://www.informedtrades.com/2916-double-bottom-double-top-...

VIDEO TRANSCRIPTION

In our last lesson we learned about the double top and double bottom and how to spot these setups on a stock chart. In this lesson we are going to learn about a common trading strategy that traders use to trade these setups in the futures, forex, and stock markets.

As the double top and double bottom are signs that a financial instrument has failed to break through a certain level (resistance for a double top and support for a double bottom) these chart patterns are considered reversal patterns. As this is the case, traders will commonly look to trade the double top when it occurs at the top of a trend as a sign that the uptrend is reversing, and to trade the double bottom at the bottom of the trend as a sign the downtrend is reversing.

First lets look at the a common trading strategy for the double top. For confirmation that a double top has actually formed and that a reversal in the uptrend is at hand, a common strategy is to look for declining volume going into the second peak and rising volume on a break below the bottom of the trough which has formed between the two peaks (support).

Once these things line up a common trading strategy is to enter the trade on the break of support with a target which is equal to the distance between the bottom of the trough and the top of the two peaks projected downward from the bottom of the trough. The stop order is then placed just above the last peak.

For double bottoms the process is a mirror image of the above explanation. The strategy here is to look for declining volume going into the second trough and rising volume on the break of the peak which has formed between the two troughs (resistance). Once you spot the double bottom the trade is entered on the break of resistance with a target which is equal to the distance between the top of the peak and the bottom of the two troughs projected upward. The stop order is then placed just above the last trough.

We should now have a good understanding of a common strategy used to trade double tops and double bottoms. In or next lessons we are going to look at another common chart pattern which is known as the head and shoulders pattern and a common trading strategy which is used to trade this chart pattern.
Lecture 9
How to Trade the Head and Shoulders Pattern Part 1
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How to Trade the Head and Shoulders Pattern Part 1
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The 3rd lesson in a series on charting patterns which looks at the head and shoulders pattern and how traders use this in the stock market, forex market, and futures market. For the full article with links, images, and discussion, click here: www.informedtrades.com/3047-head-shoulders-pattern.html


VIDEO TRANSCRIPTION:

As we have learned in previous lessons, double tops and double bottoms are forex, futures and stock chart patterns which show that the momentum needed to break a specific level of resistance for the double top and support for the double bottom is not there. When these patterns show up on a stock, futures or forex chart day traders will look for a reversal of the current trend.

In this lesson we are going to look at a chart pattern which also shows that the momentum needed to break a support or resistance level is slowing which is known as the head and shoulders pattern and the reverse head and shoulders pattern. Once we have a sound understanding of how to spot these patterns we will then look at a specific strategy for trading these patterns when they appear on a chart.

A Head and Shoulders pattern is defined by one peak, followed by a higher peak, which is then followed by a lower peak, and finally a break below the support level established by the two troughs formed by the pattern.

The head and shoulders pattern is thus seen as a potential reversal pattern and day traders will pay special attention to this pattern when it occurs on an uptrend, and will look to trade a potential reversal of the uptrend should the pattern play out. For further confirmation that the potential for a reversal is high traders often give more credibility to a falling neckline than they do a rising neckline.

The reverse head and shoulders is basically a mirror image of the head and shoulders pattern and is defined by one trough, followed by a second lower trough, which is then followed by a third higher trough, and then finally a break above the resistance level established by the two peaks formed by the pattern.

the reverse head and shoulders is basically showing the sellers trying 3 times unsuccessfully to take the market lower before finally giving into the buyers who theoretically retain control after the 3rd failure. Like the Head and Shoulders Pattern, the Reverse Head and Shoulders is seen as a reversal pattern, and traders of the stock, futures and forex markets will pay special attention to this pattern when it occurs as part of a downtrend should the pattern play out. For further confirmation that the potential for a reversal is high, day traders will look for a rising neckline.
Lecture 10
How to Trade the Head and Shoulders Pattern Part 2
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How to Trade the Head and Shoulders Pattern Part 2
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The 4th lesson in a series on charting patterns which looks at how to trade the head and shoulders pattern and the reverse had and shoulders pattern for daytraders in the stock market, futures market, and forex market. To view this lesson with text, links, images, and discussion, see our thread on InformedTrades here: http://www.informedtrades.com/2916-double-bottom-double-top-...

VIDEO TRANSCRIPTION

In our last lesson we learned how to spot a head and shoulders pattern and a reverse head and shoulders pattern in the forex, futures, and stock markets. In this lesson we are going to look at a specific strategy that many traders use to trade these patterns.

Upon the break of the neckline support level the chart pattern is said to be in place so this is where traders will commonly look to enter a short position. Their target will be calculated by measuring the distance from the head of the pattern down to the neckline and then projecting that distance downward from the breakpoint of the neckline. The stop will then be placed just above the right hand shoulder of the pattern which is considered resistance. The idea here is that once the neckline support has been broken sellers will theoretically remain in control but if this does not happen then you are protected with a stop loss just above the nearest resistance level.

For the reverse head and shoulders the strategy is a mirror image of the above. Upon the break of the neckline resistance the pattern is said to be in place so traders will commonly look to buy at this level. Just as with the head and shoulders their target will be calculated by measuring the distance between the head and the neckline but in this case the target is projected upward from the break point of the neckline. The stop will then be placed just above the right had shoulder of the pattern which is in this case considered the nearest support level.

For confirmation, traders will commonly look for a downward sloping neckline before entering a trade on the break of a head and shoulders pattern and an upward sloping neckline before entering a trade on the reverse head and shoulders, as this is further indication that the trend is reversing. Secondly traders like to see the volume on the second peak (trough with a reverse head and shoulders) be lower than the volume on the first, and the volume on the third peak (trough in a reverse head and shoulders) be lower than the volume on the second peak as this is further confirmation that the trend is ready to reverse. Lastly they will look for increasing volume on the break of the neckline to show that the break is real.

That's our lesson for today. You should now have a good understanding of the head and shoulders pattern and the reverse head and shoulders pattern as well as a trading strategy for each of them. In our next lesson we are going to finish up on reversal patterns by looking at the rising wedge and falling wedge patterns and then we will move onto continuation patterns after that.
Lecture 11
How to Trade the Wedge Chart Pattern Like a Pro Part 1
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How to Trade the Wedge Chart Pattern Like a Pro Part 1
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VIDEO TRANSCRIPTION

In our last lesson we looked at specific strategies for trading the Head and Shoulders Pattern and the Reverse Head and Shoulders Pattern, two chart patterns which we view as reversal patterns when they show up in the stock, futures, or forex markets. In this lesson we are going to look at a pattern called the wedge pattern, which is unique in the sense that it can be viewed as either a reversal pattern or a continuation pattern, depending on the shape of the pattern and whether it is located in an uptrend or a downtrend.

The Falling Wedge:

The falling wedge pattern is characterized by a chart pattern which forms when the market makes lower lows and lower highs with a contracting range. When you find this pattern in a downtrend it is considered a reversal pattern as the contraction of the range indicates the downtrend is loosing steam. When you find this pattern in an uptrend it is considered a bullish pattern as the market range becomes narrower into the correction indicating that it is running out of steam and the resumption of the uptrend is in the making.

The Rising Wedge:

The rising wedge pattern is characterized by a chart pattern which forms when the market makes higher highs and higher lows with a contracting range. When you find this pattern in an uptrend it is considered a reversal pattern as the contraction of the range indicates that the uptrend is loosing steam. When you find this pattern in a downtrend it is considered a bullish pattern as the market range becomes narrower into the correction indicating that it is running out of steam and the resumption of the downtrend is in the making.

That's our lesson for today. You should now have a good understanding of the falling and rising wedge pattern and situations where they are considered a reversal pattern and situations where they are considered a continuation pattern. In our next lesson we are going to go over a strategy for trading rising and falling wedge patterns complete with entry and exit points and how to determine each.
Lecture 12
How to Trade the Wedge Chart Pattern Like a Pro Part 2
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How to Trade the Wedge Chart Pattern Like a Pro Part 2
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VIDEO NOTES

In our last lesson we learned about the falling wedge and the rising wedge patterns, two chart patterns which can be seen as reversal or continuation patterns depending on whether they appear in an uptrend or a downtrend. In this lesson we are going to learn a trading strategy traders of the stock, futures, and forex markets commonly use to trade these chart patterns.

The Falling Wedge Reversal Strategy:

As you hopefully remember from our last lesson when a falling wedge appears in a downtrend it is considered a reversal pattern. As this is the case when traders see this pattern occur in a downtrend they commonly look to trade a reversal of that downtrend so they are looking for buying opportunities. The buy point they will commonly use is the breakpoint of the upper resistance line as this is seen as a potential confirmation that the downtrend is reversing. The target for the trade is then calculated by measuring the distance from the highest peak on the pattern to the lowest trough, projected upward from the beak point. Lastly, the stop loss is placed just below the outside of the wedge formation.

When a falling wedge appears in an uptrend, this is seen as a potential continuation pattern. As this is the case when traders see this pattern occur in an uptrend in the forex, futures, or stock market, they will commonly look to trade in the direction of the prevailing trend. The buy point they will use here as well is the breakpoint of the upper resistance line as this is seen as a potential confirmation of the continuation of the prevailing uptrend. The target for the trade is then calculated by measuring the distance from the highest peak on the pattern to the lowest trough, projected upward from the breakpoint. Lastly, the stop loss is placed just below the outside of the wedge pattern.

As you also hopefully remember from our last lesson, when a rising wedge appears in an uptrend this is considered a reversal pattern. As this is the case when traders see this pattern occur in an uptrend, they will commonly position to trade the reversal of that uptrend by looking for selling. The sell point they will commonly use is the breakpoint of the bottom support line as this is seen as confirmation the uptrend is reversing. The target for the trade is then calculated by measuring the distance from the lowest trough on the pattern to the highest peak, projected downward from the breakpoint. Lastly, the stop loss is then placed just above the outside of the wedge pattern.

When a rising wedge appears in a down trend in the forex, futures, or stock market, it is considered a continuation pattern. As this is the case when traders see this pattern occur in a downtrend they will commonly look to trade the continuation of that downtrend by looking for selling opportunities on the break of the lower support line. The target for the trade is then calculated by measuring the distance from the lowest trough on the pattern to the highest peak, projected downward from the breakpoint. Lastly, the stop loss for this strategy is then placed just above the outside of the wedge pattern.

That concludes our lesson. You should now have a good understanding of how to trade both the falling wedge and rising wedge pattern. In our next lesson we will start looking at continuation patterns beginning with the Flag and Pennant chart patterns.
Lecture 13
How to Trade the Flag/Pennant Patterns Like a Pro Part 1
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How to Trade the Flag/Pennant Patterns Like a Pro Part 1
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VIDEO NOTES

In our last lesson we looked at strategies for trading the rising wedge pattern and falling wedge pattern in the stock, futures, and forex market. In this lesson we are going to start our series on continuation patterns with two chart patterns known as Flags and Pennants.

Typically seen after a big move in one direction in a particular financial instrument, flags and pennants represent brief consolidations or pauses in the market before a resumption of the trend in which they occurred. The flag and pennant patterns both contain a "flagpole" which is represented by the sharp move upwards or downwards, and then the flag portion of the pattern which forms when there is a consolidation which can be encompassed with a rectangle, or a pennant portion of the pattern which forms when there is a consolidation which can be encompassed by a symmetrical triangle.

When a flag or pennant occurs in an uptrend, a break of the top resistance line can be seen as a resumption of the uptrend. Conversely when a flag or pennant occurs in a downtrend a break of the bottom support line can be seen as a resumption of the downtrend.

Flag Patterns:

As you can see in the below example the flag portion of the bull flag pattern is encompassed by two parallel lines. These lines can be either flat or pointed downward representing the consolidation in the market. The pole is then formed by a line which represents the move big move upward which sets up the bull Flag. The pattern is seen as the market potentially just taking a "breather" after a big move before continuing its move upward and is thus referred to as a bullish pattern.

The bear flag occurs in down trends and is exactly the same pattern as the bull flag, simply flipped upside down. The lines which form the flag can be either flat or pointed upward, and the pole of the pattern is then formed by a line encompassing the move downward which sets up the bear flag consolidation. The pattern is seen as the market potentially just taking a "breather" after a big move downward before continuing its move downward and is therefore referred to as a bearish pattern.

Similar to a flag, a pennant pattern forms when the consolidation in the market narrows as it matures requiring a more triangular shape to encompass the move instead of a square shape which forms the flag pattern.

Just as with the Bull Flag the pennant portion of the pattern can be either pointed straight ahead or downward and the pole is formed by the move upward which sets up the pennant shaped consolidation.

Just as with the Bear Flag the pennant portion of the pattern can be either pointed straight ahead or upward, and the pole Is formed by the move downward which sets up the pennant shaped consolidation.
Lecture 14
How to Trade the Flag/Pennant Patterns Like a Pro Part 2
Play Video
How to Trade the Flag/Pennant Patterns Like a Pro Part 2
The second lesson in a two part series on trading strategies for trading the flag and pennant chart patterns using technical analysis for day traders and investors in the stock market, futures market, and foreign exchange market. For the full lesson with text, images, links, and discussion, go here: http://www.informedtrades.com/3485-strategies-trading-flag-p...

See the full course for free at http://www.informedtrades.com/trades.php?page=freetradingcou...

While watching the videos, be sure to free the concepts presented using a free practice trading account here: http://bit.ly/IT-forex-demo3

Don't forget to check out our huge (and growing!) collection of organized material to help traders learn. Visit, register as a member, and participate in our learning community at http://www.informedtrades.com.

VIDEO NOTES

In our last lesson we learned about the flag and pennant chart patterns, how to identify them on a chart, and when the pattern is a bullish or bearish sign. In this lesson we are going to learn how to identify entry and exit points for potential trades after spotting these patterns on a chart.

As we learned in our last lesson when you spot a flag pattern in an uptrend this is a bullish sign as the market consolidation which forms the flag is seen as a pause before a resumption of the original uptrend. As this is the case when traders spot these patterns on a chart they will commonly look to enter a buy position. The entry point which they will commonly use to enter the long position is the breakpoint of the upper line of the flag which is resistance. The target for the trade is then calculated by measuring the distance between the start of the up move and the highest point on the flag and then projecting that upwards. The stop is then placed just below the bottom support line of the flag.

The strategy is exactly the same for the bull pennant, with one exception. When trading the bull pennant the stop loss is placed just below the bottom trend line, in line with the closest trough.

When you spot a flag pattern in a downtrend it is a bearish sign as the market consolidation which forms the pattern is seen as a pause before a continuation of the original downtrend. As this is the case when traders spot this pattern on a chart they will commonly look to enter a short position. The entry point that is normally used when trading this strategy is to sell on a break below the bottom support line. The target is then calculated by measuring the distance between the start of the down move and the lowest point on the flag and then projecting that downwards. The stop is then placed just above the upper resistance line of the flag.

So that completes this lesson. You should now have a good understanding of the strategies used to trade flag and pennant patterns as well as how to identify these patterns on a chart. In our next lesson we are going to look at the triangle chart pattern and how to spot this on a chart so we can look at ways to trade that continuation pattern. So we hope to see you in that lesson.
Lecture 15
How to Trade Triangle Chart Patterns Like a Pro Part 1
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How to Trade Triangle Chart Patterns Like a Pro Part 1
While watching the videos, be sure to free the concepts presented using a free practice trading account here: http://bit.ly/IT-forex-demo3

The first lesson in a two part series on how to identify and trade the ascending, descending, and symmetrical triangle chart patterns using technical analysis in the futures market, forex market and stock market for day traders and investors. For the full lesson with text, images, links, and discussion, go here: http://www.informedtrades.com/3557-learn-trade-triangle-char...

See the full course for free at http://www.informedtrades.com/index.php?page=freetradingcour...

Don't forget to check out our huge (and growing!) collection of organized material to help traders learn. Visit, register as a member, and participate in our learning community at http://www.informedtrades.com.

VIDEO NOTES

In our last lesson we learned strategies for trading the flag and pennant chart patterns. In this lesson we are going to look at a pattern which is similar in nature to the flag and pennant pattern which is called the triangle pattern.

Triangle Patterns can be broken down into three categories: The ascending triangle, the descending triangle, and the symmetrical triangle. While the shape of the triangle is significant of more importance is the direction that the market moves when it breaks out of the triangle. Lastly, while triangles can sometimes be reversal patterns they are normally seen as continuation patterns.

The Ascending Triangle:

The ascending triangle is formed when the market makes higher lows and the same level highs. These patterns are normally seen in an uptrend and viewed as a continuation pattern as the bulls gain more and more control running up to the top resistance line of the pattern. While you normally will see this pattern form in an uptrend if you do see it in a downtrend it should be paid attention to as it can act as a powerful reversal signal.

The Descending Triangle:

The descending triangle is formed when the market makes lower highs and the same level lows. These patterns are normally seen in a downtrend and viewed as a continuation pattern as the bears gain more and more control running down to the bottom support line of the pattern. While you normally will see this pattern form in a downtrend, if you do see it in an uptrend it should be paid attention to as it can act as a powerful reversal signal.

