Hello everyone and welcome back to "Trade with Technical Analysis Program" and in
this video we'll take a look on how we usually create a trading setup.
Knowing how we usually create setup and why it is supposed to work is important because
one setup may or may not work equally well on two different scenarios.
After going from this lesson I hope you'll understand why it is so ?
Well to understand how to create chart setup, first you need to understand what actually
Technical Analysis teaches you about trading.
Now you can pick up any certified course on Technical Analysis or any popular book on
Technical Trading.
The format of how contents are arranged never changes, it remains exactly the same either
you are learning indicator based trading, price pattern trading, candle stick trading,
geometric trading or price action trading.
And the format is Theory first, then comes trend lines support and resistance and last
comes the trading method.
The understanding of this format is all you need to know which type of setup we are supposed
to use on which situation.
[ Bullish Price Cycle 2 ]
In front of you is diagram of Bullish Price Cycle as per Price Cycle Theory.
Now what we learned about bullish and bearish price cycles is that the first minor cycle
helps in detection of beginning of new upside and trades are usually taken on second minor
cycle.
Every book, every course and absolutely every certification program on technical analysis
teaches you exactly the same thing and it doesn't matter which theory they select to
convey this point.
There are also few exceptions which also suggest reversal trading and counter trend trading,
mostly who suggest reversal and counter trend trading are FOREX Traders.
Usually Index, Stocks, Futures or Commodity traders never suggest anything against trend.
Stage one of any analysis phase is always dedicated to detection of first price cycle
so that traders can enter trade on second cycle.
There are two ways a Trend marks its beginning first by breaking out of consolidation and
second by exhibiting trend reversal.
[ 1 ]
In front of you is chart of Agarwal Industrial Corporation.
As you can see the prices were in consolidation for a very long amount of time.
Now in this case you can not do anything to represent underlying trend because trend doesn't
have any direction.
So to spot beginning of uptrend you have to add a standard two filter setup or price volatility
setup.
Why, because cross over on filters is condition required for bullishness or bearishness and
when prices will break out of range, volatility is 100% guaranteed to change.
Standard filters usually include MA of 25, 30, 50, 100 or 200 day.
All books and courses that usually teach price action trading recommend use of 100 or 200
day moving average whereas indicator based books will recommend use of 25,50 or 30,50
MA setup.
[ 2 ]
Right now you can see a volatility setup on screen, where 14 is representing magnitude
and 50 is representing polarity.
Here first we see crossover and then resistance break which means price volatility is supporting
the up ward direction of price.
This price move that we see in front of us is first price cycle.
Keep in mind it is not necessary that you'll always end up getting this big first minor
cycle.
[ No Crossover ]
Now there may come scenarios where you might find resistance break but no crossover.
In that scenarios you have to wait for prices to generate crossover and exhibit either bounce
on support or new resistance break marking beginning of second cycle.
Keep in mind we usually say that second price cycle is equal to first minor price cycle
but while investing that may not be the case.
In majority of investing scenarios second cycle usually results in multi bagger gains.
[ 3 ]
The current setup is two filter setup with 25 and 50 day moving averages.
Here again MA got aligned in ascending order which means condition of bullishness is matched
then resistance break or bounce on support will mean time to enter position.
[ 4 ]
Scenario number 2, beginning of new trend with reversal.
Here on chart of Aptech, prices first fell down and then new trend began.
In this type of scenario we first prefer to draw moving average to represent the underlying
trend.
So first we'll draw a trend line.
[ 5 ]
Then we draw moving average to represent that trend line.
[ 6 ]
Here in this case 30 day EMA is capable of representing underlying downtrend.
Keep in mind, you might not always get a clean representation and you shouldn't bother about
getting clean representation either.
A close representation can also do the job.
Now here you can see that first prices came above EMA and then broke resistance thus marking
beginning of new trend with first minor price cycle.
Remember prices may come back to test support, from where you can add new positions on bounce.
EMA that is representing downtrend is 30 day, in his book, "Secrets For Profiting in Bull
and Bear Markets" Stan Weinstein recommended use of 30 day EMA on weekly chart for investing.
He also suggested the same thing that you should first let prices come above 30 day
EMA and trade all continuation patterns till trend persists.
[ 7 ]
On other hand Dreyfus, William O' Neil and other pattern and trend traders and investors
suggested let price come above 50 day EMA and enter continuation patterns or wait for
resistance to break.
The reason why 25, 30 and 50 day MA are used as standard because majority of strong trends
usually respect them.
Hardly you'll find any trend that would not respect 30, 50 MA filter.
Now conclusion of all this is, you can either use a standard reference lines of 30 or 50
day EMA or EMA to represent underlying trend or filters.
First let price breach your preferred confirmation setup and then wait for prices to exhibit
break or bounce on support or resistance to enter position.
Also keep in mind if you are planning to use standard filter for investing then 30 and
50 EMA as per stats can be considered as best performing standard filters on weekly as well
as monthly time frame.
Personally I always prefer monthly time frame for investing.
I believe it might help me catch businesses that can become industry leaders of tomorrow
which will not only pay heavy dividends but will also provide bonus shares and splits.
Now you might have a question if 30,50 standard filter works that good while investing, can
it be used while trading to get similar results.
Well answer is yes but you have to keep in mind that while trying to catch first minor
cycle on investing your risk is extremely less as compared to upcoming rewards.
