# Learning to trade



## DaveTrade (26 September 2021)

After seeing a couple of people mention starting out learning to trade in their posts, it got me interested in how people start to learn trading these days and what their experiences were. If anyone is willing to share their experience it could be helpful for others.


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## tugga82 (14 October 2021)

Understanding Stocks by Mike Sincere is a great book that I'd recommend to learn the basics first. I'd then progress to using a paper account or dummy trading account to get a hang of how things work before you use real money on the line.


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## Greynomad99 (14 October 2021)

Personally, I think basic technical anlaysis with a simple trendline trading technicque is the safest way for someone to start understanding the ins and outs of the market without too much risk to their capital. Advanced technical anlaysis on the other hand takes years to master properly but if someone finds T/A suits them then they can grow their skills over time. As for the best way to learn - find a reliable educator who runs a basic trading course. 'Reliable' is the difficult part as most want big money for modest information - ie they are in it for the money. If the educator provides mentoring all the better as someone holding your hand can be very valuable while learning. If you can't find a mentor you will find forums like this one have many members with years of experience who are happy to answer your questions (and question your logic) all day long. Certainly, read whatever you can as I always take something away from most trading books - but keep it simple at the start (and as tugga82 says, paper trade first is a good plan. My tips are 1. Don't act on tips unless your analysis supports them; 2. Stick with the ASX 100 stocks until you feel comfortable to move beyond these generally more secure stocks (and leading on from this point don't invest in low value, specualtive penny dreadfuls or IPO's or stocks listed for less than a couple of years); 3. Never buy in a downtrend; 4 (should really be point 1!) always, always set a stop loss, being a point you will sell (not think about selling) should the trade not go your way.
Good luck with it.

PS: Several years ago I realised my SMSF share trading just wasn't showing the results I wanted so I looked around at educators and found the industry chock a block with failed snake oil salesman. In the end I took what was then the only government approved T/A course (you used to be able to get Fee Help if you did it full time - which I did over about 2 years). Wealth Within was the firm. They are still around and you might want to watch some of their You Tube videos  or read their principal traders books. They were a very expensive course but the content was good (although no course is perfect). Unless you are someone who can cope with the logic and maths that advanced T/A requires you might find yourself spending big dollars for no good reason. WW do run a cheaper basic course these days I believe, but I don't know what it entails.


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## Sean K (14 October 2021)

DaveTrade said:


> After seeing a couple of people mention starting out learning to trade in their posts, it got me interested in how people start to learn trading these days and what their experiences were. If anyone is willing to share their experience it could be helpful for others.




My brother is a stockbroker. Comes in handy to have someone talk you through it first hand. 

Friends of mine have wanted to get into it and I've invited them over to sit next to me for a few hours researching stocks, looking at charts and placing trades. 

So, if you know someone in the game, ask to watch it live. Probably needs to be a good friend.


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## tech/a (14 October 2021)

*Unfortunately* it takes many years in the Technical Analysis field of learning to understand

*("You need to know what it is you dont need to know") (" Before you know what it is you need to know.")*

The vast majority of course information falls into Part 1 with the lure that more $s will open the doors for you to Part 2


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## tugga82 (14 October 2021)

tech/a said:


> *Unfortunately* it takes many years in the Technical Analysis field of learning to understand
> 
> *("You need to know what it is you dont need to know") (" Before you know what it is you need to know.")*
> 
> The vast majority of course information falls into Part 1 with the lure that more $s will open the doors for you to Part 2



Totally agreed. Experience hones the skill over time. You can go long a stock and make money and I can short the exact same stock and make money.  The goal here of TA is to not hit a home run but to be very consistent. One has to preserve the capital and that objective has to be met at all times. On another note, STRAT is a new way of trading that is emerging here in North America and a lot of technical analysts that I know are moving to use it for high probability set ups. Benzinga Pro Blog - a financial website I believe has the person who created this method of trading. Personally, I am also experimenting and learning the Strat. Happy to bounce ideas.


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## tech/a (14 October 2021)

Had a quick look.
Nothing I can see that interests me.
But happy to follow your posts.


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## Sean K (14 October 2021)

tech/a said:


> Had a quick look.
> Nothing I can see that interests me.
> But happy to follow your posts.




Sounds like it's for beginners tech. Maybe you should write your own book / training package...


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## tech/a (14 October 2021)

kennas said:


> Sounds like it's for beginners tech. Maybe you should write your own book / training package...




Couldn't think of anything WORSE.


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## DaveTrade (4 December 2021)

I originally created this thread to hear what experiences people have had on their path of learning to trade but it’s had some posts offering advice to new traders and I like the way that these two things marry together.

I came across a website with a diagram of the path that a lot of people that are learning to trade end up following. I’m posting it here so that people can recognise when they may have fallen into it and then refocus and pull themselves out of the quicksand onto a solid path forward once again.




From one who has had some experience with most of what’s on this diagram I know this is very accurate. My personal advice to new traders is to start by learning about price structure and how price moves, then when you learn about an indicator, understand fully how the indicator is formed so you can relate the function of the indicator back to the price action. Even if you intend to trade completely on fundamentals you still need to understand price structure.


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## DaveTrade (5 December 2021)

There are a lot of separate things to make sense of when learning to trade but sometimes ‘concepts’ are overlooked. What I’m talking about are the ideas that help you understand how to put all the things you have learnt together in a way that has the best chance of a successful outcome.