The Symmetrical Triangle:

The symmetrical triangle is formed when the market makes lower highs and higher lows and is commonly associated with directionless markets as the contraction of the market range indicates that neither the bulls nor the bears are in control. If this pattern forms in an uptrend then it is considered a continuation pattern if the market breaks out to the upside and a reversal pattern if the market breaks to the downside. Similarly if the pattern forms in a downtrend it is considered a continuation pattern if the market breaks out to the downside and a reversal pattern if the market breaks to the upside.

So that completes this lesson. You should now have a good understanding of the different types of patterns patterns and what each signifies. In our next lesson we are going to go over strategies for trading triangle chart patterns of these patterns complete with entry and exit points so we hope to see you in that lesson.
Lecture 16
How to Trade Triangle Chart Patterns Like a Pro Part 2
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How to Trade Triangle Chart Patterns Like a Pro Part 2
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VIDEO NOTES

The second lesson on how to identify and trade triangle chart patterns in the stock market, forex market, and futures market using technical analysis.

In our last lesson we learned how to spot the three different types of triangles on a chart, the ascending triangle, the descending triangle, and the symmetrical triangle. In this lesson we are going to look at the strategies for trading these patterns complete with entry and exit points.

As we learned in the last lesson, the direction in which the market breaks out of the triangle, and whether the market is in an uptrend or downtrend determines whether the pattern is a continuation or a reversal pattern and therefore whether traders look to go long or short.

As with the other patterns we have recently learned about, when traders spot an ascending triangle, they will look to trade the break of the upper resistance line. The target is then derived by measuring the distance between the starting high point of the ascending triangle with the starting low point of the triangle, which is then projected upward from the breakpoint. The stop is then placed just below the most recent trough of the pattern.

The descending triangle is the mirror image of the ascending triangle and normally seen in downtrends. When traders see this pattern they will look to trade the break of the lower support line. The target is then calculated the same way as with the ascending triangle, by measuring the distance between the high and low points at the start of the pattern and then projecting that distance downward from the break. The stop is then placed just above the nearest peak.

The symmetrical triangle can be seen and traded in either up trends, down trends, or sideways markets. When traders find this pattern on a chart they will look to trade in the direction of the breakout, as this is a sign that one direction either the bulls or the bears have won out over the other. Like ascending and descending triangles, traders will look to trade the break of the pattern, calculating their target by measuring the distance between the high and low at the start of the pattern. The stop will then be placed just outside of the nearest peak if the market breaks to the downside or the nearest trough if the market breaks to the upside.

For confirmation on all three strategies, traders will look for declining volume as the pattern matures and then increasing volume on the break.

That completes our last lesson in our series on chart patterns. You should now have a good understanding of many of the most common chart patterns as well as common strategies for trading those patterns. In our next lesson we are going to start our series on learning technical indicators by looking how these tools are used in trading and how they can be used to compliment the concepts and strategies we have learned in our chart patterns lessons.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!
Lecture 17
Learn to Trade with Technical Indicators
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Learn to Trade with Technical Indicators
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VIDEO NOTES: The first lesson in a new series on technical indicators which gives an introduction to the concept so that we can move on to learning about specific indicators and how to use them to trade profitably in the forex market, stock market, and futures market. Technical analysis for daytraders and investors.

In our last lesson we finished up our series on chart patterns with a look at strategies which can be used to trade triangle chart patterns. In this lesson we are going to start a new series on technical indicators with an overview of what technical indicators are, and how traders use them to help pick their entry and exit points.

A technical indicator is a mathematical formula which is derived from the price action of a financial instrument and/or the volume traded. The results of these formulas are commonly displayed in graphical form above or below a financial instruments price chart, and are used to help predict future price movement. When used in combination with other forms of technical analysis, such as the chart patterns we have learned so far, technical indicators can be a powerful compliment which traders can use to assist in their trading decisions.

Technical indicators can be broken down into two main categories which are leading and lagging indicators. As their name suggests, leading indicators are created to try and predict future price movement. Because most leading indicators are trying to gauge price momentum from relatively recent price action, these indicators tend to generate frequent buy and sell signals and are therefore normally used in ranging markets. While some traders like the opportunity to enter more trades, it is important to keep in mind that the potential for false signals with leading indicators is high.

Lagging indicators on the other hand are created to give a picture of where the market has been, and therefore where it is likely to continue to go. As this is the case these indicators are normally used by traders looking to trade with the trend, and offer little value in ranging markets. Secondly because these indicators are designed to catch and stay with the trend for as long as possible, they generate less trading signals than leading indicators. This is often seen as a positive from the standpoint of generating less false trading signals and also a negative as this also means that they normally get you into a move later than a leading indicator.

One of the biggest issues when deciding how and when to use a particular indicator is determining how sensitive to make the indicator to price movements. The more sensitive the indicator the earlier you will catch the move, however the more false signals that will be given. Conversely the less sensitive the indicator the less false signals but the later you will get into the move.

That completes this lesson. You should now have a good understanding of what a technical indicator is and how they are used in trading. In the lessons that come we will look at some of the more popular indicators, starting in the next lesson with moving averages, as well as how to use these indicators in your trading, so we hope to see you in those lessons.
Lecture 18
How to Trade Moving Averages Like a Pro (Part 1)
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How to Trade Moving Averages Like a Pro (Part 1)
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VIDEO NOTES:

The basics of trading with moving averages in two lessons for active day traders and investors in the stock market, futures market, and forex markets.

Moving average as a trading indicator

In our last lesson we gave an introduction to technical analysis, which started our latest series of lessons on how to use these in your trading. In this lesson we are going to start with looking at one of the most popular technical indicators, the moving average.

Exponential moving average and simple moving average

There are several different types of moving averages, which we are going to explore here, all of which are used by traders to try and smooth out the price action of a financial instrument, and get a better feel for the longer term direction without all the noise that is often associated with just looking at the price. In addition to getting a better feel for the longer term trend of a financial instrument, moving averages are also used to spot potential support and resistance levels, and are often used in conjunction with one another to generate buy and sell signals.

Before we get into the details however, let's first have an overview of the two main types of moving averages: the simple moving average and the exponential moving average.

The Simple Moving Average Model

The simple moving average is the most basic of the moving averages and is calculated by taking the past x number of points averaging them, and then plotting the resulting line on a chart. The reason it is called a moving average is because as new data points become available the average moves forward to incorporate the new data point and drops the last data point in the series.

For example, if a trader plots a 10 day moving average on a chart the last 10 days of trading are averaged to come up with the most recent point plotted on the moving average line on the chart. On the next day of trading the data point, which occupied the first day used in the above moving average is dropped from the equation, the data point which was day two in the equation becomes day 1, and the next day of trading becomes the 10th data point in the equation.

I included this example here so you can simply have a basic understanding of how the average is calculated, however any charting package which you use should automatically do the calculations for you.

The Exponential Moving Average (EMA) :

Critics of the simple moving average argue that it is too simple in the sense that it gives the same weight to each point in moving average calculation. The problem with this it is argued is that the more recent data points deserve a greater weighting in the formula as they are more relevant to the future price action of the instrument.

To solve this problem traders came up with the exponential moving average, which gives more weight to the more recent price points in calculating the moving average line. Whatever chart package that you end up using should automatically calculate the exponential moving average for you but for those who want to know the formula for doing so is below:

When the simple moving average and the exponential moving average are plotted together on a chart you can see that the exponential average reacts faster to the most recent price action.

Moving averages can be created from any number of trading periods however the most commonly used are the 200 day moving average and the 50 day moving average followed by the 15, 20, and 100 day moving averages.

Whether traders use the simple or exponential moving average normally depends on trading style and the financial instrument that one is trading. As the simple moving average is slower to react than the EMA, traders will often use the SMA for trading longer term moves and EMA's for shorter term moves. Traders will often look at how different financial instruments have reacted in the past using both types of moving averages and then pick the one that has best represented the types of moves they are trying to trade. Lastly, some traders are firm believers in price and volume, and do not use any technical indicators in their trading.
Lecture 19
How toTrade Moving Averages Like a Pro (Part 2)
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How toTrade Moving Averages Like a Pro (Part 2)
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VIDEO NOTES

In our last lesson we looked at the two main types of moving averages, the simple moving average and the exponential moving average. In this lesson we are going to look at some of the ways that traders use moving averages to pick their entry and exit points in the currency, commodities, and equities market.

As moving averages are lagging indicators they tend to work well in identifying and following a trend and not to work well in ranging or trend less markets. Because of this traders will often use them to trade with the trend as well as to identify potential areas of support or resistance which may result in a continuation or reversal of a trend.

Lets look at some examples:

The most basic way that traders will use moving averages is to identify and then trade with the trend of a particular instrument. Although most traders will probably want to use the moving average in conjunction with some of the things that we have learned so far and some of the things we will learn in future lessons, the most basic way to trade using just the moving average is to buy when the price of a financial instrument breaks above the moving average line and sell when the financial instrument breaks below the moving average line. For confirmation traders will often wait for a full bar to close above the moving average line before entering long and a full bar to close below the moving average line before entering a short position.

Example of Trend Following Using Moving Averages:


A second way that traders use moving averages is to identify areas of support or resistance and then trade the break of these levels, looking for a potential reversal of the trend. When a financial instrument has shown a particular moving average level to be significant from a support or resistance standpoint in the past by testing the moving average line several times, and then breaks that level, traders will often see this as a warning sign that the trend is reversing and position themselves accordingly.

Example of Trading Support and Resistance Breaks Using Moving Averages:

The last way that traders will using moving averages is by plotting a longer term moving average and a shorter term moving average on a chart and trading the cross over. The idea here is that the shorter term moving average will be faster in identifying changes in the trend and therefore traders will look to get long when the shorter term moving average crosses above the longer term moving average and short when the shorter term moving average crosses below the longer term moving average.

That completes this lesson. You should now have a good understanding of how many traders trade moving averages. As always if you have any questions or concerns please feel free to post them in the comments section below, and have a great day!
Lecture 20
How to Trade the MACD Indicator Like a Pro (Part 1)
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How to Trade the MACD Indicator Like a Pro (Part 1)
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VIDEO NOTES

In our last lesson we learned about the different ways people trade with moving averages. In this lesson we are going to learn about the Moving Average Convergence Divergence (MACD) an indicator that is built using moving averages, but is set up to give a good indication of the momentum of a particular financial instrument as well as its trend.

The indicator, which was developed by Gerald Appel, is constructed by taking a 12 period exponential moving average of a financial instrument and subtracting its 26 period exponential moving average. The resulting line is then plotted below the price chart and fluctuates above and below a center line which is placed at value zero. A 9 period EMA of the MACD line is normally plotted along with the MACD line and used as a signal of potential trading opportunities.

When the MACD line is above zero this tells the trader that the 12 period exponential moving average is trading above the 26 period exponential moving averages. When the MACD line is below zero this tells the trader that the 12 period exponential moving average is below the 26 period exponential moving average. Traders will watch the MACD line as when it is above zero and rising this is a sign that the positive gap between the 12 and 26 EMA's is widening, a sign of increasing bullish momentum in the financial instrument they are analyzing. Conversely when the MACD line is below zero and falling this represents a widening in the negative gap between the 12 and 26 day EMA's, a sign of increasing bearish momentum in the financial instrument they are analyzing.

The purpose of the 9 period exponential moving average line is to further confirm bullish changes in momentum when the MACD crosses above this line and bearish changes in momentum when the MACD crosses below this line.

Lastly many traders and charting packages will plot a histogram along with the MACD which is representative of the distance between the MACD and its signal line. When the MACD histogram is above zero (the MACD line is above the signal line) this is an indication that positive momentum is increasing. Conversely when the MACD histogram is below zero this is an indication that negative momentum is increasing.

When the MACD histogram is above zero (the MACD line is above the signal line) this is an indication that positive momentum is increasing. Conversely when the MACD histogram is below zero this is an indication that negative momentum is increasing. The higher or lower the histogram goes above or below zero the greater the momentum of the trend is thought to be.
Lecture 21
MACD Indicator: Trade it Like a Pro (Part 2)
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MACD Indicator: Trade it Like a Pro (Part 2)
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VIDEO NOTES

In our last lesson we looked at the different components that make up the MACD indicator. In today's lesson we are going to look at how traders use the MACD to identify whether or not a market is trending, how strong that trend is, and where good potential entry and exit points are.

As we learned in our last lesson the MACD indicator is used to identify trends in the market and the momentum of those trends. Because of this the MACD is an indicator that traders will look to trade when the market is trending and avoid when the market is range bound.

In addition to being able to tell if the stock, futures contract, or currency you are analyzing is trending or not from simply looking at its price action on the chart, you can also use the MACD indicator. Very simply if the MACD line is at or close to the zero line, this indicates that the financial instrument you are analyzing is not exhibiting strong trending characteristics, and thus should not be traded using the MACD.

Once it is determined that the financial instrument you are analyzing is exhibiting trending characteristics, there are three ways that you can trade the MACD.

1. Positive and Negative Divergence
2. The MACD/Signal Line Crossover
3. The zero line crossover

Trading the MACD Divergence:

Divergence occurs when the direction of the MACD is not moving in the same direction of the financial instrument you are analyzing. This can be seen as an indication that the upward or downward momentum in the market is failing. Traders will thus look to trade the reversal of the trend and consider this signal particularly strong when the market is making a new high or low and the MACD is not.

Trading the MACD Crossover

This is the simplest way to trade the MACD as it involves simply watching the MACD line and going long when the MACD line crosses above the signal line and going short when the MACD line crosses below the signal line. As this strategy generates the most signals, it also generates the most false signals, and the potential to get into a bad trade using just this method is high. For this reason traders will confirm the signals with other methods such as the chart patterns we have learned so far, volume etc.

The MACD Zero Line Crossover:

The MACD zero line cross over occurs when the MACD crosses above or below the line plotted at point zero on the indicator. When this occurs it is an indication that market momentum has reversed direction. The strength of the move that can be expected as a result of this depends on what has been happening in the market, and what has been happening with the indicator. If the market and the MACD are both coming off of recent new highs then this could be considered a strong signal. If the market is simply trading in a weak trend or range and the MACD has simply crossed from just above to just below the zero line, then this would be considered a weak signal.

As with all of the indicators that we are learning about in this series it is normally better to trade the MACD along with other confirming signals such some of the things we have learned so far like trend lines, chart patterns, and breaks of significant support resistance levels.
Lecture 22
How to Trade the Relative Strength Index (RSI) Like a Pro
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How to Trade the Relative Strength Index (RSI) Like a Pro
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VIDEO NOTES

A lesson on how to trade the RSI for traders and investors using technical analysis in the stock market, futures market and forex market.

In our last lesson we looked at 3 different ways that the MACD indicator can be traded. In today's lesson we are going to look at a class of indicators which are known as Oscillators with a look at how to trade one of the more popular Oscillators the Relative Strength Index (RSI).

An oscillator is a leading technical indicator which fluctuates above and below a center line and normally has upper and lower bands which indicate overbought and oversold conditions in the market (an exception to this would be the MACD which is an Oscillator as well). One of the most popular Oscillators outside of the MACD which we have already gone over is the Relative Strength Index (RSI) which is where we will start our discussion.

The RSI is best described as an indicator which represents the momentum in a particular financial instrument as well as when it is reaching extreme levels to the upside (referred to as overbought) or downside (referred to as oversold) and is therefore due for a reversal. The indicator accomplishes this through a formula which compares the size of recent gains for a particular financial instrument to the size of recent losses, the results of which are plotted as a line which fluctuates between 0 and 100. Bands are then placed at 70 which is considered an extreme level to the upside, and 30 which is considered an extreme level to the downside.

Example of the RSI


The first and most popular way that traders use the RSI is to identify and potentially trade overbought and oversold areas in the market. Because of the way the RSI is constructed a reading of 100 would indicate zero losses in the dataset that you are analyzing, and a reading of zero would indicate zero gains, both of which would be a very rare occurrence. As such James Wilder who developed the indicator chose the levels of 70 to identify overbought conditions and 30 to identify oversold conditions. When the RSI line trades above the 70 line this is seen by traders as a sign the market is becoming overextended to the upside. Conversely when the market trades below the 30 line this is seen by traders as a sign that the market is becoming over extended to the downside. As such traders will look for opportunities to go long when the RSI is below 30 and opportunities to go short when it is above 70. As with all indicators however this is best done when other parts of a trader's analysis line up with the indicator.

Example of RSI Showing Overbought and Oversold:

A second way that traders look to use the RSI is to look for divergences between the RSI and the financial instrument that they are analyzing, particularly when these divergences occur after overbought or oversold conditions in the market. These divergences can act as a sign that a move is loosing momentum and often occur before reversals in the market. As such traders will watch for divergences as a potential opportunity to trade a reversal in the stock, futures or forex markets or to enter in the direction of a trend on a pullback.

Example of RSI Divergence:

The third way that traders look to use the RSI is to identify bullish and bearish changes in the market by watching the RSI line for when it crosses above or below the center line. Although traders will not normally look to trade the crossover it can be used as confirmation for trades based on other methods.

Example of the RSI Centerline Crossover:


That's our lesson for today. You should now have a good understanding of the RSI and how traders use this indicator in their trading. In tomorrows lesson we will look at another Oscillator which is known as the Stochastic Oscillator so we hope to see you in that lesson.

