"Meticulous Planning Will enable everything a man does to appear spontaneous."

Mark Caine

It's Your Money. Shouldn't It Be Your Plan?

Trading the Rule Based Breakout

Let’s talk about breakouts.  What makes a great one, what makes a poor one, and what exactly is a breakout?  Even if we learn what to do, if we don’t define some actual rules that we can apply every time, we’re just running around with our heads cut off.

Rules Based Breakouts are high probability and for good reason.  This training is A+ meaning what we’re giving away here for free most “pros” charge $495 for the privilege of this one video.  In other words, get ready to take notes, study hard, and learn how to apply some real world know how to your trading plan.

If you thought this was good, it's time to join the CTP Group. You ain't seen nothin yet.

Breaking the Trading Plan

The purpose a trading plan is not to shackle you down, force you to a rigid set of losing rules, or any other excuse traders make as to why they don’t have one.  The main purpose of a trading plan is to allow yourself all the flexibility needed in a time of fear by controlling it during a time of peace.  

Put another way, by designing your plan when the market is not open, or your positions aren’t effecting you, then you will not allow fear to take over when the market is open and those positions really are effecting you.  The most successful traders all have trading plans.  Whether completely written out or simply an internal process, success is not an accident for them.  Remember what Mark Caine said, “Meticulous Planning will enable everything a man does to appear spontaneous”.

Meticulous Planning Will Enable Everything A Man Does To Appear Spontaneous.

Let's Look at Today's Results & See This In Action

$294.25 made in under 12 minutes.  That’s more than the average american makes in 8 hours, this must have been a great day, right?

Absolutely not.  This is where traders confuse R’s with Profits.  

R=Risk Unit.  Whether a trader is trading $250 an R or $10 an R, either way, they should be risking 1 R when taking a trade.  The amount being risked is dependent on the skill of the trader, the amount of capital at work, etc.  

In R terms, if a trader risking $100 an R makes $200 then they made 2R’s on the day in profits.  If the next trader is risking $10 a trade but makes $40, then they made 4R’s on the day.  

In profit terms, the first trader obviously made more money, but in R terms, the second trader made more.  On a one trade basis, you could easily say the first trader is the better trader.  But over the long haul, this can change drastically.  This is important because lots of traders on social media will risk $1,000 and try to make $500 to $1,000 and look like a hero to the average joe.  

When in reality, that trader is doing little more than looking for a 1:1 payout and trying to use that result to promote themselves online, ultimatley for other intentions be that monetary or egotistical.  In either case, the traders that follow them on social media are focused on the dollar signs when the R Return Value is not worth it.  If they cannot copy that traders style to a T, then they will not have the finite success that the high dollar risk, low R return trader is getting.  This is exactly why so many traders get sucked into the cycle of following traders who win huge amounts of money but they can never copy the success.  

They are focused on the money and not on the true results.

Back to today’s results.  I typically risk $250 a trade intraday but with the high volatility lately pulled back slightly to risk around $220 per trade.  End Results in R’s Today: 1.3375 R’s or 1.34 for rounding purposes.

 My plan says 2:1 with a stop moved to break even at 1.5R’s.  Now let’s take a look at how this played out.

This is the CTP Calculator.  It tracks daily results for day trading and swing trading.  It also shows targets necessary depending on entries.  It’s available in our premium section if needed.  Today I traded 2 stocks, the SPY and IRBT.  SPY was a double test of the 1 minute based on the CTP Double Test which we actually teach and IRBT was a custom coded breakdown strategy.

If you’d like to get that double test teaching, you can sign up free here.  You can learn this exact same strategy we traded today by signing up to our CTP Group Email List.  

Let’s take a look at these setups here.

The first trade was a breakdown using a custom coded combination.  When they fire the signal together for the first time on the day, you want to pay attention.  You can’t see in hindsight what I saw on the break, which means I saw something that wasn’t really there.  IRBT was taken at $65.15 with a stop at $66.25.  The 2:1 Target was $62.95.  This trade was taken at 9:03 central time.  80 minutes later the current price is $61.00, this would be a 3.77R profit and I exited at break even.

My plan says once in, target is 2R with a stop moved to break even at 1.5R.  I can push past 2R if I lock in at least 1:1 when 2R is hit.  As in IRBT’s example, this would have been an excellent trailing option at the trade just hit 4:1.  Instead, it broke down and immediately popped back, and I exited break even. 

My plan said not too, and I can count the number of times one hand I’ve broken my plan this year, yet I did today. 

End Result: Break Even. 0R’s.