Let’s talk about a stock picking strategy where stocks are selected to trade using random selection. Like a repeated coin toss you would expect that in the long run you would get about 50% winners and 50% losers, let’s say for the sake of this concept that I’m trying to explain that this was the case. As shown in this diagram you would end up with a mix of small winners and losers and large winners and losers.




The number of small losers will be about the same as the number of small winners and will therefore cancel each other out, now if you can do away with having any large losses in your trading then you will be left with large winners.

I hope that I’m making my point that making money in trading is statistical and your biggest enemy is large losses. If you can stop having large losses then it becomes much easier to make money.

For a new trader starting out with a small account, one large loss can wipe them out. That makes having a large loss the number one thing to protect against. Hope this helps.


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## Sid23 (7 December 2021)

Thanks DaveTrade, thought as a beginner trader I'd provide my journey. 

Initially starting out in share market by receiving free shares when Colonial Mutal demutialised (eventually end up as part of CBA), then over next 20 odd years bought the odd company, usually because they sounded good in some news paper article (ie. OneTel).

Trading phase 1 (which I called gambling) started with lithium excitement 5 years ago, definitely had all the points in Stage 1. Gave trading advice on lithium to work colleagues (thinking I knew lithium would change the world and you couldn't lose), picked up new companies to buy from forums, quickly placed trade orders before lunch finished at work and hoped they wouldn't go down before I had a chance to check price later in the day.

Stage 2 & 3 were kind of mixed together. The breakthrough came during these stages, 3 years ago,  finding and sticking to the one teacher (Nick Radge - The Chartist). 

Biggest problem I found early on was using fundamental & technical from as many sources as I could find and not really understanding any of it, hoping to choose the perfect stock (really just wanted an easy answer, a winning tip from someone), I didn't even understand how to use a stop loss (note to self if I go back in time to 2016, add stop to spec lithium, don't buy falling knife thinking it will rebound soon for no reason, and don't hold for 3-4 years because work got too busy to keep following every 30 minutes. 90% drops or delisted on most of portfolio, ouch...). 

By sticking to the one teacher (transparent, knowledgable, trustworthy) whilst learning, I have moved onto that solid path, I have been able to trade one of their portfolios whilst learning about systematic trading. The site has most of what I need, systematic & discretionary portfolios to follow, chart research & plenty of education. Now learning Amibroker, programmed and running live a simple BBO & working on a couple other systems. Had been working on Nick's WTT strategy thanks to Skate but recently bought WTT turnkey as really wanted to understand Nick's code. 

Big thanks to the many posters on this site for imparting their valuable knowledge, everytime I read threads, I always leave knowing a little bit more than I did prior.


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## DaveTrade (7 December 2021)

@Sid23 thanks for posting your story so far. You've made some mistakes (we all do) and learnt from them and now you are on a safer path forward that sounds like you're getting good value from.

To other beginners reading along, one key point is that sid23 made mistakes just like everyone does but he survived them to continue his journey. Don't put yourself into a position where if it all goes bad you won't have enough capital to continue. The other point I'd like to make is that sid23 found something that he can relate too and is following it and trying to really understand fully what he's doing, I think that this is very important, if you don't fully understand then it's very easy to get confused later in your journey. Finally I'll add that there are many different approaches to the market that all make money, so if a particular approach does not click with you then look for one that does.


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## DaveTrade (12 December 2021)

@Skate said in the 'Dump it here' thread;

*Trading Crypto's*
Now, this is my opinion, don't do it. Those beginning their trading journey should not start off trading cryptocurrencies. I'm amazed at the amount of enthusiasm that cryptocurrencies have. If enough believe crypto has value, I guess that's all it takes. I have trouble wrapping my head around that "nothing" has a tradable value. The (CIO) of Magellan, Hamish Douglass remarked that crypto is not an asset but is an illusion, imaginary & absolutely nothing. Berkshire Hathaway Vice Chairman Charlie Munger called bitcoin a "turd" that's “disgusting & contrary to the interests of civilization.” that's been "invented out of thin air”. (Their descriptions are in line with mine)

*Bitcoin is built on the enthusiasm of others*
Bitcoin has no intrinsic value but the adoption & investment in bitcoin shows no signs of letting up anytime soon. Bitcoin is currently in unchartered territory taking a pause before the next big move. I have no idea if that move will be down or up.

@ducati916 *recently said*
"Bitcoin is a fool's investment of those who trade hoping to offload it on someone dumber than them who will pay more for it".

Skate.

Now I don't fully agree with Mr Skate's views about Crypto but I do agree that those without a lot of experience should not trade it. It's very volatile and unpredictable and in my opinion it needs regulation, so if your a gambler looking to have a flutter, go ahead, but if you are trying to lay down a good foundation of understanding on how to trade, then stay away. Hope this helps.


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## DaveTrade (17 December 2021)

The One Metric More Important than Performance​By Mike ReillyDecember 16, 2021


Traditional investment advice asks that you buy and hold onto investments… often index funds.

Unfortunately, this approach is pretty inefficient in creating actual capital.

The data shows that investors spend the majority of their time simply treading water… 

Or worse, riding through a market decline only waiting to get back to even. 

*The truth is that investors are only creating new capital less than 20% of the time!*

That’s no way to grow your wealth over the long run.

The investment industry is performance-centric…

Almost every investor presentation, every piece of literature, and all investor attention is placed on performance.  