As always if you have any questions please feel free to leave them in the comments section below, and have a great day!
Lecture 23
How to Trade Stochastics Like the Pro's Do
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How to Trade Stochastics Like the Pro's Do
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VIDEO NOTES


A lesson on how to trade the stochastic oscillator for active day traders and investors using technical analysis in the stock market, forex market. and futures market.

In our last lesson we learned about the RSI indicator and some of the different ways traders of the stock, futures, and forex markets use this in their trading. In today's lesson we are going to look at another momentum oscillator which is similar to the RSI and is called the Stochastic.

Let me start by saying that there are 3 different types of stochastic oscillators: the fast, slow, and full stochastic. All of them operate in a similar manner however when most traders refer to trading using the stochastic indicator they are referring to the slow stochastic which is going to be the focus of this lesson.

The basic premise of the stochastic is that prices tend to close in the upper end of their trading range when the financial instrument you are analyzing is in an uptrend and in the lower end of their trading range when the financial instrument that you are analyzing is in a downtrend. When prices close in the upper end of their range in an uptrend this is a sign that the momentum of the trend is strong and vice versa for a downtrend.

The Stochastic Oscillator contains two lines which are plotted below the price chart and are known as the %K and %D lines. Like the RSI, the Stochastic is a banded oscillator so the %K and %D lines fluctuate between zero and 100, and has lines plotted at 20 and 80 which represent the high and low ends of the range.

Whatever charting package you use will calculate the lines for you automatically but you should know that the data points which form the %K line are basically a representation of where the market has closed for each period in relation to the trading range for the 14 periods used in the indicator. In simple terms it is a measure of momentum in the market.

The %D line is very simply a 5 period simple moving average of the %K line. Lastly you should know that you can change the inputs for the indicator and use for example a 3 period moving average of the %K line to get faster signals, however as this is an introduction to the indicator and because most traders I know do not change the standard inputs, I do not recommend changing them at this point.

Like the RSI the first way that traders use the stochastic oscillator is to identify overbought and oversold levels in the market. When the lines that make up the indicator are above 80 this represents a market that is potentially overbought and when they are below 20 this represents a market that is potentially oversold. The developer of the indicator George Lane recommended waiting for the %K line to trade back below or above the 80 or 20 line as this gives a better signal that the momentum in the market is reversing.

The second way that traders use this indicator to generate signals is by watching for a crossover of the %K line and the %D line. When the faster %K line crosses the slower %D line this is a sign that the market may be heading up and when the %K line crosses below the %D line this is a sign that the market may be heading down. As with the RSI however this strategy results in many false signals so most traders will use this strategy only in conjunction with others for confirmation.

The third way that traders will use this indicator is to watch for divergences where the Stochastic trends in the opposite direction of price. As with the RSI this is an indication that the momentum in the market is waning and a reversal may be in the making. For further confirmation many traders will wait for the cross below the 80 or above the 20 line before entering a trade on divergence.

As the RSI and Stochastic are similar in nature many traders will use them in conjunction with one another to confirm signals.

That's our lesson for today. You should now have a good understanding of the Stochastic Oscillator and some of the different ways that traders use this in their trading. In tomorrow's lesson we are going to look at an indicator which allows us to gauge the volatility of a financial instrument over a given time called Bollinger Bands.
Lecture 24
The Difference Between the Fast, Slow and Full Stochastic
Play Video
The Difference Between the Fast, Slow and Full Stochastic
http://www.informedtrades.com/
My answer to a question on what is the difference between the fast stochastic, slow stochastic and full stochastic.

The link that I reference in the video is here: http://en.wikipedia.org/wiki/Stochastic_oscillator

Practice trading the stochastic oscillator with a free demo trading account: http://bit.ly/IT-forex-demo3
Lecture 25
How to Trade Bollinger Bands - Stocks, Futures, Forex
Play Video
How to Trade Bollinger Bands - Stocks, Futures, Forex
Practice these concepts with a free practice charting and trading account here: http://bit.ly/forex-demo1

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/4206-bollinger-bands.html

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

A Lesson on Bollinger Bands for active traders and investors using technical analysis in the forex, futures, and stock markets.

The link that I refer to on Standard Deviation is here: http://en.wikipedia.org/wiki/Standard_deviation

The link that I refer to with more resources on Bollinger Bands is here:

http://www.informedtrades.com/tags/index.php/bollinger%20ban...

In our last lesson we learned about the Stochastic Oscillator and how traders use this in their trading. In today's lesson we are going to learn about an indicator which helps traders gauge the volatility and how current prices compare to past prices.


Bollinger Bands are comprised of three bands which are referred to as the upper band, the lower band, and the center band. The middle band is a simple moving average which is normally set at 20 periods, and the upper band and lower band represent chart points that are two standard deviations away from that moving average.

Example of Bollinger Bands:

Bollinger bands are designed to give traders a feel for what the volatility is in the market and how high or low prices are relative to the recent past. The basic premise of Bollinger bands is that price should normally fall within two standard deviations (represented by the upper and lower band) of the mean which is the center line moving average. If you are unfamiliar with what a standard deviation is you can read about it here http://en.wikipedia.org/wiki/Standard_deviation. As this is the case trend reversals often occur near the upper and lower bands. As the center line is a moving average which represents the trend in the market, it will also frequently act as support or resistance.

The first way that traders use the indicator is to identify potential overbought and oversold places in the market. Although some traders will take a close outside the upper or lower bands as buy and sell signals, John Bollinger who developed the indicator recommends that this method should only be traded with the confirmation of other indicators. Outside of the fact that most traders would recommend confirming signals with more than one method, with Bollinger bands prices which stay outside or remain close to the upper or lower band can indicate a strong trend, a situation that you do not want to be trading reversals in. For this reason selling at the upper band and buying at the lower is a technique that is best served in range bound markets.

Example of Buying and Selling at the Upper and Lower Band:




Large breakouts often occur after periods of low volatility when the bands contract. As this is the case traders will often position for a trend trade on a break of the upper or lower Bollinger band after a period of contraction or low volatility. Be careful when using this strategy as the first move is often a fake out.



Example


As Bollinger bands paint a good picture directly on the price chart of how high or low price is relative to historical prices, this is a good indicator to use in conjunction with other methods such as some of the chart patterns that we have learned so far and some of the candlestick patterns which we will learn in future lessons. Below is one such example:


As Bollinger Bands are one of the most popular indicators around I have created a special page on InformedTrades.com which lists multiple resources for those looking for more information on trading Bollinger Bands.

That's our lesson for today. You should now have a good understanding of Bollinger bands and how traders use these in their trading. In our next lesson we are going to go over the Average Directional Index or ADX, which helps traders identify the strength or weakness of a trend so we hope to see you in that lesson.

As always if you have any questions or comments please feel free to have them in the comments section below, and have a great day!
Lecture 26
How to Trade the Average Directional Index (ADX)
Play Video
How to Trade the Average Directional Index (ADX)
Practice these concepts with a free practice charting and trading account here: http://bit.ly/forex-demo1

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/4525-adx-how-trade-trends-usin...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

Link to the formulas behind the ADX: http://hubpages.com/hub/ADX

Link to Additional Resources on Trading the ADX: http://www.informedtrades.com/4529-six-resources-help-you-tr...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

A lesson on how to trade the ADX for traders of the stock, futures, and forex markets.

In this lesson we are going to learn about the Average directional Index (ADX), an indicator which helps traders determine when the market is trending, when the market is ranging, when the market may be about to change from trending to ranging or vice versa, and to gauge the strength of the trend in the market.

When plotted below the chart the ADX Line is normally accompanied by two other lines which are known as the +DI and --DI Lines.

I am not going to go into the formulas for the Indicator here however you do need to know that:

• The ADX line is composed of two other indicators which are known as the Positive Directional Index (+DI Line) and the Negative Directional Index (-DI Line).
• The +DI Line is representative of how strong or weak the uptrend in the market is.
• The --DI line is representative of how strong or weak the downtrend in the market is.
• As the ADX line is comprised of both the +DI Line and the --DI Line, it does not indicate whether the trend is up or down, but simply the strength of the overall trend in the market.

If you would like a deeper explanation of the computation of the indicator you can find it here: http://hubpages.com/hub/ADX

As the ADX Line is Non Directional, it does not tell you whether the market is in an uptrend or a downtrend (you must look to price or the +DI/-DI Lines for this) but simply how strong or weak the trend in the financial instrument you are analyzing is. When the ADX line is above 40 and rising this is indicative of a strong trend, and when the ADX line is below 20 and falling this is indicative of a ranging market.

So one of the first ways traders will use the ADX in their trading is as a confirmation of whether or not a financial instrument is trending, and to avoid choppy periods in the market where many find it harder to make money. In addition to a situation where the ADX line trending below 20, the developer of the indicator recommends not trading a trend based strategy when the ADX line is below both the +DI Line and the --DI Line.

Another way that traders use this indicator is to identify the potential start of a new trend in the market. Very simply here they will look from below the 20 line to above the 20 line as a signal that the market may be beginning a new trend. The longer the market has been ranging, the greater the weight that most traders will give this signal

Another way traders use the ADX is as a signal of trend reversals. When the ADX is trading above both the +DI line and the --DI line and then turns lower this is often a signal that the current trend in the market is reversing and traders will position themselves accordingly:

The final example that I am going to cover on how traders use the ADX is to position to trade long when the +DI crosses above the --DI (as this is a sign that the buyers are winning out over the sellers) and to position to trade short when the +DI line crosses below the --DI (as this is a sign that the sellers are winning over the buyers). As with the other crossover strategies that we have covered used alone, the DI crossover is prone to many false signals.

That completes our lesson for today. You should now have a good understanding of the ADX and several different ways that traders use this in their trading. In tomorrow's lesson we are going to look at a new indicator which is called the Parabolic SAR, which many traders use to set stops when trading trends in the market.
Lecture 27
How to Trade the Parabolic SAR
Play Video
How to Trade the Parabolic SAR
Practice these concepts with a free practice charting and trading account here: http://bit.ly/forex-demo1

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/4559-parabolic-sar.html

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

A lesson on how to trade the Parabolic Stop and Reversal (SAR) indicator for traders of the forex, futures, and stock markets.

In our last lesson we learned about the Average Directional Index (ADX) an indicator which helps traders determine the strength of trends in the market. In today's lesson we are going to look at another indicator called the Parabolic Stop and Reversal (Parabolic SAR), which helps traders enter and manage positions when trading those trends.

The Parabolic SAR is an indicator that, like Bollinger bands is plotted on price, the general idea of which is to buy into up trends when the indicator is below price, and sell into downtrends when the indicator is above price. Once traders are in positions the indicator also assists in managing the position by providing guidance as to how one should trail their stop.

While this is an indicator that works very well in trending markets, as you can see from the below chart simply following the basic be long when the indicator is below price and be short when the indicator is above price will lead to many whipsaws in range bound markets.

To combat this problem the developer of the indicator J. Welles Wilder (who also developed the RSI and ADX) recommended establishing the strength and direction of the trend first through the use of things such as the ADX, and then using the Parabolic SAR to trade that trend. As mentioned above although the Parabolic SAR is used for both entering and managing positions, it is used far more to set stops once in a position.

As with the other indicators we have covered in past lessons it is recommended to use this indicator in conjunction with other methods of analysis for confirmation not only on trade entry but also on trade exit.

That's our lesson for today. While my lessons are by no means exhaustive on the subject this also concludes my series on technical indicators. If you are interested in learning more about the indicators that we have studies as well as some of the other indicators that traders use, I encourage you to visit the technical indicators section of informedtrades.com. In our next lesson we will finish up our series on technical analysis by taking a deeper look at candlestick chart patterns and how one can use these in their trading.

As always I encourage you to participate in the community by posting your comments and questions below, and have a great day!
Lecture 28
How to Trade Candlestick Chart Formations Part 1
Play Video
How to Trade Candlestick Chart Formations Part 1
Practice these concepts with a free practice charting and trading account here: http://bit.ly/forex-demo1

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/4563-introduction-trading-cand...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com


VIDEO NOTES

In our last lesson we finished up our series on technical indicators with a look at the Parabolic SAR. In today's lesson we are going to start a new series on Candlestick chart formations by looking at some of the most common candlestick patterns in the market.

As you should remember from our lesson on the basics of trading charts, candlestick charts display the open, high, low, and close of an instrument and shade the "candle" portion white if the close of the period is greater than the open of the period, and black if the close for the period is less than the open. The high and the low of the period are then connected by a thin line which is referred to as the wick.

At their most basic candlestick charts give us a picture of how volatile a particular period was and whether buyers or sellers won the trading period the candlestick represents. If a candle is long and white, this tells us that the period started with buyers in control and remained that way as they drove prices higher throughout the period. If a candle is long and black this is an indication of a volatile period where sellers won out over buyers. The less of a wick there is on a long candle the greater the control of either the buyers or the sellers depending on the color of the candle.

Candlesticks which have long wicks and short bodies indicate periods where there was a lot of action pushing the market either higher or lower but where it ended up closing right near the open.

If there is a long part of the wick on the upper part of the candle means that buyers initially ran the market up against the sellers but then the sellers pushed the market back against the buyers to close the period right where it opened. Conversely if the long part of the wick is below the candle this means that sellers initially pushed the market against the buyers but buyers then pushed back successfully against the sellers to close the period near its opening.

Short candlesticks represent periods in the market where the market closed near its open for the period and can represent either periods of little market activity or periods of activity where neither buyers nor sellers gained much ground.

That concludes our lesson on the basics of candlesticks. In our next lesson we are going to look at two candlestick patterns called The Doji and The Spinning Top and what they can tell us about the supply demand situation in the market so we hope to see you in that lesson.
Lecture 29
How to Trade Spinning Tops and Doji Candlestick Patterns
Play Video
How to Trade Spinning Tops and Doji Candlestick Patterns
Practice these concepts with a free practice charting and trading account here: http://bit.ly/forex-demo1

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/4612-spinning-top-doji-candles...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

In our last lesson we learned how different candlestick formations can tell us different things about whether the buyers or the sellers won out in a particular time period. In today's lesson we are going to look at some of the basic candlestick patterns and what they mean when looked at in the context of recent price action in the market.

The Spinning Top

Add A picture

When a candlestick with a short body in the middle of two long wicks forms in the market this is indicative of a situation where neither the buyers nor the sellers have won for that time period as the market has closed relatively unchanged from where it opened. The upper and lower long wicks however tell us that both the buyers and the sellers had the upper hand at some point during the time period the candle represents. When you see this type of candlestick form after a runup or run down in the market it can be an indication of a pending reversal as the indescision in the market is representative of the buyers loosing momentum when this occurs after an uptrend and the sellers loosing momentum after a downtrend.

The Doji

Like the Spinning Top the Doji Represents indecision in the market but is normally considered a stronger signal because unlike the spinning top the open and the close that form the Doji Candle are at the same level. If a Doji forms in sideways market action this is not significant as the sideways market action is already indicative of indecision in the market. If the Doji forms in an uptrend or downtrend this is normally seen as significant as this is a signal that the buyers are loosing conviction when formed in an uptrend and a signal that sellers are loosing conviction if seen in a downtrend. Most traders will place greater significance on the Doji when it forms in a market that is in overbought or oversold territory.

The Bullish Engulfing Pattern

The Bullish Engulfing pattern is another candlestick formation which represents a potential reversal in the market when seen in a downtrend. The pattern is made up of a white and black candle where the latest candle (the white candle) opens lower than the previous candle's (the black candle) close and closes higher than the previous candle's open. When this happens the current period's white candle completely engulfs the previous period's black candle.

When thinking about this from a buyer/seller perspective, you can understand that the long body of the current candle engulfing completely the body of the previous candle to the upside is representative that the buyers have not only taken control but have taken control with force. When this white engulfing candle occurs after a small black candle the formation is given even more significance as the small black candle is already indicative of a trend that is running low on steam.
The Bullish Engulfing Pattern


The same things apply when the pattern forms in an uptrend simply in reverse as shown in the image above.

That completes our lesson for today. In our next lesson we are going to look at several more candlestick formation and how traders use these in their trading so we hope to see you in that lesson. As always if you have any questions or comments please feel free to leave them in the comments section below, and have a great day!
Lecture 30
How to Trade the Bullish/Bearish Engulfing Candlesticks
Play Video
How to Trade the Bullish/Bearish Engulfing Candlesticks
Practice these concepts with a free practice charting and trading account here: http://bit.ly/IT-forex-demo3

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/4642-how-trade-bullish-bearish...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

In our last lesson we looked at two candlestick patterns which represent an indecisive moment in the market and can also represent a potential trend reversal when seen during an uptrend or downtrend in the market and are known as the spinning top and doji candlestick patterns. In today's lesson we are going to look at two more candlestick patterns which also can represent potential reversals which are known as the Bullish and Bearish Engulfing Patterns.

The Bullish Engulfing Pattern

The Bullish Engulfing pattern is another candlestick formation which represents a potential reversal in the market when seen in a downtrend. The pattern is made up of a white and black candle where the latest candle (the white candle) opens lower than the previous candle's (the black candle) close and closes higher than the previous candle's open. When this happens the current period's white candle completely engulfs the body previous period's black candle.