End Result of Plan: 2R+

The Second Trade was the SPY.  This was a double top retest CTP Style.  We teach this exact setup to new CTP Group members.  It takes 60 seconds or less if you’re interested.  I took SPY on the confirmation using my plan.  $267.69x$267.20.  2:1 Target was $266.22 with the option to trail for more.

When SPY got down to the previous pivot low and held, I was already out IRBT break even after watching it go 1.8:1 without me.  I had broken my plan once already which frustrated me.  I was now looking at a trade up 1.3 and thinking how pissed I’d be if this one takes a loss after IRBT fiasco.  I overrode my plan a second time and jumped.  This is the power of journaling, you must recreate as best you can your reason so you won’t make the mistake again. 

Within 4 minutes 2R was hit, and as of this writing, the price has reached $263.68 which would have been 7R+.

I’m not saying you get the bottom on these moves, I’m just showing max potential.

Actual Results: 1.34R

Potential Results: 2R+

The Plan Wins Out

Combined potential results are 4R+.  Combined actual results are 1.34R.  At $220 a trade that means my plan made $880 (less commissions) and I made $294.25 including commissions.  Remember at the start where I said I made more money in 12 minutes than most make in a day yet I screwed up, now do you see why?

This is why we have trading plans.  The absolute flawless simply never break their plans once they are built.  I consider myself a few steps under that but try extremely hard not to break my plan.  The few times I do break it however, the end result typically compounds itself in the wrong way.  This is why the trading plan is so important.

It’s built when the market isn’t moving.  It’s built when your mind is clear.  It’s built in a time of peace so that when the time of risk comes, when that potential time of fear comes, you have something stronger to help you overcome it.  

And yes, there will be times when you think the plan wasn’t built for this, I need to override it.  Considering the market is moving on average 200+ points this week, you could absolutely make this case.

Yet even with higher volatility than normal, the plan has still beat me by over 1.5x today.  Imagine what could happen in a week if this was a regular occurrence!

This is why when the plan is built, you have to follow it as best as you can.  And on those days you break your plan, you need to consider shutting down.  Something inside you is so off today.  Accept it, Improve it, and try again tomorrow.  The market is ready and waiting.  

Going forward, I will remember this day like many of the others when I violated my plan.  I understand nothing works every time, but being consistent with a proven setup gets me so much further than intuition based on tick fever.  My plan is designed to help me succeed, and help me overcome myself.  I’m still human and I will still make mistakes.  But if I remember mistakes are what successful people call experience, then I won’t be so hard on myself.  I will use this experience next time to try a little harder to stick to my plan.  One trade at a time. 

The plan is built when the mind is clear so when risk comes, it can be overcome.

Trading Double Bottoms & Tops

Double Tops & Bottoms are one of those things that if you don’t understand them, they can seem completely intimidating.  Yet the truth of the matter is that they are one of the most mechanical setups you can trade.  The beauty of the double top is that it is 100% mechanical.  Taking away all gray area and only allowing a setup when all conditions are met.  This results in significant profits when done correctly and the ability to sleep at night without any doubts you messed up when they do not work.

If you want to learn more about double tops & bottoms, we encourage you to get our Free Training on the CTP Double Tops & Bottoms.  Most companies would charge over $200 to learn this information, we simply ask you become part of our CTP Group.  To join, click here If not, watch our training video and then decide for yourself.  You’ll see what others charge $200 plus for, we simply include for all CTP Group Members.  It won’t be like this forever, but while it is, we suggest you strike.

The Key to Success in Any Strategy is Making It Your Own. That is the Biggest Edge You'll Ever Find.

Facebook
Google+
Twitter
LinkedIn
Email

Market Selloffs

Whenever the days turn red, traders begin to think the worst.  Instead of joining the crowd, let’s instill some common sense and rules so that next time your stock takes a hit you’ll have a better understanding of knowing what’s really going on.

First and foremost, we need to establish some definitions.  The market uses closing prices for these numbers, which means the daily close.  This is important as using the highest high or lowest low may get you there quicker, but it doesn’t mean the market agrees.

Pullbacks: Any retracement in the market or equity which is less than 10%.  This can happen any time for any reason.  Typically, if it’s less than 3%, it shouldn’t even be on your radar.  Knowing when to ignore the noise is an excellent thing to do.

Correction: Any retracement in the market or equity which is greater than or equal to 10%.  These are steeper corrections that  on average happen about once per year in the general market.  If you’re trading a high beta stock (highly volatile) this may be happening weekly.  As a rule of thumb, expect this in the market on average once a year.  