*But I am going to challenge you to ignore performance.*

At least until you look at one other metric first…

*Risk.  *

In my opinion, there’s nothing more important.   

*Understanding risk determines the quality of the journey and whether or not you’ll reach your financial destination.*

We can define risk in several ways.  

The first is through what is known as *maximum drawdown (MDD%)*. MDD% defines how much an investment has declined from peak to trough during a market decline. 

Let’s use the S&P 500 SPDR (SPY) as an example. Between the end of 2007 and 2009,  the SPY lost a little more than 55% of its value.



For every $100,000 you had invested in “the market,” your account balance was taken down to $45,000. 

Many investors would have bailed well before that.    

There is something psychological that happens once losses start to exceed 20-30%. It becomes mentally challenging to stay the course.   

While it’s easy to look at the past performance of the market and convince yourself that you would have stayed the course, remember this: You have the benefit of hindsight. You know how it turned out.  

The next time it happens, you won’t have this benefit. And who is to say that the MDD% won’t be larger the next time?

The fact is, we don’t know. The future is unknown. 

This point becomes even more important the older you get and the closer you are to big financial objectives such as retirement.

It’s critical to understand that losses are asymmetrical. What I mean by that is that it requires a greater return to recover from a loss than the amount of loss itself.

Let me demonstrate:


A 20% loss requires a 25% return to get back to even.
A 30% loss requires a 42.85% return to get back to even.
A 50% loss requires a 100% return to back to even.
Recovery times from deep market corrections have varied historically… the 35% decline that investors saw during the Covid crash in 2020 was recovered in only six months – a record short time compared to past market corrections.

Past market declines have been less kind to investors. 


During the 1929-1932 market crash, the market lost 84% of its value and took 30 years to recover.
Between 1966-1982 the stock market lost 72% of its value and took 29 years to recover.
The 2000-2002 dot.com market crash caused a market loss of 37% that took 13 years to recover.
Between the end of 2007 and 2009, the market lost 55% and it took nearly 6 years to recover.




Again, the point is *we don’t know how things will play out in the future and it’s better to not get behind the eight ball in the first place*.    

So while return metrics *are *important, risk metrics provide detail to the other side of the same coin and can provide valuable information that can help determine your likelihood of long-term investment success.


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## DaveTrade (23 December 2021)

There's an ancient story of a group of blind men who were summoned to a palace where the prince had brought an elephant. 

The prince asked each of the blind men to feel the elephant and to describe what an elephant was.

In the case of the first man, whose hand landed on the trunk, he said "This being is like a thick snake."

For the second man, whose hand reached its ear, it seemed like a kind of fan.

Another man, whose hand was on its leg, said, "The elephant is a pillar – like a tree trunk."

The blind man who placed his hand on its side described the elephant as a wall.

Another who felt its tail described it as a rope.

The last, who felt its tusk, stated the elephant is hard, smooth, and like a spear.

While each of them was right based upon what they had experienced, none of them actually described an elephant. 

In some versions of the story, they come to suspect that the other person is dishonest in their description and they come to blows. 

The moral of the parable is that humans have a tendency to project their partial experiences as the whole truth, ignoring other people's partial experiences. 

One should consider that one may be partially right and may have only partial information.

The elephant was the reality but each of the blind men used their own limited reality to define what an elephant was.

*What does this have to do with investing? Plenty.*

In my three decades of professional investing, I have learned that the financial industry is very good at "partial truths." 

There are many things that are used to describe attributes to successful investing, but each of those things may be only partially true, and thus, as in the example of the blind men, provide only a limited view.

Unfortunately for investors, this can be very costly.


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## DaveTrade (26 December 2021)

I’m going to talk about some basic things for people starting to learn about trading, it will be my way of thinking and therefore may resonate with some but not others. I’m just dipping a toe into the water here because more often than not people want you to tell them ‘what they want to know’ and not listen to ‘what you want to tell them’. That’s OK, everyone’s different and people learn in different ways.

You can make money in the market by selling something and then buying it back later but here I’ll be talking about buying and then selling later for a profit. In order to make money this way the market has to move, it can move up or it can move down but it must move away from your purchase price so you can sell it for a higher price. There may be fundamental reasons why you think a move might take place but I’m going to talk about reading what the market is doing using technical analysis. Even fundamental traders use some technical analysis so it’s a good place to start learning.

I will assume that the reader is familiar with bar charts and candlestick charts, a least what they look like. One of the most important and useful chart indicators is the moving average. A moving average shows the movement of the market over a period of time and for this reason it is referred to as a trend indicator, but the moving average also acts as support and resistance for a market. I will explain more about this in a later post. Different period moving averages can be plotted on a chart at the same time showing the trend of the market over different time periods. In order for you to make a profit on your trade you must have the market move in your direction for the time period of your trade, in other words, the market needs to trend in the direction of your trade at least for the time period of your trade. When you enter a trade it is always good to know what the trend is for the time period of your trade and the trend for the next higher time period. If you are starting to think that this is because the higher time period trend would be supportive of the lower time period then, it depends. One of the most important things to know about trading is that there no black or white, everything is a shade of grey. That is the main reason why experienced traders on this forum have many disagreements, most of the time they are both right and both wrong.

Back to ‘trend’, the higher time frame trend can change the direction of the lower time frame trend or the lower time frame trend can be the one to change the direction of the higher time frame trend. Yes it’s very grey, but our job is look for more evidence so we can view each trend as being more light grey or more dark grey.