Unlike the Spinning Top and the Doji we learned about in the last lesson, the Bullish Engulfing Pattern represents not indecision in the market, but a situation where the control has shifted from sellers to buyers. The long body of the current candle completely engulfing the body of the previous candle to the upside is representative that the buyers have not only taken control, but have taken control with force. As such, when this pattern is seen during a downtrend in the market it is seen as a potential sign that the trend may be reversing.

There are several instances where traders will normally see greater potential for a reversal which are:

The longer the white candle and the smaller the black candle which precedes it the greater the potential for reversal
When the white candle completely engulfs the black candle that precedes it
When there is large volume during the period in which the white candle forms

The Bearish Engulfing Pattern

The Bearish Engulfing Pattern is a Mirror Image of the Bullish Engulfing Pattern so the same rules apply, just in reverse. The Bearish Engulfing pattern when seen in an uptrend is representative of a potential reversal of that trend. The pattern is made up of a white and black candle where the latest candle (the black candle) opens higher than the previous candle's (the white candle) close and closes lower than the previous candle's open. When this happens the current period's black candle completely engulfs the body of the previous period's white candle.

There are several instances where traders will normally see greater potential for a reversal which are:

The longer the black candle and the smaller the white candle which precedes it the greater the potential for reversal
When the black candle completely engulfs the white candle that precedes it
When there is large volume during the period in which the white candle forms
Lecture 31
How to Trade the Hammer Hanging Man Candlesticks
Play Video
How to Trade the Hammer Hanging Man Candlesticks
Practice these concepts with a free practice charting and trading account here: http://bit.ly/forex-demo1

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/4696-how-trade-hammer-hanging-...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES
A lesson on how to trade the Hammer and Hanging Man Candlestick Chart Patterns for active traders and investors in the forex, futures, and stock markets.

Like the Spinning Top and Doji which we have studied in previous lessons, the Hammer candlestick pattern is made up of one candle. The candle looks like a hammer as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be a valid hammer most traders say the lower wick must be two times greater than the size of the body potion of the candle, and the body of the candle must be at the upper end of the trading range.

When you see the Hammer form in a downtrend this is a sign of a potential reversal in the market as the long lower wick represents a period of trading where the sellers were initially in control but the buyers were able to reverse that control and drive prices back up to close near the high for the day, thus the short body at the top of the candle.

After seeing this pattern form in the market most traders will wait for the next period to open higher than the close of the previous period to confirm that the buyers are actually in control.

Two additional things that traders will look for to place more significance on the pattern are a long lower wick and an increase in volume for the time period that formed the hammer.

Chart Example


The Hanging Man

Picture

The Hanging Man is basically the same thing as Hammer formation but instead of being found in a downtrend it is found in an uptrend. Like the Hammer pattern, the Hanging man has a small body near the top of the trading range, little or no upper wick, and a lower wick that is at least two times as big as the body of the candle.

Unlike the Hammer however the selling pressure that forms the lower wick in the Hanging Man is seen as a potential sign of more selling pressure to come, even though the candle closed in the upper end of its range. While the lower wick of the Hammer represents selling pressure as well, this is to be expected in a downtrend. When seen in an uptrend however selling pressure is a warning sign of potential more selling pressure to come and thus the categorization of the Hanging Man as a bearish reversal pattern.

As with the Hammer and as with most one candle patterns most traders will wait for confirmation that selling pressure has in fact taken hold by watching for a lower open on the next candle. Traders will also place additional significance on the pattern when there is an increase in volume during the period the Hanging Man forms as well as when there is a longer wick.

Chart Example



That completes our lesson for today. In our next lesson we will look at two additional reversal patterns which are known as the Inverted Hammer and The Shooting Start Candlestick Patterns so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!
Lecture 32
How to Trade the Morning/Evening Star Candlestick Pattern
Play Video
How to Trade the Morning/Evening Star Candlestick Pattern
Practice these concepts with a free practice charting and trading account here: http://bit.ly/IT-forex-demo3

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/4710-morning-evening-star-cand...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

A lesson on how to trade the morning and evening star candlestick chart patterns for active traders and investors using technical analysis in the stock, futures, and forex markets.

In our last lesson we looked at the Hammer and Hanging Man Candlestick Chart Patterns. In today's lesson we are going to look at two more reversal candlestick patterns which are known as the Morning and Evening Star.


The Morning Star

Pic

The Morning Start Candlestick Pattern is made up of 3 candles normally a long black candle, followed by a short white or black candle, which is then followed by a long white candle. In order to have a valid Morning Start formation most traders will look for a close of the third candle that is at least half way up the body of the first candle in the pattern. When found in a downtrend, this pattern can be a powerful reversal pattern.

What this represents from a supply demand situation is a lot of selling into the downtrend in the period which forms the first black candle, then a period of lower trading but with a reduced range which forms the second period and then a period of trading indicating that indecision in the market, which is then followed by a large up candle representing buyers taking control of the market.

Unlike the Hammer and Hanging Man which we learned about in our last lesson, as the Morning Star is a 3 candle pattern traders often times will not wait for confirmation from the 4th candle before entering the trade. Like those patterns however traders will look to volume on the third day for confirmation. In addition traders will look to the size of the size of the candles for indication on how big the reversal potential is. The larger the white and black candle and the further that the white candle moves up into the black candle the larger the reversal potential.

Chart


The Evening Star

The Evening Star Candlestick Pattern is a mirror image of the Morning Star, and is a reversal pattern when seen as part of an uptrend. The pattern is made up of three candles the first being a long white candle representing buyers driving the prices up, then a short white or black second candle representing indecision in the market, which is followed by a third black candle down which represents sellers taking control of the market.

The close of the third candle needs to be at least half way down the body of the first candle and as with the Morning Star most traders will not wait for confirmation from the 4th period's candle to consider the pattern valid. Traders will look for increased volume on the third period's candle for confirmation, the larger the black and white candles are and the further the black candle moves down the body of the white candle the more powerful the reversal is expected to be.

Chart Example

That's our lesson for today. In our next lesson we are going to finish up our series on Candlestick patterns with a look at the Shooting Star and Inverted Hammer Candlestick Patterns.
Lecture 33
How to Trade the Inverted Hammer/Shooting Star Patterns
Play Video
How to Trade the Inverted Hammer/Shooting Star Patterns
Practice these concepts with a free practice charting and trading account here: http://bit.ly/IT-forex-demo3

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/4920-how-trade-inverted-hammer...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

A lesson on how to trade the Inverted Hammer and Shooting Star Candlestick Chart Patterns for active traders and investors using technical analysis in the stock, futures, and forex markets.

In our last lesson we learned about the Morning and Evening Star Candlestick Patterns. In today's lesson we are going to wrap up our series on candlestick patterns with a look at the Inverted Hammer and the Shooting Star candlestick patterns.

The Inverted Hammer

As its name implies, the inverted Hammer looks like an upside down version of the Hammer pattern which we learned about several lessons ago. Like the Hammer Pattern, the Inverted Hammer is comprised of one candle and when found in a downtrend is considered a potential reversal pattern.

The pattern is made up of a candle with a small lower body and a long upper wick which is at least two times as large as the short lower body. The body of the candle should be at the low end of the trading range and there should be little or no lower wick in the candle.

What the pattern is basically telling us is that although sellers ended up driving price down to close near to where it opened, buyers had significant control of the market at some point during the period which formed the long upper wick. This buying pressure during the downtrend calls the trend into question which is why the candle is considered a potential reversal pattern. Like the other one candle patterns we have learned about however, most traders will wait for a higher open on the next trading period before taking any action based on the pattern.

Most traders will also look at a longer wick as a sign of a greater potential reversal and like to see an increase in volume on the day the Inverted Hammer Forms.


The Shooting Star

pic

The Shooting Star looks exactly the same as the Inverted Hammer, but instead of being found in a downtrend it is found in an uptrend and thus has different implications. Like the Inverted Hammer it is made up of a candle with a small lower body, little or no lower wick, and a long upper wick that is at least two times the size of the lower body.

The long upper wick of the pattern indicates that the buyers drove prices up at some point during the period in which the candle was formed but encountered selling pressure which drove prices back down for the period to close near to where they opened. As this occurred in an uptrend the selling pressure is seen as a potential reversal sign. When encountering this pattern traders will look for a lower open on the next period before considering the pattern valid.

As with the Inverted Hammer most traders will see a longer wick as a sign of a greater potential reversal and like to see an increase in volume on the day the Shooting Star forms.

Chart



That completes this lesson and wraps up our series on candlestick chart patterns. In our next lesson we are going to start a new series with a look at Money Management and how this applies to profitable trading so we hope to see you in that lesson.
Lecture 34
Why Most Traders Lose Money and The Solution
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Why Most Traders Lose Money and The Solution
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For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/5011-solution-why-traders-lose...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

A lesson on the importance of money management in trading and how most traders of the stock, futures, and forex markets ignore money management because they do not consider it important and therefore loose money trading.

Why the Majority of Traders Fail

In our last lesson we finished up our series on Candlestick Chart Patterns with a look at the Inverted Hammer and the Shooting Star Candlestick Chart Patterns. In today's lesson we are going to start a new series on money management, the most important concept in trading and the reason why most traders fail.

Over the last several years working in financial services I have watched hundreds if not thousands of traders trade, and over and over again I see smart people who have been intelligent enough to accumulate large sums of money in their non trading careers open a trading account and loose huge sums of money making what you would think are easily avoidable mistakes that one would think even the dumbest traders would avoid.

Those same traders are the ones that consider themselves too good or smart to make the same mistakes that so many others make, and that will skip over this section to get to what they feel is the "real meat" of trading, strategies for picking entry points. What these traders and so many others fail to realize is that what separates the winners from the losers in trading is not how good someone is at picking their entry points, but how well they factor in what they are going to do after they are in a trade into their trade entries and how well they stick to their trade management plan once they are in the trade.

For the few who do get that money management is far and away the most important aspect of trading, the large majority of these people don't understand the large role that psychology plays in money management or consider themselves above having to work on channeling their emotions correctly when trading.

So in this series of lessons we are going to first start with a look at the psychology of money management and the role that this plays in causing so many traders to loose their shirts and then move on to ways of managing this before finishing up with specific strategies for managing trades once you are in them.

While not the most exciting part of trading, I assure you that if you don't understand and work on the concepts presented in this section you are pretty much doomed to failure as a trader no matter how well you understand the other aspects of trading. Having said this I also assure you that if you do understand and work to expand your knowledge of the concepts presented in this series you will be well on your way to becoming a successful trader.
Lecture 35
Why Traders Hold On to Losing Positions
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Why Traders Hold On to Losing Positions
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For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/5099-psychology-trading-effect...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

A lesson on how the ability and willingness to take losses when trading the forex, futures, or stock markets is one of the key factors that differentiates successful traders from unsuccessful ones.

Trading Success Means Comfort with Being Wrong

In our last lesson we introduced the concept that money management and the psychology of money management as the most overlooked but most important component of trading success. In today's lesson we will begin to look at one of the most important components of the psychology of money management: a willingness to be wrong.

Humans in general grow up being taught by their environment of the importance of always being right. Those who are right are envied as the winners in society and those who are wrong are cast aside as losers. A fear of being wrong and the need to always be right will hold you back in general, but will be deadly in your trading.

With this in mind lets say that you have been watching my videos and feel that I am an intelligent trader, so you want me to give you a method to trade. I say fine and give you a method and tell you that the method will trade 100 times a year with an average profit of 100 points for winning trades and an average loss of 20 points for loosing trades. You say great and take the system home to give it a try.

A few days later the first trade comes and quickly hits its profit target of 80 points. Great you say and call a bunch of your friends to tell them about the great system you've found. Then a few days later the next trade comes but quickly takes a loss. You hold tight however and then the next trade comes, and the next trade etc until the trade has hit 5 losers in a row and amounting to 100 points in loses on the losers so you are now down 20 points overall, and all your trader buddy's who started following the system after the first trade are now down 100 points.

Now you feel really dumb and are the joke among the group of guys that you trade with, so the next day you come back to me yelling about how bad the system I gave you is. I say ok and tell you I have another system for you. This one also trades 100 times a year but has a higher success rate that I think he will be happy with. You take this system home and the next day it quickly hits a winner followed by another then another and then another until over the next few days you have 5 winners in a row totaling 50 points in gains for your account. Getting very excited you call all of your trader friends and tell them that this time you have found it, you tell your wife how you haven't lost on a trade in two weeks and you rub your perfect trading statement in the face of all your trader buds as revenge.


So now ask yourself this question. If you were really the trader in this example which system would you rather have? I can tell you from experience that the large majority of traders will take the second system without a second thought, and on top of that will stick with it even if it hits a few losses that wipe out most or all of its gains.

Although the successful trader will want to know a lot more about both these systems which we are going to learn about in the lessons that come before deciding which one to trade I can tell you that what they will glean from the above information is the following:
Lecture 36
Two Trading Mistakes Which Will Destroy Your Account
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Two Trading Mistakes Which Will Destroy Your Account
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For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/5168-destroy-your-trading-acco...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

A lesson on two of the most common mistakes that traders make when trading the stock, futures and forex markets.

One of the most common mistakes is sticking in a trade where you know you are right in your analysis, but the market continues to move against you. As the famous economist John Maynard Keynes once said:

"The markets can remain irrational longer than you can remain solvent"

Perhaps one of the best examples of this are those who shorted the NASDAQ into the runup in 1999 and early 2000. At the time it was pretty obvious that from a value standpoint NASDAQ stocks were way overvalued and that people's expectations for growth that they were buying on were way out of line with reality. There were many great traders at the time who recognized this and began shorting the NASDAQ starting in late 99. As you can see from the below chart and the huge sell off that ensued after the peak in 2000, these traders were right in their analysis. Unfortunately for many of them however stocks continued to run up dramatically from already overvalued points in late 99 wiping out many of these traders who would eventually be proved correct.

So as we learned about in last lesson, people's strong desire to be right will often times keep them in trades that they should have moved on from even though the market may eventually prove them correct.

For those traders who are able to initially move on from trades where they feel they are correct but the market moves against them, another common theme which arises is for a trader to initially stick to his plan, but after being proved correct and missing out on gains he becomes frustrated and deviates from his plan so that he will not miss out on another profitable opportunity.

One place of many where I have seen this time and time again is when watching traders who trade reversals at support or resistance levels. Many times when the market touches a support or resistance level it will have a brief spike upwards or downwards which hits the stops of a trader looking to profit from the reversal, taking him out of the market just as it turns in his favor. Because many traders think a like, often times the level at which the trader is taken out of the market is right at his stop level as well.

After this happens once or twice to a trader he will then stop placing hard stops in the market and instead convince himself that he will manage the trade if it moves against him. This may work a few times for the trader giving him more confidence in the strategy until the market does finally break. As we have learned about in previous lessons often times when the market breaks significant support or resistance levels it will break violently to the point where the trader in the above situation is quickly down a large amount on his trade. Typically what will happen at this point is instead of taking the big loss, learning his lesson, and moving on the trader will remain in the position or worse add to it with the hopes that the market will turn back in his favor. If the trader gets lucky and the market does turn back in his favor this only goes to support this bad habit which will eventually knock him out of the market.

Successful traders realize that situations such as the above occur constantly in the market and that one of the main things that separates successful traders from unsuccessful ones is their ability to accept this, stick to their strategy, accept that loosing trades are a part of trading, and move onto the next trade when the market does not move in their favor.

That's our lesson for today. In our next lesson we are going to look at another major part of trading psychology which is related to not wanting to take losses which is people's desire to follow the crowd.

As always if you have any questions or comments please post them in the comments section below so we can all learn to trade together, and good luck with your trading!
Lecture 37
Herd Mentality is the Psychology That Leads to Big Trading Losses
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Herd Mentality is the Psychology That Leads to Big Trading Losses
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For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/5356-crowd-psychology-followin...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

A lesson on crowd psychology and how it relates to trading the stock, futures, and forex markets.

The best summary that I have seen on this subject, as well as a great book on trading in general is Dr. Alexander Elder's book Trading for a living. As the Trader and Psychologist points out in his book, people think differently when acting as part of a crowd than they do when acting alone. Dr Elder points out that "People change when they join crowds. They become more credulous, impulsive, anxiously search for a leader, and react to emotions instead of using their intellect."

In his book Dr. Elder gives several examples of academic studies which have been done which show that people have trouble doing simple tasks such as choosing which line is longer than the other when put in a situation with other people who were instructed to give the wrong answer.

Perhaps no where is the strange effect is the psychology of crowds seen than in the financial markets. One of the more recent examples as I have spoken about in my other lessons of the effect that the psychology of crowds can have on the markets is the run-up of the NASDAQ into 2000. As you will find by pulling out the history books however, this is not an isolated incident as financial history is littered with similar price bubbles created and then destroyed in the same way as the NASDAQ bubble was.

So why does history continue to repeat itself? As Dr. Elder points out in his book, from a primitive standpoint chances of survival are often much higher as part of a group than they are alone. Similarly war's are often one by militaries with the strongest leaders. It is thus only natural to think that human's desire to survive would breed a desire to be part of a group with a strong leader into the human psyche.