Note: In 2017 the S&P 500 never experienced a correction.  Average means just that.  The past is there to base assumptions on but never there to concrete the results.

Opposite Trend: Any retracement in the market or equity which is greater than 20%.  Typically, there is also a time rule on here of at least 2 months.  This keeps gaps based on news/earnings that may correct themselves over the short term from being classified back and forth.  There should be little whip saw in terms here from a bullish to a bearish trend.

Let's Look at the Past to Learn for the Future

This is a Weekly Chart of the SPY from ’08 to ’12.  If you are constantly trading by your own rules, then this may be of no value to you.  However, if you prefer to go a more mainstream route when considering trend definitions, then study this chart.  Take it all in.  Whether you traded during this time or only learned about it afterward, the definitions of trends can help you go along way.

The Red Box is when the bullish trend turns bearish. 

Remember, it takes a 20% retracement from the highest or lowest close to change the direction of the trend.

The blue boxes are all considered corrections.  These are all areas that retraced greater than 10% but did not reach a 20% move.  

Notice the first correction technically happens before the bearish trend officially begins.  Had you tweaked the numbers to highest high/lowest low you would have reached 20% and immediately gone into a correction.  Had you instead used the highest close argument you would have stayed away from looking short until the red box closes and would have immediately produced a winning short.

However, this may have kept you looking long on the pullbacks which should have produced a decent winner on the shorter time frames when the market retraces early on, but this should show you why first and foremost you must decide if you are going to use highest close or highest high.  Everything changes based on how you determine the starting point and this must be decided before not during the process.  If unsure, remember the majority uses highest close.  This is just one more part however that comes down to you trading what works for you.

The green box is when the bearish trend turns bullish.  At this point, price has retraced 20% from it’s lowest close and the market goes long for the next 8 years.  Notice the two corrections that happen in 2010 and 2011.  This should show you that corrections can happen quickly after a market trend changes and they happen on average once per year.

Now that you’ve seen this in action, let’s look to the present.

The SPY must reach $257.92 to enter a correction.  This means even as nasty as this roughly 5% pullback is, it’s still just a pullback.  The fact that this did not happen in 2017 should not scare you because it’s finally happening in 2018.  It’s just part of trading and should be expected, not feared.

 

The SPY must reach $229.27 to turn to a bearish trend.  Remember, if price closes below $229.27 on a daily time frame, the market will officially be bearish, but this doesn’t mean you should expect it.  

In the current state, the market is in an aggressive pullback.  While it may be tempting to throw up a #BTFD and get in there, stop, and think.  Ask yourself is this part of my plan?  If this a % based buy or simply looks enticing because at one point it was $285?

The key to trading this properly is knowing what your plan says, and sticking to it.  

If you have a plan, and know how you’re going to trade this type of pullback, then the last thing to do is recognize that you have to ignore the noise.  

On Social Media, there will be plenty of bears saying this is it.  This time it’s it.  This time everyone’s going broke.  While it very well may be, it seems strange to bet against the US, but maybe that’s just me.

Next time, instead of paying attention to that noise, trust your plan.  Trust the knowledge you’ve gained knowing the current numbers the market must hit to truly change course.  Understand that if new highs come, these numbers again change.  Always based simply on the 10% and 20% rules. And finally, as always, only trade what works for you by trading your plan.

If you are unsure of what to do with this new information, head over to our strategies section and learn the price channel breakout.  It’s  must easier to buy the dip when it’s making a new high on a smaller timeframe.  If you liked what you learned today, make sure you join the CTP Group to get more information just like this every few weeks. And last but not least, Trade Your Plan.  It’s the best edge you’ll ever have.

Intraday Fading 101

Suppose you want see a big move but it goes without you.  Especially for the day trader, there are times that missing the move means you miss the move.  Whereas swing & position traders can get second entries, day traders can simply entirely miss their move if it’s not taken at exactly the right time.

Does this mean that the trade is completely over or are there other options to consider?  Let’s find out together.  Suppose you saw this move 5 minutes into the day, what would you do?

Obviously hindsight being 20-20 you could have just jumped in.  However, notice the first 5 minute bar, it moves over 1/2 the overall move which means if you aren’t lightning quick you immediately have a smaller piece of the pie with no clear spot to put a stop at.

Next, you could wait for a consolidation like what happens around 30 minutes in but that only gets you a 1.5:1 RR at best if you give the proper stop, and that’s only if you’re perfect.  Sometimes, especially daytrading, the move simply goes without you.  This is why you don’t chase.  Chasing is the Fastest Way to Go Broke Day Trading.