That’s it for now, I’m trying here to get you to think about the relevance of everything that you learn and not just say to yourself ‘ok I know what that is, what next’. There are many different ways to trade and I believe to be successful a trader needs to reach a point where he or she knows what they want to do and chooses the indicators and/or methods to use to make that happen.

If I get any positive feedback on my long winded descriptions I’ll keep going but I know that some won’t find this helpful.


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## Greynomad99 (26 December 2021)

For what it is worth I don't think indicators are generally of much value and I don't use them (at all) - but then I've got a pretty good understanding of what constitutes a technical trend and anyone without a reasonable level of charting will probably find using some indicators will compensate. That said, indicators come with their own issues because users need to choose the indicator parameters to apply.

As an aside, one of the biggest mistakes many (including myself) often make is reading too much into short term (daily) charts. What might look like a great pattern on a daily chart can rapidly turn to custard when you pull back to daily and monthly (for the Big Picture).


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## tech/a (26 December 2021)

I support all who put up a view it takes a lot to get up and put it out there.
But when arrogance shows its face the ignore button is a great tool.

*Dave*

You've offered up
Basic T/A but as you know Basic will generally return basic results.

* Grey Nomad*

Agree re indicators. Short-term trading technically has a life span as does longer-term analysis. 
Recognizing those timelines and trading with them in mind will help you see the picture within your analysis.
It's a long road and we all find our niche. I've written enough up here for a life time so keep it up, Dave.


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## DaveTrade (28 December 2021)

Reading back my last post even I think that it’s a bit unclear what I’m trying to say. No wonder I’ve had no responses from people learning to trade. Being a good teacher is a skill that unfortunately we don’t all have, I’m good at teaching myself but teaching others is a whole different ballgame.

I’ll try to define my main message in a succinct manner. My message is to tattoo into your brain that you are learning HOW and WHY the markets move. So everything you learn about, each pattern, each indicator, each element of market structure, each government policy, each intention from big market players, each world event, absolutely everything you learn about that relates to the markets, that you dig deeply to understand why this may affect a market, in what circumstances, and how this possible effect can be seen on a chart. It’s your understanding that makes the money not the things you learn about.


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## divs4ever (28 December 2021)

SOMETIMES  the learners  are shy , unsure and uncertain , in my experience on other forums  less the 10% of novices  ( in general ) are brave enough to ask questions  , and about half of them wait until they are in DEEP trouble  , 

 what most learners do not understand  is ,  the questions they ask help ( nearly ) everybody  in some way 

 cheers 

 ( just because i chose not to trade , doesn't mean i am not interested in learning the basics )


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## DaveTrade (9 January 2022)

*Trading With The MACD*

The MACD ( moving average convergence divergence ) indicator by Gerald Appel is a trend-following momentum indicator that uses 2 exponential moving averages to:

Give buy and sell signals

Show bullish divergence/bearish divergence

Helps determine trend direction

Some traders will also include the histogram, that will cross the zero line when the EMAs cross in either direction.




In this article, you are going to learn:

How to determine the momentum trend using the 2 line cross

How to read momentum using the fast line

The benefits of multiple time frame analysis

Always remember that a trading indicator is a derivative of price and will have some lag to current price action.

*MACD Settings*

The MACD default setting are: 12, 26, 9 which represents the values for:

The lookback periods for the fast line (12)

The lookback period for the slow line (26)

Signal EMA (9)

As with any trading indicator, I always start with the input parameters that were set out by the developer and later determine if I will change the values.



*MACD Calculation*

This leads us to how the MACD calculates its output:

The 12 period EMA calculates a number for this period

The 26 period EMA calculates a number for this period

Subtraction of the 26 EMA result from the 12 EMA result

A 9 period EMA is calculated from 26 EMA – 12 EMA

*How does the indicator work?*

The MACD indicator is generated by subtracting two exponential moving averages (EMAs) to create the main line (MACD line), which is then used to calculate another EMA that represents the signal line.



*What is the signal line?*

Signal line is a 9 EMA of MACD line. When the MACD line and signal line cross, it’s usually considered a trend reversal signals, especially when they happen away from the zero line.



*MACD Settings For Intraday Trading*

As with any indicator, you can change the input values depending on your needs.

Intraday traders may want a faster indicator to cut down on lag time due to their short term trading style. The search for the best settings for any indicator is a trap many of us have fallen into at least once in our trading.

You must test any changes you make to ensure it actually adds to your trading plan. Often times, a faster trading indicator will give many false signals so you must be aware of the trade-off.

That said, one very popular combination of the MACD is 3, 10, 16 which is a variation of the 3/10 oscillator.

I highly suggest that before you start crunching numbers and looking for short term macd settings for faster signals, you know exactly how the MACD works and determine if it will benefit your own trading.



*What Does The MACD Measure?*

The MACD line is faster than the signal line and is the result of the difference between the fast and slow EMAs.

*Momentum Oscillator*

When you see a signal line crossover of the faster MACD line over the signal line, we see a change in the direction of momentum.


There are traders that will use the shift in momentum as the direction they want to trade in.

*Trend Direction*

The signal line crossing the zero line is often used for trend direction . Traders can use the momentum aspect as a sign of a pending trend change. The zero line cross can be a confirmation of trend.

Bearish crossover – Fast MACD line crosses from above to below the slow line

Bullish crossover – Fast line crosses from below to above the slow line


Knowing that we measure trend and momentum, you may already see how we can use the MACD to actually trade with when we use both the MACD line and the signal line to alert us to a possible change in the market we are trading.