So how does this relate to trading? Well as we learned in our lessons on Dow Theory, the price is representative of the crowd and the trend is representative of the leader of that crowd. With this in mind think about how difficult it would have been to short the NASDAQ at the high's in 2000, just at the height of the frenzy when everyone else was buying. In hindsight you would have ended up with a very profitable trade but, had the trade not worked out, people would have asked how could you have been so dumb to sell when everyone else knew the market was going up?

Now think about all the people who held on to their positions and lost tons of money after the bubble burst in 2000. As they had lots of company there were probably not a whole lot of people who were laughing at them. Yes they were wrong but how could they have known when so many others were wrong too?


By looking at this same example, you can also see how panic selling often ensues after sharp trends in the market as this is representative to a crowd whose leader has abandoned them.


In order to trade successfully people need a trading plan which is designed before entering a trade and becoming part of the crowd so they can fall back on their plan when the emotions which are associated with being part of a crowd inevitably arise. Successful traders must also realize that there is a time to run with the crowd and a time to leave the crowd, a decision which must be made by a well thought out trading plan designed before entering a trade.

That completes our lesson for today and our lessons on the psychology of money management. In tomorrow's lesson we are going to begin looking at different strategies which can be used to manage a trade once you have entered, which many traders also use to help remove some of the negative emotional effects of trading as part of a crowd.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!
Lecture 38
Profit Expectations: What Millionaire Traders Know
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Profit Expectations: What Millionaire Traders Know
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A lesson on how most traders have unrealistic profit expectations which cause them to lose all their money and what realistic profit expectations are when trading the stock, futures or forex markets.

The first step in understanding and building a solid money management plan, the key component in successful trading, is setting realistic profit expectations. All too often I see people open trading accounts with balances of $10,000 or under expecting to make enough money to support themselves from their trading profits within a short period of time. After seeing all of the hype that is out there surrounding most trading education, trading signal services, etc it is no wonder that people think this is a reasonable goal, but that does not make it a realistic one.

As most any truly successful trader will tell you, the stock market has averaged somewhere in the neighborhood of 10% a year over the last 100 years. What this basically means is that if you would have invested in the 30 stocks that make up the Dow Jones Industrial Average, the index which is designed to represent the overall market, you would have earned about 10% on your money on average over the last 100 years. With this in mind, what most any truly successful trader will also tell you, is that if you can consistently double that return, on average, over the long term, then you will be considered among the best traders out there.

Learn more here: http://www.informedtrades.com/
Lecture 39
How to Join the Minority of Traders Who Are Successful
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How to Join the Minority of Traders Who Are Successful
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A lesson on the importance of the preservation of capital as part of a trading strategy for traders of the stock, futures an forex markets.

In our last lesson we looked at what one can reasonably expect to earn from their trading over the long term, and how one can avoid the common misconceptions of most traders which ultimately cause them to fail. In today's lesson we are going to look at the next step in developing a successful money management strategy which is how to manage your losses.

One of the main key's to successful trading is the preservation of capital. Beyond the obvious point here that if you loose your trading capital then you will be out of the game, is the fact that it takes much more to come back from a loss than it does to take the loss you are trying to come back from.

As an example here lets say you start with $10,000 and loose $5000 from a string of bad trades. That $5000 loss represents a 50% loss on your account which now has $5000 left in it. Now ask yourself this question. What percentage gain will you need to make on the $5000 left in your account in order just to be back to breakeven (the $10,000 level) on your account? If you have done the math correctly you will see that in order to make back the 50% loss you took on your account you will need to make a 100% return or basically be twice as successful in your comeback as you were unsuccessful in your drawdown.

It is this concept that is one of the most important to understand in trading, as it underscores the importance of protecting one's trading capital, as it shows the difficulty of coming back from a loss in relation to the ease of taking a loss. It is also most traders lack of understanding of this concept that causes them to take risks which are way to large and is a major contributor to the high failure rate among traders.

That's our lesson for today, in tomorrow's lesson we are going to talk about how to design a plan before entering a trade or managing the position in case it starts to move against you so we hope to see you in that lesson.

As always if you have any questions or comments please feel free to leave them in the comments section below so we can all learn to trade together, and good luck with your trading!
Lecture 40
How To Determine Where to Put Your Initial Stop Loss Order
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How To Determine Where to Put Your Initial Stop Loss Order
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A less on how traders determine their initial stop levels when trading the stock, futures, and forex markets.

In our last lesson we looked at the difficulty of overcoming a loss in the market to further emphasize the importance of protecting your trading capital as a critical component of any successful trading strategy. In today's lesson we are going to start to look at the first and one of the best ways of protecting one's trading capital, setting your initial stop.

As we learned about in our lesson on the effects of trading losses, 50% or more of the trades made by many successful trading strategies are losers. These trading strategies and traders are successful not because they are highly accurate on a trade by trade basis, but because when they are wrong they cut their losses quickly and when they are right they let their profits run. While the trading strategy that you eventually end up trading for yourself may have a higher success rate than what I mention above, any strategy is going to have loosing trades, so the first key to staying in the game is to have a plan for managing those losses so they do not get out of control and wipe out your chances for success.

With this in mind, what most traders will start with when designing a plan for setting their initial stop loss is the amount they can afford to loose on a per trade basis without having a detrimental affect on their account. While this varies from trader to trader and from strategy to strategy, as Dr. Alexander Elder mentions in his book Trading for a Living, many studies have shown that strategies and traders who risk more than 2% of their overall trading capital on any one trade are rarely successful over the long term. From what I have seen most traders risk way more than this on an individual trade basis, another large contributor to the high failure rate among traders.

Traders who set their per trade risk level at 2% of their trading capital or less, not only put themselves in a situation where a fairly lengthy string of losses will not knock them out of the game, but also put themselves in a situation where any one trade is not going to make or break their account. This is important not only from a money management standpoint but also from a psychological standpoint in that they are not attached to any one trade and are therefore more likely to stick to their strategy.

In order to have a true understanding of what this number should be for a specific strategy you will need to know what the expected accuracy rate is for the strategy, something which will cover in later lessons. For now however it is sufficient to simply understand that you need to have a feel for how much you plan to risk on a per trade basis as a first step in designing a successful money management strategy, and that you should be very wary of any strategy which risks more than 2% of your trading capital on any one trade.

Now that we understand that determining how much to risk per trade is the first step in any successful money management strategy, we can move on to other methods of setting your initial stop which fit within the limit set by the amount a trader is willing to risk on a per trade basis.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!
Lecture 41
How to Use the Average True Range (ATR) To Set Stops
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How to Use the Average True Range (ATR) To Set Stops
Practice these concepts with a free practice charting and trading account here: http://bit.ly/apextrader

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/5837-how-set-stops-using-avera...

For our full beginner course in technical analysis and trading, go here: http://www.informedtrades.com/index.php?page=freetradingcour...

And of course, don't forget to jump start your learning as a trader by registering as a member of our learning community: http://www.informedtrades.com

VIDEO NOTES

A lesson on how to include volatility in setting for traders of the stock, futures, and forex markets.

In our last lesson we looked at determining how much you are willing to risk on any one trade as the first step in developing a successful money management strategy. Now that we have established this, in today's lesson we are going to look at some of the different ways that you can then set your stop, which fit within this initial criteria.

As we learned in last lesson, risking more than 2% of total trading capital on any one trade is a major reason for the high failure rate of most traders. Does this mean that when setting a stop we should simply figure out how many points away from our entry represents 2% of our account balance and set the stop there? Well, traders could obviously do this and to be honest it would probably be a lot better than most of the other money management strategies I have seen, but there better ways.

Although many traders will look at other things in conjunction, having an idea of the historical volatility of the instrument you are trading is always a good idea when thinking about your stop loss level. If for instance you are trading a $100 stock which moves $5 vs. a $100 stock that moves $1 a day on average, then this is going to tell you something about where you should place your stop. As it is probably already clear here, all else being equal, if you put a stop $5 away on both stocks, you are going to be much more likely to be stopped out on the stock which moves on average $5 a day than you are with the stock that moves on average $1 a day.

While I have seen successful traders who get to know a list of the things they are trading well enough to have a good idea of what their average daily ranges are, many traders will instead use an indicator which was designed to give an overview of this, which is known as the Average True Range (ATR)

Developed by J. Welles Wilder the ATR is designed to give traders a feel for what the historical volatility is for an instrument, or very simply how much it moves. Financial instruments that exhibit high volatility move a lot, and traders can there fore make or lose a lot of money in a short period of time. Conversely, financial instruments with low volatility move a relatively small amount so it takes longer to make or lose money in them all else being equal.

As with many of the other indicators we have studied in previous lessons, Wilder uses a moving average to smooth out the True Range numbers. When plotted on a graph it looks as follows:

What you are basically seeing here is a representation of the daily movement of the EUR/USD. As you can see when the candles are longer (which represents large trading ranges and volatility) the ATR moves up and when the candles are smaller (representing smaller trading ranges and volatility) it moves down.

So with this in mind, the most basic way that traders use the ATR in setting their stops is to place their stop a set number of ATR's away from their entry price so they have less of a chance of being knocked out of the market by "market noise".

That's our lesson for today. In tomorrow's lesson we are going to look at how you can use volatility based stops in conjunction with another method traders use for setting stops based on technical levels so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below so we can all learn together and good luck with your trading!
Lecture 42
How to Up Your Chances for Profit When Setting Stops
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How to Up Your Chances for Profit When Setting Stops
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http://www.informedtrades.com/

A lesson on how to incorporate technical analysis in identifying support and resistance and incorporating this into setting your stop loss when trading the stock, futures, and forex markets.

In our last lesson we learned about the Average True Range (ATR) and how traders use this to get an idea of the volatility in the market so they can incorporate this into their stop levels. In today's lesson we are going to add an additional factor that most traders consider important when setting stops, support and resistance.

As we have learned in previous lessons many traders will use technical analysis to determine where support and resistance is in the market, and look for trading opportunities based on what that chart analysis tells them. In addition to using technical analysis to find support and resistance levels in which trades can be entered, many successful traders also use this method of analysis to determine where their stops should be placed.

One of the most popular methods which we have touched on in previous lessons where many traders use support and resistance in their trading is when trading ranges in the market. Many traders favor ranges, as they provide traders with the ability to enter trades with tight stop losses and much larger potential returns. The reasoning here is that traders can enter a trade just below resistance or just above support in the range, place their stop just outside that level and then their profit target at the other end of the range. Generally the distance between the stop level is much shorter than the distance between the other end of the range, providing traders with a great opportunity for a relatively low risk and potentially high reward trade.

Chart Example

This is also another example of using tech levels (the bottom and top of the range) to place trades and set stops. Often times however as many traders are employing this type of strategy, the market will jump up or down above/below the resistance/support level stopping traders out of trades before quickly reversing and moving in the favor of the traders original entry price. Because of this traders are faced with the delema of how far to place there stop outside of the range that they are trading, so that they can be in a position where they are protected but are less likely to be stopped out on market spikes. One way that this can be done is by incorporating the ATR.


Although the example above shows 1 ATR as the level at which the stop is placed outside of the range. That number could be a percentage such as 50% of the ATR or any other multiple of the ATR such as 2 ATR's outside the range, depending on the traders timeframe, profit target, and strategy.

To finish off this example we now have several components which make up a basic strategies for placing stops based on technical levels and can now analyze the feasibility of one of the trades here to see if it fits all of our criteria.
Lecture 43
How to Reduce the Chances of Being Stopped Out on a Trade
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How to Reduce the Chances of Being Stopped Out on a Trade
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A lesson on how to incorporate multiple support or resistance levels into a trading strategy for the stock, futures, or forex market to reduce the chances of being stopped out on a trade.

In our last lesson we looked at how many successful traders incorporate support and resistance into their trading strategies. In today's lesson we are going to expand on this concept by looking at how many traders look for multiple support or resistance levels when placing trades as well as how many chart patterns incorporate this concept already, providing traders with areas in which they can place their stops.

As we learned about in our last lesson, when setting a stop many traders will find a level of support if they are buying to enter the trade or resistance when they are selling to enter the trade and place there stop outside of this level. When entering trades many successful traders will also look for trades which have few if any levels of support/resistance in the direction they are trading, but several levels of support/resistance in the direction in which they are placing their stop.

Chart example:


As we have also learned in previous lessons, one of the key reason's why traders favor or recognize certain chart patterns is because they often times signal what is next to come in the market. What is often overlooked however about almost all of the most popular chart patterns, but perhaps just as important, is their ability to point out potential places where you want to place your protective stop loss.

As you can see from the below chart the head and shoulders pattern is a perfect example of this. By entering the trade on a break of the neckline and placing the stop just above the right shoulder of the pattern traders ensure that there are at minimum two resistance levels in between their entry price and their stop level if not more.

Chart Example

For patterns such as the triangle pattern which do not already incorporate this multiple support/resistance levels between your entry and your stop concept, it is often wise to find entry opportunities which provide these additional levels naturally in addition to the setup when looking at the chart pattern in isolation:

That's our lesson for today. In tomorrow's lesson we are going to look at another way traders use to set their stops: Indicator based stops so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and have a great day!
Lecture 44
How Successful Traders Use Indicators to Place Stops
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How Successful Traders Use Indicators to Place Stops
Practice using stops with a free demo trading account here: http://bit.ly/forex-demo1

A lesson on how to incorporate the use of technical indicators when placing stops in the forex, futures, and stock market.

In our last lesson we learned how many successful traders look for entry opportunities which allow them to set their stop so that there are multiple support or resistance points between their entry point and stop level, and few if any support or resistance points between their entry price and their target. In today's lesson we are going to look at another factor that many traders use when deciding where to place their stops, the use of technical indicators.

As you hopefully remember from watching my previous lessons we have already covered two indicators and gone over specific strategies on how they can be used to set stops which are the Average True Range and the Parabolic SAR. While these indicators were designed specifically to help traders gauge where to place their stops, many of the other indicators which we have looked at using to pick trade entry points can also be used to decide when to exit a trade.

With this in mind the question then becomes, with all the options available how do you choose which indicator if any to look at when deciding when to exit a trade. Which indicator if any you choose to include in your money management strategy for setting stops is going to depend largely on the type of strategy that you are trading. As a general rule however if you use an indicator to signal for example a buy entry on a trade most traders will keep an eye on that same indicator and take into account when that same indicator signals to exit a trade.

As an example of this, lets say that your analysis of the ADX shows that the chart of x is about to start a nice trend and you decide to place a trade on that analysis. Using the knowledge you have gleaned from our lessons on stops so far you also pick a level for your stop which has some nice protection and is close enough that it fits within your two percent loss limit. During this trade however if the ADX which is the indicator you used primarily to enter the trade begins to signal that the trend is weakening and the market is about to range, should you remain in that trade? The answer to that question is going to depend on the strategy and what other things are going on in the market at the time, but I would say at minimum most successful traders would take this into account when deciding whether or not to continue with the position, regardless of whether their stop had been hit or not.

Lastly on this point there is one indicator that so many traders watch that many traders will at least keep an eye on what happens with this indicator and that is the 50 and the 200 day moving average. These indicators are in general thought to be representative of the overall trend in the market and a break above or below these levels and/or a crossing of the 50 day moving average above/below the 200 day moving average is normally seen as significant for a market and as such many traders will take this into account and place their stops accordingly.

As you probably have noticed when thinking about placing stops using indicators, as you don't know where price is going to be when your indicator signals for a trade exit, you do not have a hard stop in the market, are in the very bad position of not being protected in your trade. This is why, as we have talked about many times in our other lessons, that if this method for setting stops is used it should always be used in conjunction with another method which allows you to set a hard stop and stays within the 2% loss limit rule we have established.

This concept of the stop being a sort of "moving target" is a nice lead in to our next concept and lesson where we are going to be talking about what is known as a trailing stop.

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Lecture 45
Stop Your Mind From Causing You to Take Profits Too Soon
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Stop Your Mind From Causing You to Take Profits Too Soon
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VIDEO NOTES

A lesson on psychology of trading and how it relates to people's inability to let their profits run when trading the stock, futures, or forex markets.

In yesterday's lesson we looked at how many traders use technical indicators as an additional factor they consider when deciding when to exit a trade. In today's lesson we are going to begin to move into the next phase of our series on money management, with a look at how traders go about taking profits once a position moves in their favo,r and some of the difficulties that are associated with this.

Before getting into the details of what a trailing stop is and how many traders use them, it is first important to understand the psychology behind taking profits. Develop

From the last several lessons you should not have a good understanding of some of the psychological difficulties people have in taking losses, and some of the different money management strategies that can be put into place to help overcome these difficulties that are the downfall of so many traders.

What may come as a surprise to many of you is that just as many traders have problems letting their profits run as they do in cutting their losses. To help illustrate this I am going to give a quote from one of my favorite books on money management strategies Trade Your Way to Financial Freedom by Dr. Van K. Tharp. When explaining this concept in his book he gives the example below:

When given a chance for "1. a sure $9000 gain or 2. a 95% chance of a $10,000 gain plus a 5% chance of no gain at all....which would you choose?"

A study which was done on this showed that 80% of the population chose the sure thing even though the second opportunity represents a $500 larger gain on average.