Chasing is the Fastest Way to go Broke Day Trading.

So if you missed the move, what now?

If the move was missed, the thing to do instead of chase is to look at the longer term charts.  This will show rather quickly whether there’s room lower after a stronger consolidation (like a 15 minute) or if the better play at this point is either pass or fade.  Let’s take a look at the daily with the same 5 minute on the right side.

Same chart but a daily screenshot is now included.  What stands out against continuation?

  1. Price low is within pennies of previous pivot low (Support).
  2. The 200sma is underneath price (Support).
  3. The cloud is underneath price and rising (Bullish Daily Trend).
  4. The move is over 2.25x normal Daily Average True Range (Over-Extended).

Now let’s look at the other side.  What show’s potential continuation?

  1. All day trading moving averages are angled down (Not Shown, Lagging).
  2. Current Strength

Whenever you are taking a trade, remember you are taking on risk because your conviction is there.  If your reasons for taking a trade are ever less than reasons for not taking a trade, pass, conviction isn’t there.

To fade an intraday move, you must have conviction.  For that to happen, there should be as many of the following reasons as possible.  Always remember, if there are more reasons against you than with you, you do not have conviction, no matter how nice the trade looks.

  1. Daily Support or Resistance
  2. Long Term Moving Averages on Daily Time Frame (50 or higher)
  3. Bullish Trend Indicators for Long/Bearish Trend Indicators for Short
    • This was talked about in our Indicators 101 Section.  You can read up on that now
    • Trend Indicators like MACD, Ichimoku Cloud, and LT Moving Averages can all work well here
  4. Over Extended Ranges
    • ATR stands for Average True Range.  A stock that moves on average $1 and today has moved $2 either has substantial news/earnings as a reason or is due for a pullback.  When the ranges are extended without a news catalyst, be prepared for a rubber band effect.

 

How to Increase the Odds with a Fade

What if there was a way to instantly get a 14.28% Chance of Picking the Top/Bottom on every single trade?  By itself this obviously isn’t an edge but when added too a basket of other pieces, this can become an excellent edge boost.  How do you do something like this?  How do you gain an immediate and powerful edge on every potential fade?

I’ll tell you.  But first, I’d like you to do something for me.  This edge is real, and it’s something I’ve seen sold for triple digits yet it’s something so basic I feel everyone should be allowed in on this secret.  I don’t want you to have to pay for this edge.  But I want you in return to join the CTP Group.  This training only gets better and if you are liking it so far, you haven’t seen nothing yet.  Simply Click the Link Below and Sign-Up to join.  Trust me, It’s Worth it and it’s free.  You’ve got nothing to lose but a whole lot to gain.

Did you join?  Great, You won’t regret it.  Be sure to check your inbox and get us out of the spam section, there’s a special training for pullbacks heading your way, our way of saying thanks for joining the CTP Group.  Now that you’re part of the Group, let’s continue.

The way to increase the odds on every single top/bottom fade is by knowing when to take the trade.  There are 6.5 hours of trading time per day, that means 390 minutes.  When you look at a 60 minute chart, the charting software automatically gives you 7 bars, 6 actual timeframe bars and 1 half timeframe that is still counted as a full bar for simplistic purposes.

Put another way, there are 7 sixty minute bars per day.  This means if you wait until a 60 minute candle closes, you automatically have a 1 in 7 chance of picking the top or bottom of the day.  Mathematically this comes out to a 14.28% chance every single time.  This isn’t advisable to be overused, but when a high probability fade sets up AND the hour candle just closed, the edge can get incredibly powerful on your side.  

Let’s go back to our M example.

First Hour Candle closes, immediately have a 1 in 7 chance the Low of Day is now established.

Not enough by itself, but when adding the additional conviction reasons we stated above, what comes next is a high probability setup.

We took that setup and got out at the 382 fib retracement area, while a 50 fib retracement was ultimately reached.  Just depends if you like quick action or want to hold for the long term kill.

 

In Closing, the Fade play is a valid option but only when done correctly.  In case we missed some, here are the biggest takeaways when using this strategy.

  1. Expect it to retrace 1/3 to 1/2 of the initial move.  It is rare to retrace more than that.
  2. There must be strong conviction as to why you can fade the move.  You get to decide the rules of conviction you wish to use, but you must be consistent and only take the trade when they are present.
  3. This is strongest after the first hour of the day or after any closed hour candle.
  4. You must decide ahead of time whether you need closed candle confirmation or not.  We prefer closed and waited for the 5 minute to give us just that before entry.
  5. Be willing to take a second shot if wrong on the fade.  Fades fail more often than not but a solid fade can produce 3:1 or better, the math works but only if your plan allows it.
  6. Volume is always helpful to show potential ending spots but as M shows it is not required.
  7. Conviction is a must, not a maybe. 