The 2 line cross can be a very powerful indicator of trading potential in the market and is my preferred approach.

*Zero Line Crossover*

MACD crossing above zero is considered bullish, while crossing below zero is bearish. This is also expanded to include bullish and bearish momentum when the lines cross regardless of which side of the zero line.

*MACD Momentum Trading Strategy*

We have set up the indicator on our chart and are going to use the standard settings as previously discussed and learn how to read the MACD.

For this strategy, we are using the momentum feature of the MACD plus breaks of swing highs/low that also take place when an imbalance of buyers/sellers are present.


When we want to determine trend direction via the MACD for this strategy, we look where the MACD line is *in relation to the signal line*.

*Strategy Details (Uptrend Example)*

Mark off current swing high and low points

Price breaks swing high confirms uptrend is still in place

EMA cross on the MACD shows momentum to the upside

Use buy stop orders at high of candle that broke swing high/turned the indicator bullish via the crossing

*Can we improve on this?*

We can use multiple time frame trading by trading in the direction of the higher time frame momentum.



This is a one hour chart and the daily chart has bearish momentum. We would only trade breakdowns through support with confirmation via MACD.

If price gaps through support, we would not take the trade.

The power of this approach is we have the bearish daily chart momentum at our backs when going short on the smaller time frame.



*MACD Combinations*

My favorite combination of trading indicators is the MACD + Keltner channels and price action.

Keltner channels would show a market that is extended and prime for a retrace

We look for a piercing of the upper or lower Keltner channel to show extension

MACD can show loss of momentum or divergences

Keltner is set to 20 periods with a 2.25 multiplier




Price is making lower lows while piercing the lower Keltner channel. This is showing an extended market (oversold conditions) and while traders love to counter trend trade, we need another event to happen.



*What Is a Divergence?

Divergences form when the MACD heads in one direction while price movement is in the other direction*

In the black circle, we have price break lower, pierce the channel, and then we get a cross up. This cross shows momentum to the upside while price is making a lower low and is known as positive divergence.

We want to trade the reversal as this is our buy trading signal.

Entry can be a buy stop over the red candle, green candle, or a break of the small trading range.

Targets will be the middle channel line and the upper Keltner band. Trend reversals can often start from this condition so having a trading plan that includes some type of trailing stop method may be worthwhile.

*Trading With The MACD – Key Takeaways*

As will all technical indicators, you want to test as part of an overall trading plan that includes:

Entry and exit criteria

Risk management

Markets and timeframes you will trade

*What default values are used with the MACD?*

The values of 12, 26 and 9 are the typical settings used with the MACD. Other values can be substituted depending on your trading style and goals.

You may also want to experiment, as with any moving averages, consolidation plays when the 2 lines of the MACD converge. When this happens, price is usually in a range setting up a possible break out trade.

*Is the MACD good for day trading?*

Any indicator can be used for intraday trading and traders will often look to “tweak” default settings. Indicators will react more to faster price changes and can give more false signals.

*What is a good indicator to use with MACD?*

Using a moving average can be useful when looking for pullbacks after MACD makes a new momentum high or low. Also consider using price structure zones of support and resistance as well as Keltner Channels.

*Is the MACD reliable?*

I have found the MACD to be reliable when looking at negative and positive divergence plays. Price action always dictates if I take a trade and not the indicator itself.


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## tech/a (9 January 2022)

To be honest anything that has past history as it’s basis for calculation is at best curiosity value.

its application in real time is far more challenging than showing how 200 points of data is charted in hindsite.

Charting to me is a book with chapters but chapters that can be read and ANTICIPATED going forward. To the degree that we can confidently use the book of each chart as a profitable trading tool 

you’ve gone to a lot of effort and thank you for taking the time 
For newbies practical application in real-time both winning and losing examples I think could be of great help

eg how to apply MACD and how to handle risk and reward 

just an idea .


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## divs4ever (9 January 2022)

not only traders use this  , investors looking to place extra cash  , or reduce the holding  can benefit as well , just not as  frequently as the traders might


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## DaveTrade (18 February 2022)

How to Earn More and Risk Less​By Tim FortierFebruary 17, 2022

There’s an important concept that when correctly implemented can almost assure your investing success.



Get this wrong – and most investors do – and you could be doomed to financial ruin.  

Asymmetric investing is the concept of investing where the probability or outcome of a trade has more profit than loss (or the risk taken to achieve the profit).   

Said another way, the upside profit potential is greater than the downside loss possibility.

Let me first demonstrate what is *NOT* an example…

Buying and holding the S&P 500.   

Investing in the S&P 500 has had a historic annualized return of 10.5% since 1957.   

In the same period, the worst drawdown has been -55% which occurred between November 2007 and March 2009.  

The potential of losing 5X–8X your potential return is NOT positive asymmetry, yet investors make this trade all the time when buying and holding index and mutual funds in their 401(k).     

Losses themselves are asymmetric. 

A 20% loss requires a 25% gain to get back to even.  
A 50% loss requires a 100% gain to get back to even.  
Investors who suffer large losses miss out on the magic of compound returns. 

Compounding works only if the return stream is consistent and losses are kept small. You can’t spend your losses.    

Asymmetric is not symmetry. Asymmetric is imbalanced: more of one, less of the other.

As investors, we want more gains. More profits. We want less loss. A lot less loss.   