Similar to the way that human's are raised in a way that does not allow them to accept losses our environment also teaches us to seize opportunities quickly, or "that a bird in the hand is worth two in the bush", a rule that goes against the second half of the most important rule of trading:

"Cut Your Losses and Let Your Profits Run"

With this in mind we can now move into the next phase of our series of money management with a look at some of the different ways that traders go about managing their position once it begins to move in their favor starting with a look at trailing stops.

Once a position has begun to move in a traders favor, many traders will implement a trailing stop which is basically a strategy for moving the stop they have implemented on their position up when they are long or down when they are short to lesson the loss or increase the amount of profit they will take should the market reverse and begin to move in the opposite direction of their position.

As you may realize from watching my previous lessons we have already gone over one precise method which many traders use for setting trailing stops, the Parabolic SAR. In tomorrow's lesson we are going to go over several other methods, so we hope to see you in that lesson.

As always if you have any questions or comments please feel free to leave them in the comments section below so we can all learn to trade together, and good luck with your trading!
Lecture 46
How To Use Trailing Stops
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How To Use Trailing Stops
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A lesson on how to traders use trailing stops when trading the stock, futures, and forex markets.

In yesterday's lesson we talked about some of the psychological difficulties people have with letting their profits run and introduced the concept of the trailing stop as one way traders can overcome these difficulties that are the downfall of so many traders.

As we spoke about briefly in yesterday's lesson, once a position has begun to move in a traders favor many successful trader's will manage that position through the use of what is known as a trailing stop. The simplest type of trailing stop is what is known as a fixed trailing stop which simply moves along behind a position as that position begins to move in the traders favor. The beauty of the fixed trailing stop, is that while it will move up behind a long position or down behind a short position as the position moves in the traders favor, if at any time the position begins to move against the trader, the stop does not move, essentially locking in a large portion of the gains the trader has made up to that point.

Let's say for example that you had been following the trend in the EUR/USD chart below which started back in August and were looking for an opportunity to get into a trade. Based on your analysis you decided that if the market broke out above the little resistance point that I have highlighted on the chart below and the ADX was in a good position that you were going to enter long at 1.4360 to try and ride the trend. To manage the trade if it moved in your favor you placed a 100 Point trailing stop on the position at 1.4260. Now in this example if the market moved against you from the start 100 points your stop at 1.4260 would not have moved and you would have been executed on that order when the market touched 1.4260. As you can see from the chart below however, in this example the market did not pull back but went higher. As our stop is a 100 point trailing stop once the market moved up from 1.4360 the stop is going to continue to move up remaining 100 points behind the current price. If the market moves down however the stop does not move. So in this example once the market stoped moving higher at 1.4752 so did our stop and since the market pulled back 100 points from that level we were stopped out in this example at 1.4652.

Chart Example


Most trading platforms will allow you to set a fixed trailing stop on the platform so you do not have to manually manage the order.

As we have touched on briefly in previous lessons, indicators can also be used as trailing stops. One of the more popular indicators which was designed specifically for this purpose is the Parabolic SAR which we covered several lessons ago and you should review if you have not done so already.

As we discussed in our lesson on the Average True Range (ATR), this and other methods for measuring volatility in the market are often used to set hard stops by traders when entering the market so they do not get stopped out by market noise. In addition to using the ATR as a hard stop, this and other volatility based indicators can also be used as a trailing stop, moving your hard stop along behind the position a set number of ATR's for instance as it moves in your favor. As with a hard stop this protects your position from market noise, while allowing you to look in profits should the market begin to move against you.

Many if not all of the other indicators could also be used as trailing stops with the Moving Average probably one of the more popular here as well.

Aside from fixed and indicator based trailing stops another strategy that many traders implement is a fixed percentage of profits trailing stop. Using this method a trader will set his hard stop his profit target, and then once the market hits his profit target will then begin trailing a stop which could be any combination of the methods above. This method gives the trader a greater chance that the trade will hit his profit target but provides less protection should the market reverse and begin to move against him.
Lecture 47
Why Position Sizing is So Important in Trading
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Why Position Sizing is So Important in Trading
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A lesson on why position sizing is one of the most important aspects to consider when trading the stock, futures and forex markets.

So far in the lessons leading up to this one we have covered some of the different methods traders use to pick their entry points, as well as some of the different methods which traders use to set their exit points. In this lesson we are going to look at the factor which ties all of the above together and allows a trader the greatest control over their returns: Position Sizing.

While position sizing is one of the Key components of successful trading, like many of the other things we have covered, it is often overlooked as an unimportant aspect of trading. What successful traders know however is that once the psychology of trading is mastered and a trader has developed a sound strategy for picking their entry and exit points, it is the method they use to determine the size of the positions they trade that is the final factor which will lead to their success or failure.

To help illustrate this lets say that three traders are each given $10,000 and the same EUR/USD Mini Forex strategy to trade which has a win rate of 60% (makes a profit on 6 out of 10 trades) and makes an average profit on winning trades over the long term of 100 Points. On the losing side, this same system has a lose rate of 40% (takes a loss on 4 out of 10 trades) and takes an average loss on those trades of 90 points.

So here we have a trading strategy that has more winning trades on average than it does losing trades, as well as a strategy that when it does lose it loses less than what it does when it wins. I think most traders including myself would take that system any day of the week.

So we give these traders each this system and tell them to come back to us after 10 trades and show their results. As the system is the same for all traders, when they bring us back the trading results of their systems the entry points and exit points for each trade is going to be the same, leaving them only the position size as the factor that they can tweak.

As they are trading mini EUR/USD forex contracts the value of a 1 point move is $1 per contract traded. With this in mind after 10 trades the system produces the following results:
Lecture 48
Why Fixed Position Sizing Is Not the Best Way to Trade
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Why Fixed Position Sizing Is Not the Best Way to Trade
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VIDEO NOTES

A lesson on how using a standard amount per trade when trading the stock, futures, or forex markets is not the best way to go.

In yesterday's lesson we introduced another important yet often overlooked aspect of trading and money management which is position sizing. In today's lesson we are going to begin to look at some of the strategies that many successful traders use to determine their position sizes.

As we discussed briefly in the last lesson many traders make the mistake of choosing an arbitrary number such as 1 contract or 100 shares of stock to trade when they first enter the market. In addition to the fact that this does not consider the amount of capital a trader has at his disposal, it also does not take into account the fact that the Dollar value as well as the volatility characteristics of one contract or 100 shares of stock is going to very greatly. Like a poker player who bets the same amount on every hand, this also does not allow a trader the flexibility to trade bigger on trades with a higher probability of success and smaller on trades with a lower probability of success.

As you can see from the picture below, a trader trading 100 shares of a $20 stock which fluctuates 5% a day and a second position of 100 shares of a $30 stock which fluctuates 1% a day does not present the risk/reward picture that many traders would expect it would. In this example the smaller position actually has a greater potential risk and reward because of the greater volatility of the first stock in the example.

Chart Example

The next level of sophistication up from the above, is trading a standard trade size such as 1 contract or 100 shares of stock for every fixed amount of money. As Dr. Van K. Tharp points out however in his book Trade Your Way to Financial Freedom, there are several distinct disadvantages to using this method which are:

1. Not all Investments are Alike (100 shares of a $10 stock which moves 5% a day is not going to be the same as trading 100 Shares of a $10 stock that moves 1% a day)
2. It does not allow you to increase your exposure rapidly with small amounts of money
3. You will always take a position even when the risk is too high.

As you can hopefully see from the above information, while the fixed position size per dollar amount is better than simply picking a number of thin air, there are many disadvantages to this method. In tomorrow's lesson we will begin to look at some different ways of overcoming these disadvantages starting with a discussion of the martingale and anti martingale position sizing strategies so we hope to see you in that lesson.

As always if you have any questions or comments please feel free to leave them in the comments section below so we can all learn to trade together, and good luck with your trading.
Lecture 49
Trading The Martingale and Anti Martingale Strategies
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Trading The Martingale and Anti Martingale Strategies
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VIDEO NOTES

A lesson on the two different categories that position sizing strategies fall into when used in the forex, futures, and stock market.

In our last lesson we looked at how most traders pick a standard amount to trade per certain amount of equity in their account and how this probably isn't the best way to maximize profits and minimize losses of a potential strategy. In today's lesson we are going to look at the two categories that most position sizing strategies fall into which are known as martingale strategies and anti martingale strategies.

A position sizing strategy which incorporates the martingale technique is basically any strategy which increases the trade size as a trade moves against the trader or after a losing trade. On the flip side a position sizing strategy which incorporates the anti martingale technique is basically any strategy which increases the trade size as the trade moves in the traders favor or after a winning trade.

The most basic martingale strategy is one in which the trader trades a set position size at the beginning of his trading strategy and then double's the size of his trades after each unprofitable trade, returning back to the original position size only after a profitable trade. Using this strategy no matter how large the string of losing trades a trader faces, on the next winning trade they will make up all their losses plus a profit equal to the profit on their original trade size.

As an example lets say that a trader is using a strategy on the full size EUR/USD Forex contract that takes profits and losses both at the 200 point level (I like using the EUR/USD Forex contract because it has a fixed point value of $1 per contract for mini forex contracts and $10 per contract for full sized contracts but the example is the same for any instrument)

The trader starts with $100,000 in his account and decides that his starting position size will be 3 contracts (300,000) and that he will use the basic martingale strategy to place his trades. Using the below 10 trades here is how it would work:

example

As you can see from the above example although the trader was down significantly going into the 10th trade, as the 10th trade was profitable he made up all the his losses plus a brought the account profitable by the equity high of the account plus original profit target of $6000.

At first glance the above method can seem very sound and people often point to their perception that the chances of having a winning trade increase after a string of loosing trades. Mathematically however the large majority of strategies work like flipping a coin, in that the chances of having a profitable trade on the next trade is completely independent of how many profitable or unprofitable trades one has leading up to that trade. As when flipping a coin no matter how many times you flip heads the chances of flipping tails on the next flip of the coin are still 50/50.

The second problem with this method is that it requires an unlimited amount of money to ensure success. Looking at our trade example again but replacing the last trade with another loosing trade instead of a winner, you can see that the trader is now in a position where, at the normal $1000 per contract margin level required, he does not have enough money in his account to put up the necessary margin which is required to initiate the next 48 contract position.

Example

So while the pure martingale strategy and variations of it can produce successful results for extended periods of time, as I hope the above shows, odds are that it will eventually end up in blowing ones account completely.

With this in mind the large majority of successful traders that I have seen follow anti martingale strategies which increase size when trades are profitable, never when unprofitable, and these are the methods which I will be covering starting in tomorrow's lesson.
Lecture 50
How to Set Trade Position Size for Maximum Profits
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How to Set Trade Position Size for Maximum Profits
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In yesterday's lesson we talked about the martingale and anti martingale methods of trading which are the two categories which position sizing methodologies fall into. In today's lesson we are going to talk about one of the most basic anti martingale strategies, which is discussed in Dr. Van K. Tharp's book Trade Your Way to Financial Freedom, the Percent Risk Model.

The first step in determining your position size using this method is to decide how much you are going to risk on each trade in terms of a percentage of your trading capital. As we have discussed in our previous lessons on setting stop losses, studies have proven that over the long term traders who risk more than 2% of their capital on any one trade normally are not successful over the long term. Another factor to consider here when setting this percentage are things such as the win rate (how many winning trades) your system is expected to have versus the number of losing trades as well as other components which we will discuss in future lessons.

Once this loss in percentage terms has been determined, setting your stop then becomes a function of knowing how large a position can be traded while still being below your maximum risk level.

As an example lets say you have $100,000 in trading capital and you have determined from analyzing your strategy that 2% or $2000 (2%*$100,000) of your trading capital is an appropriate amount to risk per trade. When analyzing the Crude Oil Futures market you spot an opportunity to sell crude at $90 a barrel at which point you feel there is a good chance it will trade down to at least $88 a barrel. You have also spotted a strong resistance point at just below $91 a barrel and feel that 91 is a good level to place your stop and also gives you a reward to risk ratio of 2 to 1.

From trading crude oil you know that a 1 cent or 1 point move in the market equals $10 per contract. So analyzing further to determine your position size you would multiply $10 times the number of points your stop is away from your entry price (in this case 100) and you would come up with $1000 in risk per contract. Lastly you divide the total dollar amount you are willing to risk by your total risk per contract ($2000 total risk/$1000 risk per contract) to get the number of contracts which you can place on this trade (in this case 2 contracts)

As Dr. Van K. Tharp Points out in his book Trade Your Way to Financial Freedom, the advantages of this style of position sizing are that it allows both large and small accounts to grow steadily and that it equalizes the performance in the portfolio by the actual risk. As he also points out the disadvantages of this system are that it will require you to reject some trades because they are too risky (ie you will not have enough money in your account to trade the minimum contract size while staying under your maximum risk level) and that there is no way to know for sure what the actual amount you are risking will be because of slippage which can result in dramatic differences in performance when trading larger positions or using tight stops.

That completes our lesson for today. In tommorow's lesson we will look at another position sizing model which is known as the Percent Volatility Method.
sson on the % Risk Model of setting position sizes for active traders of the forex, futures, and stock markets.
Lecture 51
Maximize Trading Profits with Correct Position Sizing 2
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Maximize Trading Profits with Correct Position Sizing 2
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In today's lesson we are going to talk about another method which Dr. Van K Tharp talks about in his book Trade Your Way to Financial Freedom, the % Volatility Model for position sizing.

As we have discussed in our previous lesson on the Average True Range, Volatility is basically how much the price of a financial instrument fluctuates over a given time period. Just as the Average True Range, the indicator that was designed to represent average volatility in an instrument over a specified time, can be referenced when determining where to place your stop, it can also be used to determine how large or small a position you should trade in a given financial instrument.

To help understand how this works lets take another look at the example we used in our last lesson on the % Risk Model for position sizing, but this time determine our position size using the % Volatility Model for position sizing.

The first step in determining what your position size will be using the % Volatility Model is specifying what % of your total trading equity you will allow the volatility as represented by the ATR to represent. For this example we will say that we will allow Daily Volatility as represented by the ATR to account for a maximum of a 2% loss of trading capital.

If you remember from the example used in our last lesson we had $100,000 in trading capital and we are looking to sell crude oil which in that example was trading at $90 a barrel. After pulling up a chart of crude oil and adding the ATR you see that the current ATR for Crude is $2.55. As you may also remember from our last lesson a 1 point or 1 cent move in Crude equals $10 per contract. So with this in mind that volatility in dollars per contract for crude equals $10X255 which is $2550.

So as 2% of our trading capital that we are willing to risk on a volatility basis equals $2000 under this model we cannot put a position on in this instance and would have to pass up the trade.

As Dr. Van Tharp states in his book, the advantage of this model is that it standardizes the performance of a portfolio by volatility or in other words does not allow financial instruments with a higher volatility to have a greater affect on performance than financial instruments with a lower volatility and vice versa.

The position sizing methodology that one ultimately chooses for his strategy should be decided by testing the strategy, the methodology for which we will cover in later lessons, and seeing which method works best with that particular strategy.
Lecture 52
Fundamental Analysis and The US Economy
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Fundamental Analysis and The US Economy
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A lesson on the basics of fundamental analysis, the top down and bottom up, and the US Economy for traders of the stock, futures, and forex markets.

there are two ways that traders analyze the markets which are known as technical analysis and fundamental analysis. As I also mentioned in that lesson while most people who buy and sell over the short term focus on technical analysis and most people who buy and sell over the long term focus on fundamental analysis, in my opinion both technical traders, fundamental traders, and investors can all benefit from at least having an understanding of both types of analysis even if they prefer one or the other as their primary tool they use to make their trading decisions.

While technical analysis focuses solely on the analysis of historical price action, fundamental analysis focuses on everything else including things such as the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, currency or commodity using fundamental analysis there are two basic approaches one can use which are known as bottom up analysis and top down analysis. Bottom up analysis very simply means looking at the details such, as earnings if we are talking about a stock, first and then working one's way up to the larger picture by looking at things such as the industry of the company who's stock you are trading and then finally the overall economic picture. Top down analysis on the other hand means looking at the big picture things such as the economy first and then working one's way down to the details such as earnings if we are talking about a stock.

While there is some debate about which method is best my personal preference is for Top Down analysis and since by starting this way we can start with the things that apply to all markets and not just the stock market this is how we will start.

The first thing that it is important to understand from a fundamental standpoint is what the economic situation is as it affects the financial instrument you are trading. As I am based in the US and the US is the World's largest economy this is what I am going to talk about, however most of the things I discuss here apply in a broad sense to any economy. When we begin to discuss the foreign exchange market in later lessons we will go into specific details of the other major and emerging market economies from around the world.

According to Investopedia.com the definition of an Economy is "the large set of inter-related economic production and consumption activities which aid in determining how scarce resources are allocated. The economy encompasses everything relating to the production and consumption of goods and services in an area"

People often refer to the US Economy as a capitalist or free market economy. A capitalist or free market economy in its most basic sense is one in which the production and distribution of goods and services is done primarily by private (non government) companies and the price for those goods is set by the free market. This is in contrast to a socialist or planned economy where production and distribution of goods and services as well as the pricing of those goods and services is handled by the government.
Lecture 53
A Simple Explanation of the US Economy for Traders
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A Simple Explanation of the US Economy for Traders
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An overview of the US Economy and the first two components of the economy which are natural resources and the labor force. Explanation meant for traders of the forex, futures, and stock markets.