As always, only look to add the fade play to your playbook if your plan allows.  When building a plan, strategies like this can work extremely well and can be steam rolled.  You have to understand your timeframes, the market, and your specific goals.  

 

Should This Be Part of Your Plan?

Now that you’ve learned something new, you’ve got to ask yourself if this should be part of your custom trade plan.  Is this new knowledge something that could help take your trading to the next level?  Or is this something that is nice to know but ultimately does not have a place in your CTP.
You have to decide for yourself.  Your Plan can only encompass so much, and every piece that’s in there has to have a purpose.  This does not mean that once it’s written it cannot be changed, but if it’s being changed, it should only be done so for a very specific purpose.  The plan is your key to the kingdom, only put into it what helps you get there.
If you do not yet have a custom trading plan or simply don’t know where to start, we can help.  Head over to our CTP Premium Section to see how we built a swing trading system with a plan from start to finish.  This is the end all systems for plan and trade development.  No matter what part of trading you’re lacking in, this is the answer.
Or if you’re not ready to spend anything on your future, head over to the CTP trading strategies section and see if you can start building something out of that.  We’re always here if you need us, but in the end, you’ve got to be willing to put in the work.
After all, it’s your money; why isn’t it your plan?

Share This With Someone Who Could Use the Training

Facebook
Twitter
Email

Price Channels–The Hidden Gem of Breakouts

Whether you want to clean up your charts, want a better way to determine when to trade certain setups, or are simply looking for a quicker one look option, price channels can provide an excellent addition to your charts.  We talked about this in indicators 101, every single part of your charts must have a purpose.  If you can’t completely explain why the indicator is on there, take it off.  Hopefully, by the time this article is over, you will have no doubt in your mind why price channels could be in your trading arsenal.

The picture shown on the blog was SPY which was called long mid 17′ at 245.01 on the break.  Notice how on a 3% stop you’d now be up over 10% simply trading a general market breakout?  That is the power of using price channels the right way.  If you want to learn more, let’s get started.

This is SQ.  It’s clearly been a beast in 2017.  However, this wasn’t the first time it tried to be such a beast.  What about in April 2016 when it made new ATH yet it fails shortly after.  How come SQ can’t do then what it does now?  Part of the answer at least, was shown in the price channels.

All technical analysis ignores fundamentals.  We have to understand this going in because there may be a solid fundamental reason why SQ shifted in 2017 to allow such a move, whether general market or stock specific.  Regardless, for this example, we are only focusing on this indicator.  Whatever other reasons present for SQ are simply not important for our technical view.

To look at the results of SQ and ultimately price channels, we really just need to remember these 5 rules.

Rule #1. Price Channels work best on Higher Timeframes.

This means if you’re unsure, get to a higher timeframe.  If considering a daily trade using these channels and you can’t tell, move to the weekly.  If using a 15 minute trade, move to the 60. 

If you can see a breakout on your timeframe but see a potental floor or lid against you on a slightly higher timeframe, the odds of a successful break go down significantly.  Put another way, when in doutbt, zoom out.

Rule #2. Price Channels work Best after a Rest.

Let’s go back to our SQ example.  Notice in April 2016 when price makes a new 20 range high but it can’t get past that and ultimately rolls over.  Now take a look at 2017.  Price makes a new 20 range high on the weekly chart, which is also an All Time High (ATH), and then rests.

The difference is this time price pulls back slightly and holds above the old 20 range high.  After it’s held for a few weeks to months, price starts to move back up.  It has now had a long enough rest after the initial move to continue when it ultimately breaks out.

This also allows you to put your stop below the pivot low of the rest vs the pivot low of the entire move.  Notice the profit difference this makes when your total risk goes from $5 down to $2.50.  All these advantages simply come when the price channels go sideways and you see a potential rest spot.  Getting in after this rest can produce significant returns.

Rule #3. Decide if you're intrabar or closed bar now, not later.

This is a personal question.  Let’s go back to our SQ setup.  Notice the old 20 range high in early 2017.  Now notice the weekly bar that closes just past that range high.  That is the perfect signal.  Seeing this weekly bar close on friday allows you to get in on monday at the start of a new bar with a tight stop and an outsized return.  Great Job.