And the problem is that most any investment, unmanaged, is negatively asymmetric.

This leads us to…

*Asymmetric Risk Management*

Put simply, asymmetric risk management is the process of managing risk with the objective of creating a positive asymmetric risk/reward.

Remember I mentioned the worst drawdown in modern history for the S&P 500 occurred in the period between the end of 2007 and 2009? 

For many investors, this is a painful memory. Let’s see if we can produce a better outcome through risk management.  

In the whitepaper _A Quantitative Approach to Tactical Asset Allocation_ by Meb Faber, the author presents a simple approach of using the 10-month moving average to help improve the performance of a basket of broad asset classes. 

The idea is simple enough – own the investment any month in which the closing price of the previous month is greater than the moving average price. If the price is less than the moving average, then the investment is sold and the money is held as cash. 

The reason this works is that it puts a line in the sand. It creates a level where downside risk is contained.

*Every large loss began with a small loss. The moving average defines where to cut bait and move on.   *

For our demonstration, let’s apply the 8-month moving average (I find it works better). Our rule is that we will buy and hold the S&P 500 SPDR (SPY) as long as its price remains above the 8-month simple moving average.    

Let’s see what happens.  




By applying a simple risk management rule, our losing investment into the SPY has been turned into an investment with positive asymmetry.

The return is positive vs. a negative return for buying and holding SPY. More importantly, the maximum drawdown is only -9.9% vs. -55.2%.




That is an 82% reduction in risk with a higher return!

Yes, you can earn more and risk less when you invest using positive asymmetry.

And this all happened because of the use of a simple rule that sold SPY on November 30, 2007, and held cash until May 29, 2009, where the strategy went long SPY for the duration of our testing period.   

_“The essence of investment management is the management of risks, not the management of returns.” –_ _Legendary investor, Benjamin Graham _

There are many tools that can be used to create positive asymmetry. We’ll discuss them further in future articles.

*For now, remember that long-term, lasting success as an investor is not about having the highest returns. Rather, it’s about investing where risks are managed so that the opportunity for gain exceeds the potential for loss.  *


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## stanwell (18 February 2022)

For beginning traders, (not investors,) it's probably best to learn how to read charts. This is very much an art than science.

Indicators are only meant to assist chart reading, not replacement. They have limitations and can only be used correctly within the framework of chart structure.

In old days, people drew charts by hand. Doing it bar by bar, they got the feel about the price movement, ie. the strength of the move and sentiment of the market. We don't hand draw charts nowadays because of the computer. It's tedious and time consuming too. 

What I've found that works for me is to sketch the charts with a screen marker. This gives me the feel about the price moment too but more efficient than drawing charts by hand.

I use Zen trading method which centers around trading ranges. I depict chart accordingly to perceive likely opportunities or traps.

FMG for example.


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## Modest (18 February 2022)

Stanwell nice chart I agree with you. People need to learn how to read a chart before trying to learn technical analysis.


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## DaveTrade (18 February 2022)

Hi stanwell,

I can see from reading your post that you have a lot to learn so you have a long way to go in your journey. I'm sorry that you didn't get more out of my previous post but I've come to realize that learners only get the right messages when they have reached a point when they are ready to receive them. I was the same when starting out, I've had a number of times when the penny dropped and I finally understood something that I was told two years ago, back then I thought I knew what they told me and it was something that I kind of already knew.
I don't think that I have the teaching skills to get through to people in those early stages but I'll just put some things out there so that people that read it at the right point in their personal journey will get something out of it. Thanks for putting yourself out there and posting, maybe your example will encourage others.


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## stanwell (18 February 2022)

DaveTrade said:


> Hi stanwell,
> 
> I can see from reading your post that you have a lot to learn so you have a long way to go in your journey. I'm sorry that you didn't get more out of my previous post but I've come to realize that learners only get the right messages when they have reached a point when they are ready to receive them. I was the same when starting out, I've had a number of times when the penny dropped and I finally understood something that I was told two years ago, back then I thought I knew what they told me and it was something that I kind of already knew.
> I don't think that I have the teaching skills to get through to people in those early stages but I'll just put some things out there so that people that read it at the right point in their personal journey will get something out of it. Thanks for putting yourself out there and posting, maybe your example will encourage others.



I do indeed have a lot to learn. Thanks for pointing out.

It's a good thread you started, hopefully more people can get something out of it.


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## DaveTrade (21 February 2022)

I'm going to try something on this thread, questions and answers. Anyone that has a question can post here and anyone on the forum can answer it. It's OK if multiple people answer, the asker of the question and everyone else can see the differences in the answers between people with different trading methods. I think it would best to restrict the questions at first to the more straightforward type of question, a complex question may too hard to answer with text.


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## tech/a (21 February 2022)

*Questions*

Why are there mountains of examples which are shown in hindsight and virtually NOTHING shown in real-time?

Why are most of what I see just cut and paste commonly accepted principles (No edge). 

Why don't more people get involved in the very few Real-time threads put up by Pete 2
You'll learn more off of Pete's threads than 10 years trolling the net.


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## DaveTrade (21 February 2022)

tech/a said:


> *Questions*
> 
> Why are there mountains of examples which are shown in hindsight and virtually NOTHING shown in real-time?
> 
> ...



It sounds like you may think that this thread is not worthwhile and you may be right. I haven't had much positive feedback about it, the question & answer thing is my latest attempt (probably my last) to see if I can turn it around.