Therefore risk on reversal is worth taking, on other hand while trading you have to calculate
your options and also keep in mind filters perform better if prices are exhibiting less
noise, that's the reason why investing is always recommended on weekly or monthly time
frame.
You also have to keep in mind reversal trading have less reliability than trading in direction
of trend or consolidation break.
For example, take a look on on my trade on crude oil.
[ Reversal 1 ]
Here I tried to enter the first minor cycle using same formula, prices came above filters,
broke resistance but reversal failed thus resulting in loss.
[ Reversal 2-3 ]
But then prices continued in sideways move and then broke consolidation successfully
to enter new bullish trend.
So do not live with an idea that just because a trading opportunity matches all criteria
for entering position it is guaranteed to succeed.
There is no such thing as guarantee.
While trading safest entries are continuation entries and only these types of trades will
help you to trade with accuracy of 9 wins out of 10.
If you'll add reversals to your arsenal most likely your win rate will go down.
[ SR1]
Now take a look on this chart, first we see gap opening then prices moved up and then
came back to same level where gap opening happened and here we got a confirmed Doji
but there's little problem.
No matter which method of SL you would have used here your SL would have surely got hit,
which tells us there is lot of noise on current time frame.
Now was this noise visible before and answer is yes, it was visible.
[ SR2 ]
Now remember what we learned in support and resistance video, a support should not be
considered as active unless all selling bids are satisfied.
Usually we take appearance of candle stick pattern as confirmation to satisfied bids
but since there is noise on chart we need an extra level of confirmation.
[ SR3 ]
So we'll add a MA with 7 and 14 as support and resistance setup.
At this place we can see a bullish crossover, the occurrence of crossover should inform
that the support is now active.
And active support means chances of prices breaching support are reduced, so you can
place your SL below support and can take advantage of noise to take low risk entry.
You might have heard traders say "Enter On Noise and Exit on Close".
This is what we call entering the noise, close is your exit based on your risk reward condition
and profit multiplying strategy.
For example your risk reward is 3/2 and you have added 2 positions then you'll release
your first position as soon as risk reward condition is matched and you'll start trailing
second position for more profits.
Most likely noise here should have informed you that the setup needs to be changed to
attain accuracy while trading this situation.
By the way I wouldn't deny most inexperienced traders wouldn't have changed setup while
trading this situation.
But they surely would have managed to trade this situation here after experiencing previous
situation.
Now you might ask can I use this setup even if chart is a lot less noisy and answer is
yes, in fact in less noisy charts you get much better trading opportunities.
[ Test ]
For example, take a look on this chart here I used 7 day EMA and on that 7 day EMA I took
another 7 day EMA.
Some also prefer to take 5 on 5 EMA on less noisy chart.
In case your charting tool doesn't allow MA on MA better use 7,14 or 5,10 MA.
[ Support Resistance Filter ]
Here's another example but this time I also added a 50 day EMA as filter.
Remember the point of this video is helping you understand why any setup may not be equally
effective on all situations.
By no means it tells you that you should change your chart setup regularly but in case you
arrive at situation where change in setup can provide better, low risk and highly rewarding
trading opportunity you should consider changing it for a while.
[ Crude Trade 1 ]
For example take a look on this chart, this was shared by a fellow trader on Facebook,
he traded short position on crude oil with 30, 50 and 100 SMA.
I also traded same short but with 25, 50 and 100 EMA.
Note that prices are appearing different because I traded in my country and he traded in his
country.
The similarity in chart setups or traded chart concepts is usually not coincidental.
If you have been part of any trading group and you always wonder why some traders seem
to be trading different setups whenever they post their charts then I hope you have an
answer now.
Remember you have to trade what you see on chart and not what you think is on chart.
So lets take a short look on what we covered in this video.
First you need to understand concepts of whatever price theory you are planning to trade nature
of price along with trend lines support and resistance.
Step 2 is taking a look on chart to understand what exactly is going on chart.
Are price consolidating, is there trend continuation or weakening of current underlying trend.
Step 3 is to learn how prices are reacting to trend lines support and resistance.
Step 4 decide which type of confirmation setup you gonna use to enter trade.
In weakening trend you can draw MA to represent current underlying trend, or you can use 30
or 50 day EMA as reference line or you can use 30,50 EMA as standard 2 EMA filter.
During consolidation you can prefer to use standard 30,50 or 25, 50 as 2 EMA filter or
you can prefer to use price volatility setup with 14,50 EMA to detect change in price volatility
in direction of trend.
In case of continuation you have more than required options trade.
In case there is trend inside trend 3 stage EMA filter is the best option.
You can create filter by adding fast follower or in case you don't want to create one, you
can opt for standard 25,50,100 day MA filter.
In case while in continuation prices seem to be responding a lot to support and resistance,
try adding support and resistance EMA along with 50 or 30 day EMA as reference line.
Step 5 add a momentum indicator and trade its concept on setup that you created with
MA to get price confirmation.
Finally remember the best way to trade any trend continuation does not come from indicators
it comes from definition of uptrend and downtrend.
Your best trades gonna come from those signals where you'll be able to match definitions
with signals on indicators.
If your concepts are good then theoretically you can create unlimited number of working
setups and though we always keep talking about indicators.
No trader is trading indicator everyone is trading concepts those indicators are designed
to represent.
Always remember trade concepts and not the indicator.
With that said thanks for watching this video and have a nice day.
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