In our last lesson we gave an introduction to fundamental analysis with an introduction to the top down approach to analyzing fundamentals

and the US Economy. In today's lesson we are going to expand our discussion on the

US economy by looking at the different pieces which make up the economy and how each piece is relevant to us as traders of the stock, futures, and/or

forex markets.

The first component of any economy is its natural resources. One of the key factors that allowed the United

States to grow so quickly and become one of the world powers that it is today, is that it is a land that is rich

in natural resources from oil which drives our industry, to lumber to build our houses, to our large coastlines,

great lakes, and rivers which provide shipping access and move goods throughout the country.

Understanding what natural resources are most important to a country and understanding what affects the prices

of those resources is beneficial to not only commodities traders who trade the actual commodities such as oil

and gold but also to traders of the stock and forex markets. We will go into these correlations in more detail

in later lessons but a short example is that the US economy relies heavily on oil, so when the price of oil goes

higher this is normally seen as a negative for the US Economy as it then costs more for companies to ship their

goods, and for individuals to fill up their cars leaving them less money to spend. Similarly, as the US Imports

much of its oil, when the price of oil goes up this means that more dollars are being sold and converted into

the currencies of the countries which are exporting the oil to the US, therefore all else being equal weakening

the US Dollar and strengthening the currency of the exporting country.

The next component of any economy is its labor force, or the individuals who are working in that economy to

produce goods and services from the countries natural resources. As the labor force in an economy gets paid for

their labor, and then spends that money on the goods and services they and other components of the labor force

have produced, they are an important driver of growth in any economy.

The components which are watched in regards to labor are the size of the labor force in an economy, its rate of

growth, its productivity level, and its skill level, and its mobility or ability to adapt to changing

conditions. Another reason why the United States has the largest economy in the world is the size of its labor

force is constantly growing allowing the economy to produce and sell more goods and services, it is a relatively

mobile labor force which has allowed it to increase productivity faster than other nations through things such

as early adoption of new technology, and it is an educated labor force.

Why is this important from a trading standpoint? Here again we will go into more detail on this when we look at

important economic numbers but a short example is if the labor force becomes more productive, this means that

they are able to produce more goods in the same amount of time. This not only makes companies more profitable

but it holds down prices for the consumer, giving them more money to spend on other goods and services, which

drives growth, which means a higher stock market all else being equal. This increased growth can cause higher

demand for commodities therefore causing the commodities markets to rally all else being equal, and can also

have interest rate implications, something we will learn about in later lessons, which can affect the US

Dollar.
Lecture 54
Simple Explanation of The US Economy For Traders Part 2
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Simple Explanation of The US Economy For Traders Part 2
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A lesson on the second two components of the US Economy the Private and Government Sector and how these each affect forex, futures, and stock traders.

In our last lesson we began a discussion on the different components that make up the US Economy and how these relate to trading with a look at the Natural Resources and Labor Force components. In today's lesson we continue this discussion with a look at the Private Sector and Government components and how each of these relates to trading.

While having lots of natural resources and a large well educated labor force to produce goods and services from those natural resources is a great thing, without a way to organize these first two components of the economy, not much would get done. This is where the small, medium, and large businesses which make up the private sector come in. In addition to organizing the labor force to produce goods and services, the private sector is also responsible for raising the capital necessary to bring all these things together which they do through private investors, loans from commercial banks, the bond market, and/or the equities market.

While many people think that the US Economy is dominated by the large corporations, it may come as a surprise the large role that the small business play's in the US Economy. According to the US Department of State:

"Of the nearly 26 million firms in the United States, most are very small—97.5 percent ... have fewer than 20 employees," the U.S. Small Business Administration says. "Yet cumulatively, these firms account for half of our nonfarm real gross domestic product, and they have generated 60 to 80 percent of the net new jobs over the past decade."

While we will go into more details about the private sector and how this all relates to trading in later lessons, it should be obvious at this point the large effect that the private sector has on all markets as they are the ones who: 1. Raise capital through bonds and stocks that we then trade, 2. produce the goods and services which drive demand for the commodities we trade and 3. Affect the foreign Exchange markets by playing a role in what goods and services are produced domestically, which we import from overseas, as well as cross boarder mergers and acquisitions.
Lecture 55
The Business Cycle and Fiscal Policy - What Traders Know
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The Business Cycle and Fiscal Policy - What Traders Know
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A lesson on the business cycle and how the government uses fiscal policy to try and keep growth going and inflation in check and what this means for traders of the stock, futures, and forex markets.

Fiscal policy can be defined for our purposes very simply as anything relating to government spending and taxation. Before looking at the fiscal policy role of government in trying to influence the economy, one must first have an understanding of the business cycle. For a number of reasons which are widely debated the economy goes through repeated periods of growth and contraction over time which can be broken down into the following phases.

1. A Contraction where economic activity and growth slows and can turn negative
2. Trough where the economy stops contracting and a new expansion begins
3. An Expansion or the speeding up of economic growth.
4. A Peak where the growth of the economy maxes out and begins to turn downward

We could spend many months going over and debating why this is but for our purposes it is simply important to understand that, while the timing and length of each of these phases has varied widely, the above pattern repeats itself over and over again throughout history. This is important for us as traders to understand as different phases of the business cycle and changes in peoples forecasts of where the economy is in those cycles is arguably the greatest factor which effects the price level of every market.

Prior to the great depression the US Government had a pretty hands off approach in regards to the business cycle. Since the great depression however the government has played a much more active role in the economy with its stated goals being to act to facilitate full employment and price stability. To help understand these goals and the balancing act that goes on between them as they often conflict, lets look at how each relates to the different phases of the business cycle.

1. During an expansion we start to see more people employed as companies begin to sell more goods and services and need to hire more people to keep up with the demand. As economic growth picks up and more people are employed there are more people spending their paychecks which can cause prices to rise, something also known as inflation. Because of this effect on prices the government's primary concern here will normally be trying to keep prices stable and inflation in check without hurting economic growth. The two things they can do in regards to Fiscal Policy to try and keep prices in check and inflation at bay are:

a. Raise Taxes: By raising taxes money is taken away from the consumer who now has less money to spend helping to counteract the demand that is pushing prices up and causing inflation.

and/or
Lecture 56
How Interest Rates Move Markets
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How Interest Rates Move Markets
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An introduction to interest rates, what they are composed of and their extreme importance in the stock, futures, and forex markets.
Lecture 57
What Traders Know About Interest Rates Part 2
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What Traders Know About Interest Rates Part 2
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The second lesson of two on interest rates, why they are so important to the stock market and to traders and investors in the stock, futures, and forex markets with an introduction to the Federal Reserve.

In yesterday's lesson we began our discussion on Monetary Policy with a look at one of its primary components, interest rates. In today's lesson we are going to continue this discussion with another look at how interest rates affect the economy and therefore the markets, and by introducing the institution which implements Monetary Policy, the Federal Reserve.

As we saw in our example yesterday, small movements in interest rates can have dramatic effects on the economy. Just as small changes in interest rates can dramatically increase the costs for individuals to own a home or borrow money to purchase other goods, they can also have a dramatic affect on the cost of doing business.

It is for this reason that when interest rates rise, making borrowed money more costly, that people will also be less likely to start or expand a business. This not only has an effect on the business owner themselves but filters throughout the entire economy as less businesses being started and expanded means less jobs, which means less people getting paychecks, which means less people spending money and on and on down the line. The opposite is of course also true for when interest rates fall and business owners take advantage of access to cheaper borrowed money.

In addition to interest rates affecting the stock market, interest rates also have direct and indirect affects on the bond, foreign exchange, and futures markets. Here are a couple of quick examples of this which we will expand on in later lessons:

The Bond Market: When interest rates rise the value of existing bonds fall as investors can now purchase the same bond with a higher interest rate and vice versa.

The Forex Market: When Interest rates it becomes more attractive from a yield standpoint to own the dollar against other currencies or to invest in interest bearing dollar based assets. This creates a demand for dollars which will many times cause the dollar to strengthen. The reverse is also true when interest rates fall.

The Commodities Market: When economies grow at a greater rate as a result of lower interest rates this will mean a greater demand for commodities so their value will rise and vice versa.
Lecture 58
What Traders Need to Know About The Structure of The Fed
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What Traders Need to Know About The Structure of The Fed
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A lesson on the structure of the Federal reserve for traders and investors in the stock, futures, and forex markets.

In our last lesson we finalized our discussion on the importance of interest rates and introduced the Federal Reserve. In today's lesson we're going to continue our discussion on the Federal Reserve by looking at the parts of the Fed which are relevant to us as traders so we can begin to understand how this one institution is able to create drastic moves in the markets.

The Federal Reserve has many responsibilities which include regulating banking activity, playing a major role in operating the nation's payments system, and maintaining the stability of the financial system. The role that is most important to us as traders and therefore the role in which we will concentrate on in our lessons, is its role in conducting the nation's monetary policy.

***As a side note here the Federal Reserve is also the Central Bank of the United States. I say this here because most countries have something which operates in much the same way as the Fed which is many times referred to in other countries as the Central Bank. While these institutions may be structured differently from the Fed, from a broad perspective many of the things you learn in our lessons on monetary policy will apply to any central bank.

While the Fed's objectives are set by law, its day to day activities are not subject to government approval. This is an important point to understand as it means that unlike Fiscal Policy, which must be approved by both Congress and the President, monetary policy can be enacted as the Fed pleases. This gives the Fed much more control over the economy at least in the short term, and is the reason why some people consider the chairman of the Federal Reserve to be more powerful than even the President.

There are many interesting details about The Fed and its structure that I encourage everyone to explore, however the primary components which move markets, and are therefore the ones that we will focus on, are:

1. The Board of Governors: Located in Washington DC the Board of Governors is at the top of The Fed's food chain. It is made up of 7 members who are appointed by the president and confirmed by the Senate. To help keep The Fed from being influenced by political factors, 5 of the Fed Governors are appointed to staggered 14 Year terms. The Chairman and the Vice Chairman are appointed to 4 year terms and can be reappointed should the President wish to have them.

2. The Regional Federal Reserve Banks: This is a network which includes the 12 regional Federal Reserve Banks, and 25 Branches. As most of you already know, different areas of the United States are comprised of different industries. As an example the New York area economy is influenced heavily by what is going on in financial services, while the San Francisco area economy is influenced heavily by what is happening in the technology sector. As this is the case, each of the regional banks are strategically located throughout the country so that the can stay abreast of current economic conditions in each area.
Lecture 59
How the Fed Changes Interest Rates
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How the Fed Changes Interest Rates
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A lesson on open market operations and how the federal reserve increases and decreases the money supply in order to move interest rates and what this means for traders of the stock, futures, and foreign exchange markets.

In our last lesson we looked at the structure of the Federal Reserve and the components of the FOMC, the portion responsible for implementing Monetary Policy. Now that we have an understanding of this, we can look further into exactly how monetary policy is facilitated and what happens to markets under differing scenarios.

Monetary Policy very simply is anything which relates to action by the Federal Reserve to influence the amount of money and credit available in the economy. To understand exactly what this means, one first must understand the concept of fiat monetary systems.

Fiat Monetary Systems: The United States, like most major economies, has what is known as a fiat monetary system. A Fiat Monetary system very simply is any system which uses a monetary unit (in this case the US Dollar) which is not convertible to some commodity, in general a precious metal such as gold.

Fiat money, is money that is backed by the credit of some entity, normally a government, and the value for which is derived from its relative scarcity and the faith placed in it by the population which uses it.

This is important to us as traders because the fact that the Dollar is not convertible to a commodity such as gold gives the Federal Reserve the ability to increase or decrease the money supply as it sees fit, or in other words to enact Monetary Policy.

With this in mind the 3 tools available to the Fed for enacting monetary policy are:

• Open Market Operations
• The Discount Rate
• Reserve Requirements

The most common tool that the Fed uses, and therefore the one that we will cover, is Open Market Operations. Once we have an understanding of this and how increases or decreases in the supply of money affect demand and prices, the other two less commonly used tools will be more easily understood.

Through something which is known as the Open Market Committee, the Fed increases and decreases the supply of money by buying and selling US Government securities.

When The Fed wishes to reduce interest rates they will increase the supply of money by buying government securities using money that was not available in circulation before they made their purchase. As with anything, when additional supply is added and everything else remains constant, price normally falls. In this case the price that we are referring to is the cost of borrowing money or interest rates.

Conversely, when the fed wishes to increase interest rates they will instruct the open market committee to sell government securities thereby taking the money they earn on the proceeds of those sales out of circulation and reducing the money supply.
Lecture 60
How to Determine When the Fed is Going to Change Rates
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How to Determine When the Fed is Going to Change Rates
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A lesson on monetary policy and how to determine when the federal reserve is going to raise or lower interest rates for active traders and investors in the stock, futures, and forex markets.
Lecture 61
Why Markets Move Ahead of Interest Rate Announcements
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Why Markets Move Ahead of Interest Rate Announcements
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A lesson on how markets and traders anticipate interest rate changes for stock, futures and forex traders.

Link to FOMC Rate Announcement: http://www.federalreserve.gov/newsevents/press/monetary/2008...

In our last lesson we looked at how The Fed is expected to react at different points in the business cycle, and what the expected market movement will be as a result. In today's lesson we are going to look at how the Fed goes about signaling to the market changes in their thinking on the direction of monetary policy, so we can begin to understand why markets react not only to Fed interest rate announcements but just as importantly to events which change the markets anticipation of how the Fed may react.

While we have simplified the situation in order to better understand the basics of how The Fed uses monetary policy, as you can probably tell by now, forecasting economic conditions and using monetary policy to try and manage those conditions is a very difficult process. The members of the FOMC are constantly analyzing economic data from across the country to try and gauge where the economy is in the business cycle and what if any monetary policy action is needed.

As we have touched on in previous lessons, the FOMC has 8 regularly scheduled meetings throughout the year where they meet to discuss current economic conditions and expectations of future conditions. It is at these meetings that decisions on what changes if any in monetary policy need to be made. Upon completion of these meetings a press released is issued an example of which you can see at the link below if you are watching this video on InformedTrades.com or in the description section if you are watching this video on Youtube.

http://www.federalreserve.gov/newsevents/press/monetary/2008...

As we've learned in previous lessons, what the FOMC decides to do with their target for Fed Funds Rate at this meeting has wide ramifications for the economy and therefore the markets. With this in mind the results of these meetings are closely followed by market participants. It is important to understand however that the market not only looks for whether or not the FOMC takes action on the Fed Funds Rate and by how much, but also for any clues in the Fed's Statement as to what their bias may be for future rate decisions.

This is a very key point to understand because the markets are always trying to anticipate what is going to happen and therefore they move up and down depending on what people think will happen to rates going forward. Anything that comes out from this meeting or any thing else that is in line with what the market expects should have little or no effect on the market. Conversely anything that comes out which changes the markets forecasts on what if any Fed action will be, can cause drastic moves in the markets as participants react to this new information and markets adjust accordingly.
Lecture 62
How to Trade the GDP Number (Part 1)
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How to Trade the GDP Number (Part 1)
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A lesson on what traders of the stock, futures, and forex markets look for when the Gross Domestic Product (GDP) Number is released.

As we have learned in previous lessons there are many components of the US Economy which can affect overall economic growth and inflation expectations. Some of the major examples here are how many people are employed in the economy vs. unemployed, how much the housing market is growing in different parts of the country, and at what rate the prices for different products in the economy are seeing increases.

As all of these things are so important to the economy and therefore to the markets, there are no shortage of economic reports which are released to try and help people gauge how things are going with different pieces of the economy. It is important for us as traders to understand the major reports here as even if we are trading off of technicals, understanding what is happening in the market from a fundamental standpoint can help establish a longer term bias for trading. In the short term an understanding of these numbers will also help to assess the erratic and sometimes extreme movements which can occur after economic releases.

The granddaddy of all economic reports is the release of the Gross Domestic Product (GDP) number for the economy. The Gross Domestic Product for the US or any other country is the final value of all the goods and services produced in that economy. Essentially what you get after calculating GDP by adding up the value of all goods and services produced in the economy is a measure of the size of the overall economy. It is for this reason that market participants will watch the GDP number closely as the rate of growth in this number represents the rate of growth in the overall economy.

As a side note here, GDP also allows a comparison to be made of the sizes of different economies from around the world, as well as their growth rates. To give you an idea of just how large the US Economy is, 2007 GDP for the United States was estimated at 13.7 Trillion dollars. This is in comparison to the next largest economy in the world, Japan which has a GDP of under 5 Trillion Dollars.

Quarterly estimates of GDP are released each month with Advance Estimates which are incomplete and subject to further revision being released near the end of the first month after the end of the quarter being reported. In the second month after the end of the quarter being reported preliminary numbers (which basically means more accurate than advanced) normally are released and then finally the final GDP number is released at the end of the 3rd month after the end of the quarter being reported on.

Traders are going to focus heavily on the growth rate released in the Advanced number and markets will also move on any significant revisions made in the preliminary and final GDP numbers.
Lecture 63
The Components of the Gross Domestic Product (GDP)
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The Components of the Gross Domestic Product (GDP)
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The second lesson in a series on trading and how the components which make up the Gross Domestic Product number affect the stock, futures, and forex markets.