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## tech/a (21 February 2022)

*Dave*

My questions are genuine and not an attempt to de rail or debunk.

Technical Analysis gets a bum wrap often likened to Voodoo and I must admit most of what Ive seen over 30 years tends to fall neatly in that category.

I've seen long bouts (Years ) of  Gann, Elliot, VSA, Multiple Moving Averages , Staedlmayer, Point and figure. There are points of interest in all----- but in the end, they tend to die a natural death as there are volumes on theory and Nothing of PRACTICAL Application. (Putting it to work in a consistently profitable trading plan.)

*A very few* of us develop our own use of a myriad of technical analysis rules and theories into our own  APPLICATION.

Truth is the use of standard technical analysis used as a stand-alone trading method will see most people fail and a very few outperform the Index. If it was that easy the buildings full of Quants would be consistently returning over 10% for our Managed Funds.

The beauty in T/A to me is it CAN tell me what's happening now and why
and it can have me anticipating what is likely to be happening very soon. 

*Not only that* it can scream at me that I'm WRONG in real-time and I can do something about it in real-time.

*Unfortunately,* you need to know what you DONT need to know to
Know what it is that you do need to know!


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## DaveTrade (21 February 2022)

tech/a said:


> *Unfortunately,* you need to know what you DONT need to know to
> Know what it is that you do need to know!



Tech I can see what you are trying to say, it's the reason why learning to trade successfully is so hard to do and yes many fail. I've tried to express this before in this thread when I said in an earlier post, "_It’s your understanding that makes the money not the things you learn about._"

And the point you raised about watching someone trade in real-time, following the decisions that they make as they go through the trading process, yes that is a golden opportunity for someone wanting to learn that style of trading. There are many very different styles of trading, even long term investing is one style of trading the markets. I had the idea that this thread could be a place to help people find their style, to discover the direction that they want to focus on.

Like finding your way in life, some people know early what they want to do and just start doing it, others may take a very long time before they find something that feels right to them and therefore allows success to come easier for them.

I'm not trying to make this thread the one place where learners should go, no just a place that may fill in some gaps in understanding or flick the switch that turns on the light coming from another thread on this forum.


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## tech/a (21 February 2022)

Dave 

I see what you have in mind.
I'll throw in the odd question if it goes quiet.

Are you covering Fundamentals as well?

If so 
Fundamentally how do you determine when an investment is no longer a sound investment proposition?
How do you handle the lag between reporting and actual stock performance? The performance both positive 
and negative tends to lag price action leading sometimes too large gaps up and down!


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## DaveTrade (21 February 2022)

tech/a said:


> Are you covering Fundamentals as well?



Yes any trading question.



tech/a said:


> Fundamentally how do you determine when an investment is no longer a sound investment proposition?
> How do you handle the lag between reporting and actual stock performance? The performance both positive
> and negative tends to lag price action leading sometimes too large gaps up and down!



Someone else will have to answer this one, I only use fundamentals as a part of the environment I'm trading in. A current example for me would be 'rising interest rates'.


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## tech/a (21 February 2022)

Dave 

Rising interest rates can you outline how this affects positions your in and or positions you may be in in the future .


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## DaveTrade (21 February 2022)

tech/a said:


> Dave
> 
> Rising interest rates can you outline how this affects positions your in and or positions you may be in in the future .



Tech I find it hard to believe that someone with your experience does not know this, I get the feeling that you may be asking me a question that you already know the answer too and I’m wondering why you are doing this.

I don’t want the mood of this thread to be one where people may feel put off from posting fearing that they will be targeted with rapid fire questions like from an automatic weapon. I would rather have a friendly environment of open discussion.

 If you genuinely do not know how interest rates influence groupings of stocks then please let me know and I will explain.


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## tech/a (22 February 2022)

Not for me Dave 
For those who don’t ask the obvious question
A conversation point not a confrontational 
Jibe. Some would see it as a silly question 
So I’m asking you your view Or take


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## DaveTrade (19 March 2022)

I haven't had much success with this thread but I did start to talk about moving averages previously so I copied this from the NetPicks website;   (there also has been some discussion on MAs from Skate on his 'Dump it here' thread)

*Simple Or Exponential Moving Average?*

With so many technical indicators to choose from, there is always the question of the best ones to use. In fact, the question of using a Simple Moving Average Or Exponential Moving Average, is a common one. It gets worse when asking about best settings because traders are always looking for an edge.

While both EMA and SMA are useful in showing the average of price data over a fixed period, we are going to answer the questions:

*Which moving average is better? What is the best setting for easy gains? Does it even make a difference?

Simple Vs Exponential Moving Averages – Overview*

All things being equal, the main difference between the SMA and EMA is the calculation which influences how they react to price.





The simple moving average calculation is a standard average of N periods. Each price plot is given the same weight in the calculation and you get a true average price for whatever lookback period you have chosen. The SMA tends to be slower in reacting to price movements including sudden spikes in price. The SMA tracks further away from the price bars in a trending market compared to the EMA.

The exponential moving average formula contains a weighting factor for the most recent price plots. This weighting makes the EMA quicker to respond to sudden price spikes. Because of the faster response to changes in recent price, the EMA will track closer to price. Keep in mind that when using an indicator for trading decisions, the faster it reacts to current prices, the more chance of getting a false signal occurs.

*Consolidations*

One important area to note is on the left of the chart. As moving averages are averages of price using the closing price, when markets begin to consolidate and closing prices are closer to each other, price will whip around the moving average. For breakout traders, a quick scan using a moving average can give you a list of instruments in a consolidation.