Now lets’s look at the other side of the coin.  What if the signal bar gets past that high on monday but you’re trading a closed bar.  You’re another 4 trading days before this weekly bar closes and you could miss the entire thing.  Are you willing to trust this and let it play out or do you see a great setup and decide it’s foolish to wait?  When using price channels for breakouts, you have to decide before you start whether it’s a closed candle, intrabar, or both.  The only wrong answer is not deciding until FOMO (Fear of Missing Out) takes over.  Some will not stop and you’ll miss out, others will trigger and pullback and fake you out, there’s no right or wrong answer, as long as you pick an answer.

Rule #4. Watch for Polarity with Price Channels.

Polarity is when support becomes resistance or resistance becomes support.  Notice when price broke out past the 2016 high, it quickly retraces back into that area and holds.  The 2016 resistance (lid) becomes the 2017 support (floor).  

By using price channels it’s incredibly easy to see the horizontal lines where resistance used to be.  This in turn makes it incredibly easy to look at the pullback low after the break and realize it’s holding where price used to stall out at.  

This is one of the primary benefits of using price channels for pullbacks.  They help show where price has come from in a clear and concise way.  

Rule #5. With Price Channels, the shorter the length, the stronger the chance for fakeouts.

This is the only rule where we try and give less wiggle room.  There are going to be times where a 5 length price channel works great, but the shorter the input length, the more chance of false signals.  

Typically, the standard price channel is 20 periods long.  This means price takes the last 20 highs excluding the current high and paints the highest high.  It takes the last 20 lows excluding the current one and paints the lowest low.

As a result, you get a 20 range price channel.  You can tweak the numbers and get more or less signals.  We recommend going up not down in length of the price channel, but there is a reason that 20 is standard.  It’s close to a full trading month, and it encompasses the majority of price action.

 

Putting It All Together

Let’s remember one thing.  No indicator is 100%, no matter how good the article makes it out to be.  If you are simply looking to trade breakouts better, trade pullbacks stronger, or looking for something to help filter your setups a little easier, this could be it.  As all other indicators are simply built off price action, why not trade an indicator that is price action itself.

That being said, however, nothing is fool proof.  Using this in conjunction with something like the cloud creates a pretty strong breakout strategy that can be done in under 15 minutes a day if you know how to scan.

That being said, it’s going to lose.  Everything is.  The key is picking a strategy that works for you, putting in the hours testing it and proving it out, and then starting small and building your trading plan the right way.  Because there’s always another SQ just around the corner, you just have to have the skills to get it.  If you need help building a trading plan, click here.

If you know someone else who would benefit from this teaching, pass us along.  

If you’d like to learn more about trading, our blog is always open.  Good Luck, and as always, trade your own plan.

Share This With Someone Who Could Use the Training

Facebook
Twitter
Email

Swing Trading 101

Facebook
Google+
Twitter
LinkedIn
Email

This is a complete video lesson on how to swing trade.  Whether you wish to trade pullbacks or breakouts, whether your a novice or a pro, this has something for you.  Be sure to pass this on to help someone else in your trading circle.  And if you haven’t joined the CTP Group, click the button at the bottom of this page to join now.

The Ichimoku Cloud

If there was ever one indicator that was both incredibly helpful and horribly overwhelming all at the same time, the Ichimoku Cloud woud be it.  At first glance, this thing looks like a 3 year old just drew squiggles on your screen.  If you take the time to understand what it really is however, it may help you get to a whole different level in trading.  Or it may inspire you to color more with your kids, you just have to do what works best for you.  

Let’s start out by seeing what the cloud looks like in it’s raw form and then we’ll dissect this piece by piece.

This is overstock, inc.  It’s getting out of the online space and into the bitcoin space, notice how much the market appreciated this move.  Now that we’ve got our example, let’s dig in.

The

There are two important rules to learn before we break this thing down.

Rule #1.  There are only 5 parts to the cloud. 

Before you get insanely overwhelmed, just realize that no matter how many squiggles it looks like there really are, it’s only five pieces.  Most charting packages allow indicators or parts of the indicator to go clear as well.  There are many traders who prefer to know which side of the cloud they are on, but take it no further than that.  Remember, it’s all about you.  There’s no golden rule that requires you must use all parts, just keep that in mind going forward.

Rule #2.  All of these lines are still based off price.  

They are shifted forwards and backwards as well as used real time so they may seem much more complicated than normal, but that is nothing more than simple computing code.  When you realize the math isn’t that much off from a simple moving average, you start to understand this isn’t as insane as you though it was.