Link to this lesson on InformedTrades.com: http://www.informedtrades.com/14918-trading-news-gross-domes...

In addition to looking at the growth or lack thereof in the overall GDP number, traders will also look at the growth or lack there of in the different components that make up the number. As GDP represents the value of everything in an Economy you can imagine the amount of data that goes into compiling the number, much of which is published for market participants to view. By looking at the different pieces which make up GDP we can get a good picture of what is happening not only with the overall economy but with all the different components of the economy which are reported on to come up with the final number. .

Now we could spend many lessons going over all the data that is in this report. The goal here however is to build a framework for understanding the major components so we as traders can understand what is going on when the market reacts to certain pieces of the report and will recognize when to dig deeper for more information on what is happening in a certain sector. The broad categories that it is important to have an understanding of are:

1. Personal Consumption Expenditures -- as over 65% of the US economy is made up of this category, what the individual consumer is doing ie the growth or lack thereof in their consumption, as well as on what goods and services they are spending their money on is heavily focused on.

2. Private Investment - This includes purchases of things such as computers, equipment and inventories (known as fixed assets) by businesses, purchases of homes by individuals, and of businesses investing in inventories of goods to sell. These are all obviously important things, as how much businesses are investing is a good indication of how they feel about future growth prospects, and how much growth the housing market is experiencing is also an important component of the economy.

3. Government Spending -- this includes pretty much everything the government spends money on besides social programs.

4. Exports -- Imports -- an important number which shows how wide the gap is between how much the country exports and how much it imports.

What the GDP number is going to give you a feel for is how much each of the above grew for the quarter and what their overall contribution to the economy was. The above numbers will then be broken down into more detailed numbers which go into compiling the final number for the above 4 categories.
Lecture 64
Intro to Trading Non Farm Payrolls (NFP's)
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Intro to Trading Non Farm Payrolls (NFP's)
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A lesson on Non Farm Payrolls and what traders need to watch for when trading and investing in the futures, forex, and stock markets.

Link to the BLS NFP Data Section: http://www.bls.gov/ces/#news

Link to this lesson on InformedTrades.com: http://www.informedtrades.com/15030-trading-news-non-farm-pa...

As there are so many things which can be measured in an economy, there are tons of economic releases every month, with new numbers coming out on almost a daily basis. With all this data it is easy to get overwhelmed when looking at the economic calendar and trying to determine what is important to us as traders. While the importance of different economic indicators to the markets changes depending on current economic conditions, there are approximately 10 major economic indicators that have and always will be important to the market. Most of the other data that is reported throughout the month is similar to one of these 10 indictors, so once we have an understanding of the main numbers everything else will make a lot more sense.

Before getting started here it is important to understand that economic releases are designed to try and give a picture of either:

1. What has already happened in the economy based on past numbers (referred to as a lagging indicator)

2. What is anticipated going forward based on past numbers. (referred to as a leading indicator)

3. What is happening right now based on current data. (referred to as a coincident indicator)

Economic indicators are designed to try and give a picture of the growth the economy is experiencing, the level of price increases or inflation that the economy is experiencing, or both.

One of the most important and therefore market moving economic numbers after GDP is the Non Farm Payrolls (NFP), which is released at 8:30 am on the first Friday of each month. Released by the Bureau of Labor Statistics the Non Farm Payrolls Number is meant to represent the number of jobs added or lost in the economy over the last month, not including jobs relating to the Farming industry. The Farming Industry is not included because of its seasonal hiring which would distort the number around harvest times as farms add workers and then release them after the harvest is complete for example
Lecture 65
Trading the News - Economic Numbers - Retail Sales
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Trading the News - Economic Numbers - Retail Sales
http://www.informedtrades.com/ A look at how the make up of the Retail Sales number and how this economic indicator moves the stock, futures, and forex markets.

Example Release: http://www.census.gov/svsd/www/marts_current.html

Lesson on InformedTrades.com: http://www.informedtrades.com/15297-trade-news-how-interpret...

The retail sales number is released at 8:30 am on or around the 13th of each month, and is an estimate of the sales of goods by all retail establishments in the United States. These goods fall into the personal consumption expenditures category, which as we discussed in our lesson on GDP, makes up over 65% of the US Economy. Although the number does not include anywhere near the data that is included in GDP, since this number is released for each month (where GDP is released for each quarter) it is closely watched by the Fed and other market participants as a timelier indicator of what is happening with the consumer.

In addition to the widely reported headline number, the report that is issued along with the retail sales number includes a breakdown of retail sales growth by category. With this in mind the report is not only a good indicator of overall consumer activity, but also for how different parts of the economy such as automobile, restaurant, clothing and electronics sales are fairing. If you are trading the stock of a company which sells products related to one of the categories reported in the retail sales release, then it is obviously important to understand that what happens with the growth of that category is most likely going to have a direct affect on the price of the stock that you are trading.
Lecture 66
Trading the News - Economic Numbers - ISM Manufacturing
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Trading the News - Economic Numbers - ISM Manufacturing
http://www.informedtrades.com/ The Institute for Supply Management's (ISM) Manufacturing Index. A lesson on what this indicator is and what it tells us about the manufacturing sector of the economy as well as its status as a leading indicator of overall economic conditions.
Lecture 67
The Producer Price Index (PPI)
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The Producer Price Index (PPI)
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A lesson explaining what the producer price index is for day traders and investors trading in the stock futures and forex markets.
Lecture 68
The Consumer Price Index (CPI)
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The Consumer Price Index (CPI)
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A lesson on the Consumer Price Index (CPI) for active traders and investors in the stock, futures and forex markets.

Link to this lesson on InformedTrades.com: http://www.informedtrades.com/18349-trading-news-economic-nu...

Latest Release: http://www.bls.gov/news.release/cpi.toc.htm
Lecture 69
Trade the News - Existing Home Sales Index
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Trade the News - Existing Home Sales Index
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A lesson on how the Existing Home Sales Index gives us insight into the Us housing market and how this affects the stock, futures, and foreign exchange markets.

This Lesson on InformedTrades.com: http://www.informedtrades.com/18473-how-interpret-trade-arou...

Latest Release: http://www.realtor.org/press_room/news_releases/2007/ehs_dec...
Lecture 70
How To Interpret the Consumer Confidence Index (CCI)
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How To Interpret the Consumer Confidence Index (CCI)
A lesson on the Consumer Confidence Index and what it means to traders and investors in the stock, futures, and foreign exchange markets.
Lecture 71
How to Interpret the Index of Leading Economic Indicators
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How to Interpret the Index of Leading Economic Indicators
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A lesson on the Conference Board's Index of leading economic indicators for active traders and investors in the stock, futures, and forex markets.

This lesson on InformedTrades.com http://www.informedtrades.com/18709-how-interpret-trade-arou...

Latest Releasehttp://www.conference-board.org/economics/bci/pressRe...
Lecture 72
The Advantages and Disadvantages of Day Trading
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The Advantages and Disadvantages of Day Trading
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A lesson on the advantages and disadvantages of day trading the stock, futures, and forex markets for active traders and investors.
Lecture 73
The Advantages and Disadvantages of Swing Trading
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The Advantages and Disadvantages of Swing Trading
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In our last lesson we gave an introduction to the three main styles of trading and looked specifically at the advantages and disadvantages of the most popular style of trading, day trading. In today's lesson we are going to look at the advantages and disadvantages of the second most popular style of trading, swing trading.

Swing trading is generally defined as a style of trading where positions are held for larger gains over multiple days and up to several weeks. Traders who promote this style of trading normally feel that it combines the best of both day trading and position trading. What this means is that these traders feel swing trading gives you a similar ability to amplify gains as day trading does, with the slow pace and lower transaction costs of position trading.

A second advantage that many traders would site about swing trading, is that good swing traders plan their entries and exits in advance and since positions are held for longer than one day this method of trading does not have the same intensity that day trading does. While some traders prefer the intensity of day trading, traders who want a less stressful trading career often opt for swing trading as a result.

I think most traders would agree that the biggest disadvantage to swing trading is the increased risk per trade. Because swing traders hold positions for longer periods of time, their average risk per trade is generally higher than day traders in order to give the position enough breathing room to work. As swing traders hold positions overnight they are also exposed to the overnight risk which we learned about in our lesson on day trading.

Secondly, although swing trading does not require as much work as day trading, it still generally requires more work and resources than position trading, as good swing traders normally follow the markets very closely even when not entering or exiting a trade.

That's our lesson for today, in our next lesson we are going to look at the third style of trading, position trading so we hope to see you in that lesson.
Lecture 74
The Advantages and Disadvantages of Position Trading
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The Advantages and Disadvantages of Position Trading
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A lesson on the advantages and disadvantages of position trading for active traders and investors in the stock, futures, and forex markets.

In our last lesson we looked at the advantages and disadvantages of the second most popular style of trading, swing trading. In today's lesson we are going to look at the third and final category of trading, position trading.

Position Trading, which is also referred to as trend trading, generally involves holding a position for three to six months to capture a fundamental change in the value of the financial instrument that is being traded. As this is the case position traders will generally be more prone to integrating at least some fundamental analysis into their trading, than will day and swing traders.

Probably the biggest advantage to position trading is it generally involves the least amount of time of the three trading styles. After they have spent the significant time necessary to learn about trading in general, many good position traders will spend just several hours a week analyzing the market and making their trades. As they are holding positions for long periods of time good position traders have their stop loss and profit targets in place before making the trade, requiring that the trader only monitor the position to make sure nothing significant has changed since his original trading decision.

The second major advantage that I think many traders would site about position trading is that because you are in positions for long periods of time with wide stop loss orders, your positions have room to breath and are much less likely to get stopped out because of random market noise than with the other two styles.

As we learned in our lesson on Swing Trading, holding positions over longer time frames generally requires wider stop loss orders. While as we have just stated this is an advantage from a market noise standpoint it is also a disadvantage from a larger average risk per trade standpoint.

The second main disadvantage that I think most traders would site is that position traders miss out on many of the shorter term opportunities that day traders and swing traders can use to amplify their profits. This is not only true from a length of trade standpoint but also from a capital standpoint. Because position traders hold positions for long periods of time their trading capital is also tied up in those trades for longer periods of time, restricting them from taking advantage of as many opportunities.

We are going to go into a bit more detail on how to choose the style of trading which is best for each trader in our lesson on the trader's business plan, but you should now have a good understanding of what each style entails. The last thing that I would like to point out here is that often times different styles work better in different types of market conditions. With this in mind many traders will learn a bit about each of these styles so they can place longer or shorter term trades depending on the market conditions at the time.

That's our lesson for today, in our next lesson we are going to begin to take a look at the different markets that are available to traders so we hope to see you in that lesson.
Lecture 75
How to Keep a Trading Journal
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How to Keep a Trading Journal
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In our last lesson we finished up our discussion the different styles of trading with a look at the longer term style of position trading. In today's lesson we are going to start a new discussion on one of the trader's most powerful tools, the trading journal.

As I think most people who are successful at anything will tell you, a major factor that separates the successful from the unsuccessful is those who are successful look at each experience as a chance to learn and grow where those who are not move from one experience to another without learning much at all. With this in mind one of the major things that separates the profitable trader from the unprofitable trader is an openness to learning from each trade, and a willingness to put in the effort it takes to document and periodically review each trade that is made.

Traders who document their trades do so in trading journals. This can be as simple as writing down certain details of your trades in a notebook or in a word document, however those who know a bit about excel normally find this a much more powerful option

Below are 10 things that in my opinion it is important to document about each trade. :

1. The general market conditions for that specific trading day. For example is there a lot of volatility in the market, is the market trading lower or higher, ranging or trending?
2. Why you entered the trade, the time you entered the trade, and the price you entered the trade.
3. Why you exited the trade, the time you exited the trade, and the price you excited the trade.
4. Whether the trade was a long or short trade.
5. What happened with the market from the time you opened the trade to the time that you closed the trade.
6. The money management parameters you used in the trade and which we covered in our previous lessons on the subject.
7. Many traders will also attach a chart with their analysis on it to help them remember the trade when they review their trading journal.
8. Where you were weak that particular day and what you are going to do to address those weaknesses.
9. Where you were strong that day and what you are going to do to address those strengths.
10. Any other thoughts that you had that day which should be noted.
http://www.informedtrades.com/20418-10-components-successful...

That's our lesson for today. In tomorrow's lesson we will look at the next and equally important step of how to go about reviewing your trading journal periodically in order to make sure that you leverage your journal to improve your trading.
Lecture 76
The Most Important Attributes of a Good Trading Journal
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The Most Important Attributes of a Good Trading Journal
http://www.informedtrades.com/20448-7-things-your-trading-jo...

In our last lesson we began our discussion on how successful traders leverage trading journals in order to learn from their past mistakes and successes. In today's lesson we are going to wrap up our discussion on trading journals with a look at what to look for when reviewing your trades.

Simply writing the days activity down in your trading journal is the first step. The next and equally important step is to review your journal on a regular basis to see what is working and what is not. This way you can leverage your journal to help you improve in areas where you are weak and make sure you continue to leverage your strengths where you are strong.

There is a great article from Brett Steenbarger at Traderfeed.com which addresses some of the major things that traders should analyze when reviewing their trading journal. In this article Dr. Steenbarger says:

Number of long and short trades -- I correlate this to the trend condition of the market to see if I'm trading with the current or against it; if I'm trading in a one-sided way in a range-bound market. The number of trades also tells me if I'm overtrading. [/I]

Number of winning and losing trades -- When I'm trading well, I have more winning trades than losers by a reasonably healthy margin. When the ratio dips for more than a short time period, I need to re-evaluate my trading and my trading strategies.

Time holding trades -- I'm a short-term trader, and I tend to have a relatively narrow time band in which I hold trades. Moving beyond that band tells me I'm either cutting trades short or going for home runs—and neither of those have worked for me in the past.

Time holding losing trades versus winners[/B] -- It is very hard to make money over time by holding losers. Eventually, the size of the losers becomes greater than the winners so that even a trader who has more winning trades than losers can end up in the red.

Profit/Loss broken down by long and short trades and broken down by market condition. This tells me if I'm trading ranges better than breakout movements; whether I'm doing better on the long side or the short side. If my performance is significantly worse in one mode than another, I start to examine my trading for needed improvements.

I would add to this list average profit on profitable trades vs. average loss on unprofitable trades and largest drawdown or loss the account suffered before returning to profitably.

That completes our lesson for today and also wraps up our course on the basics of trading. In our next lesson we are going to begin a new course which covers the basics of Forex Trading so we hope to see you in that lesson.
Lecture 77
The 20 Components of a Successful Trading Plan
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The 20 Components of a Successful Trading Plan
Practice trading with a free demo account: http://bit.ly/IT-forex-demo3

View this entire lesson: http://www.informedtrades.com/20597-20-components-successful...

In our last lesson we finished up our discussion on trading journals with a look at the important things to look for when reviewing past trades. In today's lesson we are going to discuss how to handle trading like a business with a discussion of how to compile a trading business plan.

One of the leading causes for the failure of many businesses is their lack of planning. I think most successful people would agree that if you want to be successful in life and business you need to have a plan for how to obtain that success, set goals to meet along the way, and then work on executing your plan and meeting your goals.

Trading is no different from any other business in this sense and it is my opinion that those who fail to plan out their trading like a business are doomed to failure as well. With this in mind it is important to have a written business plan for your trading just as you would for any other business. Below are some of the things which should be included in that plan, most if not all of which you should now have a good understanding of if you have watched all of our lessons up to this point.

What are your reasons for wanting to become a trader?
What do you hope to gain from trading? Be specific here. If the possibility of making a lot of money has drawn you towards trading then list out how much money you want to make from trading and what you plan to do with that money if you make it.
What are the things that are going to separate you from the large majority of traders who fail?
What are your biggest weaknesses?
How do you plan to address your weaknesses and leverage your strengths?
How much time can you devote towards actively following the market?
Do you plan to day trade, swing trade, position trade or a combination of the three? Does your choice here reflect the time you have to devote to the markets?
What market or markets do you plan to trade and why?
At what times throughout the day are you going to spend actually trading, researching trades, and then learning about the market?
What are your criteria for entering a trade?
What are your criteria for exiting a trade?
What is your money management strategy?
How will you know if one of the pieces of your strategy stops working?
After identifying that one of the pieces of your strategy has stopped working what will you do to address it?
What trading software and equipment you will use to trade and how much is it?
What Broker/Brokers will you use?
Do you plan to add money to your account and if so where is that money going to come from?
If you are profitable do you plan to reinvest profits or withdraw some or all of them?
If you plan to trade full time how you will support yourself if you aren't profitable right away.
How much money do you plan to start to trade with? Does the math work out when considering taxes, all costs, living expenses and your initial trading balance?

As you can see, just as with any business, there are many things to consider before jumping into trading. From my experience however those who actually take the time to think about and write down the answers to each of the above questions have a much higher chance of success than those who do not.

That's our lesson for today and this completes the InformedTrades.com basics of trading course. I hope you have had as much fun and learned as much from our first trading basics course as I have from putting it together.