Another area is on the right with the pointer. The gap down is a good example of how the EMA reacted faster than the SMA to price movement. While the SMA kept climbing, the EMA reversed direction to the downside and as mentioned, this is due to the most recent data having more meaning in the calculation than the previous data.

For the most part and during a steady move, there is very little difference between the two moving averages at the same lookback period.

*Do Larger Time Periods Make A Difference?*

The last example used one of the more popular settings of 20. If we go out to a common trend following period of the 200-Day SMA and EMA, is there a difference?




Regardless of how you use moving averages for your trading, would you do anything differently with either of these averages? Probably not. The green arrow does show where the EMA reacted to the large move however it didn’t add any useful information to any strategy that I can think of.

*Trading Approaches*

There are many ways a trader will use a moving average in their trading strategies and personally, price action plays a bigger part in my own trading. The average is just to help frame the market and no trading decision is made based on the average itself.

To help determine whether you should use an EMA or SMA, let’s look at determining the trend with a price cross and trading a pullback to around the average.




If we consider the trend changes with price crossing an average, it makes little if any difference to bias. In fact, in the middle of the chart, a double top formation and price direction breakdown gives a trend change faster than either average.

With pullbacks to an area around the averages, the only issue is the black circle where it doesn’t touch either average. For most traders, close is close enough and price action, where price ranged and broke down, is enough for a short trade.

*Which Moving Average To Use*

The difference between the EMA and SMA is minimal and should not make much of a difference in a robust trading strategy. In regards to best settings, just like the type, there is no best setting.

Short term traders who enjoy faster indicator movements as part of their strategy, may opt for a 10-day EMA or SMA. A trader may be looking for a short term consolidation and will use price hugging the 10 period SMA as a trigger to start looking for a breakout trade.

Longer-term traders who don’t care for more responsive indicators may choose a 50-200 period SMA for a trend indicator. As we saw in comparing the 200 EMA and SMA, being more responsive with the EMA made little difference.

You could even use something like the 100 SMA for longer term trend direction and a 10 EMA for corrections against the main trend.




Using a recent chart of Bitcoin, the 100 SMA is showing a downtrend trend as price is trading below it.

Price rallies above the faster 10 EMA and upon a close below the average, a trader could sell. This is not a trading strategy you should start trading without some testing. You need to determine how much price action is needed on the opposite side of the EMA. Is a close below enough for a trade entry or do you need the whole candle?

*Bottom Line*

There is no best moving average or best period setting. Want quicker action for some reason? Use a shorter period moving average but be aware of false signals.

Do you just prefer to see price smoothed on your chart for a birds eye view of the market? Use a 20,50,200 SMA.

In the end, a robust trading strategy should not depend on either the type of moving average or slight variations in period settings. We are simply looking at an average of closing prices, generally, over a period of time. That period of time can be a short period of 20 or long periods of 100+.

It is what you do with that information that matters.


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## Telamelo (19 March 2022)

How can I scan for/find asx stocks where 50dma has crossed above 100dma along with having made a "60 day high price" ? 

Am keen to know if there is any software that can scan those specific parameters/filters across the ASX please ?


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## DaveTrade (19 March 2022)

Telamelo said:


> How can I scan for/find asx stocks where 50dma has crossed above 100dma along with having made a "60 day high price" ?
> 
> Am keen to know if there is any software that can scan those specific parameters/filters across the ASX please ?



This is very easy to code in my software and I would do it for you and post it if I had asx data, but I only have NYSE data. There would be a number of software platforms out there that would let you create custom filters and scans, hopefully someone that knows of a free or inexpensive platform that can do the job will read your post. The software that I use is called 'Trade Navigator'.


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## Austwide (19 March 2022)

@Telamelo I think most charting software easily does that

Amibroker would require programming or code downloaded.

Incredible chart I believe does without coding, just pick the boxes.
30 day free trial, then I think $10 a month for data and software use. You can use it for free but can't screen stocks without


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## Telamelo (19 March 2022)

Austwide said:


> @Telamelo I think most charting software easily does that
> 
> Amibroker would require programming or code downloaded.
> 
> ...



A big thanks to both of you @DaveTrade & @Austwide for your feedback/suggestions as I'll check it out.

Also advised/told Metastock can do this as well but it's a bit too pricey for my liking. 

Cheers tela


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## debtfree (20 March 2022)

Telamelo said:


> How can I scan for/find asx stocks where 50dma has crossed above 100dma along with having made a "60 day high price" ?
> 
> Am keen to know if there is any software that can scan those specific parameters/filters across the ASX please ?





Austwide said:


> @Telamelo I think most charting software easily does that
> 
> Amibroker would require programming or code downloaded.
> 
> ...




The Stock Screen Section of Incredible Charts it has its limitations.
As for moving average scans you are limited to Exponential MAs, that’s it, but you can scan for 50d > 100d EMA.
For the 60 day high Price – the closest choice is a 55 day New High or it has a 3 month (63 day) New High
** Scanned for the 50 day > 100 day EMA and the 55 day New High price within the last 1 trading day for the XAO market and it returned *99 stocks to view.*
** Scanned for the 50 day > 100 day EMA and the 3 month (63 day) 55 day New High price within the last 1 trading day for the XAO market and it returned *97 stocks to view.*
So nearly the same, not surprising as the scan is fairly close.


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