When a Market is Trending, Use a Continuation Signal. When a Market is Ranging, Use a reversal signal .All markets tend to go through periods of either strong trend movements or periods where they move up and down within a narrow trading range. Generally it has been observed that the ADX (average directional index) indicator can be used to determine whether a market is in either phase. Of course ranging or trending activity can be visually confirmed on the charts but this ADX indicator can also confirm this more accurately.

Trending vs ranging markets: Continuation signals.

Continuation signals are used and sought on the charts when the underlying market is in strong trending mode with ADX above 20, and ideally rising slowly. The first reversal signal makes the case that a new leg is about to start, as part of the existing longer rally or decline. So this new move will be in the same direction as the previous move, there’s many types of continuation signals, even a simple Head & Shoulders can be a seen as continuation signal in a strong uptrend and not as a warning that a top has been made.

Reversal signals:

Reversal signals are used when the underlying market is in ranging mode and its ADX reading is below 20 or about to fall below 20. In this case the market in question has a tendency to trade up and down within a narrow range. We know that as soon as the market reaches the top or bottom boundary of this range is due for a reversal and about to make a small move until it reaches the opposite boundary. Typical indicators for identifying turns in such ranging market periods are all types of overbought/oversold indicators such RSI, Stochastics and many others.

In practice:

Sometimes it can be extremely difficult to figure out what phase a market is really in.

Markets don’t fully respect trading ranges while being in a ranging phase and equally don’t always start a direct trend in the expected direction without first making an intimidating move in the unexpected direction. Traders are strongly encouraged to seek further advice and if possible, particularly in the case of new traders, look for a mentored, live trading service to learn how these simple indications are read in practice, how professional trading educators use multiple timeframes and additional confirming indicators to tell the fake trend breakout from the real thing or how to tell a real ranging market from one that’s about to make a massive move – Yes you guessed it right, major tops and bottoms are often identified with ranging trading activity and it can be dangerous to make oversimplified decisions.

Paul Murphy is a passionate and successful trader.  Always in search of the best trading systems, and researching ways to help you be the best trader you can possibly be.  Discover how to improve your trading performance with articles and interviews at his blog: www dot trading powerhouse dot com

The key is stop placement and profit target, so as to lose very little when you are wrong and win the full profit target margin when you are right, stop placement is very tricky and often seems counter intuitive. There are traders who use variable stop placement ideas; they look at the day’s unique trading conditions or important support / resistance levels and place stops accordingly.

You can be profitable even with a 40% win ratio!

So if you can win with just a 40% win ratio and be profitable, imagine what a 70% can do, well 70% is possible but overall profitability will still be much more on some trades and very limited on other trades, in fact 90% of the week’s profits may come from a single big margin trade. Still it’s a good idea to try and have an overall 70% success rate as this increases by far the probability that you will be able to pick up these rare, high profit trades as and when their setup occurs.

70% is achieved by many winning traders.

Most successful, winning traders make extremely high, weekly and monthly profits by managing to maintain this percentage of winners, but also and more importantly they manage to have short losing streaks of no more than 2 trades, sometimes 3.They don’t fight markets if they are wrong, they don’t increase trading size either, instead they prepare patiently for their next winning streak which will bring profitability and may be as long as 7 trades, yes 7 winning trades in a row!

70% win ratio is safer as well.

A 40% win ratio system can still make money but is more vulnerable to fast market changing conditions and possible nasty market surprises that may overpower the trading system for as long as two months. This is where the 70% win ratio trading system is less likely to fail, why? Simply because the 70% win ratio trading system examines markets more closely and in more detail, which is why it finds more profitable setups after all.

All in all, both from a profitability, safety and consistency perspective the 70% win ratio is the best and still is possible to reach,  the maximum winning ratio good traders have is also around this figure, so a consistent 70% win ratio you may say it suggests that you have made it to the top!

A consistent 70% win ratio can turn even a small trading account to a huge account, in fact, if one uses the right money management technique to increase their trading size properly and slowly as their account grows in value, it’s possible to turn $20K into a 1$ Million in just over a year. And there are people who have done it in day trading.

Paul Murphy is a passionate and successful trader.  Always in search of the best trading systems, and researching ways to help you be the best trader you can possibly be.  Discover how to improve your trading performance with articles and interviews at his blog: www dot trading powerhouse dot com

Keep it simple!

When you first learn to trade you will most likely be mislead by the alleged use of the massive information that is out there, a successful trading career does not require you to use level II stock charting quotes, breaking news on stocks, technical analysis, fundamental analysis, volume and options data etc,  all at the same time. Attempting to use just 2 of these techniques combined can be confusing enough, let alone all of them.

Complex systems make you lose focus and result in conflicting opinions about markets.

This is more evident in today’s markets where information is made available to 1000’s of traders at light speed, today’s intraday market moves, particularly those on report release days are a result of the emotions of these 1000’s of people collectively and not reasoned judgement relating to economics or anything.  Also you can use technical analysis tools alone, on multiple timeframes and still end up having conflicting signals, especially to inexperienced new traders even the simplest of technical signals and chart formations such as a Head & Shoulders formation can be too confusing, why?  Simply because these technical analysis techniques are more complex than they look, a minor overlooked detail makes all the difference and can turn a selling signal into a buying signal.

So is technical analysis ambiguous? At a glance it appears to be so, but what good traders do is this, they look at charts, at multiple time frames, if weekly charts confirm formations seen on the daily etc.  If they still can’t spot any reliable indications on market direction they turn back to longer term fundamentals, but their approach is simple at every level.

Trading on news and report releases in hope of catching fast, volatile intraday market moves can sabotage your trading system.

It’s impossible to develop a simple trading system based on the news and economic news releases, certainly not without having a mentor teaching you right from wrong.

Trying to add the ‘news’ component into your early trading system will simply sabotage your trading altogether!  Here’s why:  Most new traders do some lame mathematical calculations on compounded theoretical gains based on the chance of getting on the right side of the market being 50% when trading on news and report release days – Big misconception! According to real life traders like George Angel and Afshin Taghechian the truth is that the real chance you have of getting on the right side is a tiny 12.5%

Yes that’s right; the seemingly 50-50 probability game is an actual losing game because you have to figure out these variables:

A) Is the news about to be released, really news or has it been already priced in the markets?   One more 50-50 binary event variable.

B) Will the news to be released be better or worse than analysts expect?

That’s one more 50-50 binary event variable.

So the supposed 50% chance trading idea gets divided by 2, twice more, giving 0.125 or 12.5% a guaranteed way to lose money in the long run.

The best approach?

The best thing you can do is find a mentor, a veteran trader with a system that starts simple and ideally uses technical analysis, so you won’t have to worry about breaking news, Federal Reserve interest rate policy etc.  Technical analysis based trading systems are easy to understand, emotionless and this takes a huge complex factor out of the equation.

Paul Murphy is a passionate and successful trader.  Always in search of the best trading systems, and researching ways to help you be the best trader you can possibly be.  Discover how to improve your trading performance with articles and interviews at his blog: www dot trading powerhouse dot com