The

We will attempt to explain each part in detail and also give a shorter version to bring it home.  There are five indicators built into one in this ichimoku cloud:

  1. Tenkan
  2. Kijun
  3. Chikou
  4. Senkou Span A 
  5. Senkou Span B

Tenkan (Yellow Line).  The Tenkan Sen Line (Called Tenkan for short) is a moving average which prints the middle value between the highest and lowest points over the last 9 bars.

Layman’s terms:  It plots the middle ground over the last 9 bars.

Kijun (Purple Line).  The Kijun Sen Line (called Kijun for short) uses the same middle value plotting as the tenkan line.  The difference being it uses a 26 period range instead of a 9 period range.

Layman’s terms: It plots the same middle ground over a longer timeline, 26 bars instead of 9.

Chikou (Light Blue).  Chikou Span (called Chikou for short) plots the current price, shifted 26 periods to the left.

Layman’s terms: It plots the current price shifted left, helps to see if trending or chop.

Senkou Span A (White Line).  The Senkou Span A (called the cloud when combined when Senkou Span B) is the most complicated part of this formula.  We will break it down together.  The span A line is found by adding the Tenkan Line + Kijun Line together, dividing by 2, and plotting this point 26 periods to the right on the chart.

Layman’s terms: It takes the average of the 2 previous averages and then plots it into the future.

Senkou Span B (Orange Line).  Senkou Span B (called the cloud when combined when Senkou Span A) plots the middle value of the high’s and low’s just like the Kijun and Tenkan lines.  The difference being this line uses a 52 price period (the longest of the three).

Layman’s terms: It’s a longer version of the kijun line, 52 bars instead of 26.

The

Now that you know what it is, what’s your first though?  Have you noticed how similar it is to MACD in the candle length’s usage?  What about how it really just prints the same results in multiple ways?  It’s not all that complicated now, is it?

So if you know what it is, what should you do with it?

What To Do With It

Before we go looking at ways to use this in our trading, let’s cover some basics you really want to consider sticking with, if you decide to use this indicator.  Nothing works every time and you’ve got to test this stuff to see if it works for you at all, but here’s some tried and tested thoughts on this indicator from my own experience.

  1. If adding this indicator to your charts, at least in tradestation, you must add 26 bars to the right of spacing or the indicator will not work properly.
  2. If trying to trend trade, stay away from setups that are too far into the cloud or on the wrong side of the cloud.
  3. If trading a breakout, the Chikou line (lagging 26 range line) should be above the cloud and preferably above all previous price action.  Remember, if this line is shifted into the past by 26 bars, and you are trading a breakout, shouldn’t current price action be above previous price action?
  4. The cloud is based off highs/lows not off closing price action.  A rising tenkan/kijun line combination shows the range is bullish and moving.  Choppy range bound stocks cannot create convincing clouds and as such help predict when to get in vs passing on chop.
  5. As the cloud is shifted forward by 26 periods, the cloud in the future should be in your direction as well whenever possible.

Let’s take a look at our example again and see if we can’t find out how to put these rules into practice.

The arrows are what we’re going to look at.  They are color coded for ease of reading.  

First Attempt.

Price makes it’s first breakout attempt on the daily at the orange arrows.  Assume we are using the 2nd arrow as our entry point, the 1st arrow is to show where the Chikou line is (Rule 3 above).

When price makes it’s first breakout attempt, the chikou line is above the cloud but not above previous price.  The breakout fails.

Second Attempt.

The next attempt at the yellow arrow’s gets price above the cloud (2nd arrow) but the chikou line this time is above price action but below the cloud (1st arrow) and the breakout fails.

Third Attempt.

The green arrows at the 3rd breakout attempt give way to a monster.  Notice when price breaks out at the 2nd green arrow, the chikou line (1st green arrow) is above previous price action and the cloud.

Looking forward 26 bars notice the green box showing the cloud is bullish and staying bullish.  

This was the only spot that all 4 rules were followed and as a result this trade produced substantial results.

Notice also that on the deep pullback where OSTK lost almost 30% in 2 weeks, the cloud never crossed over, not even in the future.  This showed that shorts are not the right setup at this time.  This is only one example and of course anything can work one time, but this should help show the power of this indicator for trading trends.  Whether or not you take the time to study and test it is entirely up to you.

A Word of Warning

The Ichimoku Cloud is an excellent indicator as a one look type play.  Plenty of traders use moving averages, MACD, crossovers, etc. to gauge price based on previous closes.  Few indicators use range as well as the cloud does, and by ignoring closing action and focusing on both sides of the extremes, you can gauge potential breakouts in an entirely different way.

Before you start tweaking this or looking for ways to make it even better, however, remember it was developed by a Japanese journalist in the 1930s and was not released to the public until the 1960s.  This doesn’t mean it can’t be improved, but if the creator spent 30 years developing and tweaking it, don’t think you’ll top him in a week.  Unless you can undeniably quantify WHY you are adjusting the settings, don’t.  This goes back to the rabbit trail we talked about in indicators 101.  When you constantly look for the little tweaks, you can get caught in an infinite loop that never pays out.

There are specific strategies you can use with this indicator, but we will save those for another post.  For now, after reading this, we hope you’ve gotten a much stronger understanding of the ichimoku cloud and a better idea of how to gauge a trend.

Should This Be Part of Your Plan?

Now that you’ve learned something new, you’ve got to ask yourself if this should be part of your custom trade plan.  Is this new knowledge something that could help take your trading to the next level?  Or is this something that is nice to know but ultimately does not have a place in your CTP.
You have to decide for yourself.  Your Plan can only encompass so much, and every piece that’s in there has to have a purpose.  This does not mean that once it’s written it cannot be changed, but if it’s being changed, it should only be done so for a very specific purpose.  The plan is your key to the kingdom, only put into it what helps you get there.
If you do not yet have a custom trading plan or simply don’t know where to start, we can help.  Head over to our CTP Premium Section to see how we built a swing trading system with a plan from start to finish.  This is the end all systems for plan and trade development.  No matter what part of trading you’re lacking in, this is the answer.
Or if you’re not ready to spend anything on your future, head over to the CTP trading strategies section and see if you can start building something out of that.  We’re always here if you need us, but in the end, you’ve got to be willing to put in the work.
After all, it’s your money; why isn’t it your plan?
Facebook
Google+
Twitter
LinkedIn
Email

Indicators 101

Facebook
Google+
Twitter
LinkedIn
Email

If you decide you want to eat healthy, produce from a farmers market could be an excellent place to go.  However, just because there’s plenty of options, this does not mean you should eat them all.  Some may taste better than others, some may cause allergic reactions, some may have strange smells.  Even if the end goal of everyone at a farmers market is to buy healthier foods, there’s no one way to do so.  Everyone will buy what is best for their own purposes, whether that be taste, smell, allergies, or otherwise.

Trading indicators should be no different.  There is a camp that solely trades on price action and ignores everything else, but the vast majority employ indicators in one way or another to help them trade.  However, just like the farmers market example, there is no one way to use them.  The trader has to determine what works best for their own unique experience and desires.

When you look at indicators this way, your life will become so much less stressed.  Even if your goal is to lose weight, there’s no holy grail of fruit or vegetables that can guarantee immediate success.  Likewise, there is no one holy grail indicator that will change your entire trading career.  Indicators can be beneficial, or they can become the rabbit hole that you never stop falling into.  Stop thinking of indicators as magical, and start thinking about them like produce.  They are not the holy grail to weight loss or other results.  They are an important piece and everyone has certain types they like the best.  Trading indicators should be no different.

Now that we’ve established what they shouldn’t be, let’s talk about what they should be.

Before we get into the types of indicators, let’s establish a few rules.

Rule #1. Trading Indicators

This means that when you are using an indicator as a trigger, the price itself would have already started to make the move.  When you are looking for price to get over extended, it will have already done so before your indicator agrees.  

When using indicators, you have to accept lag time.  As they use price in their formulas, they simply cannot print until price does.  Even some of the “leading” indicators still use closed price points to print future points.  If you cannot accept getting in late because you waited for the signal to fire on an indicator, you may have to look and see if indicators are really for you.

Many traders think that certain indicators are leading and not lagging.  The truth is that they still require closed data to print, even if they are displaced forward or otherwise, they still require closed price action to print the formula and as a result I still consider them a lagging indicator.

If anyone truly created a leading indicator, they’d print money every single day.  The truth is leading indicator is just a sexy buzz word because if you could lead the market, you’d never lose.  And professional traders lose constantly, they know it’s part of the game.

Rule #2. Customizing Inputs Should Substantially

Every Indicator has the ability to customize the inputs.  For example a moving average takes the closing price of X number of candles and divides the result by that amount to create a line.  Many traders like to use a 20 moving average.

However, once the strategy is built, traders like to run computerized tests to determine chinks in the armor or areas to improve.  Once that happens, optimization becomes a problem.  If your system is failing at a 20 moving average but working great at an 18 moving average, traders start to over optimize the system based on perfect results.  The reality is customizing the inputs should NOT change the system itself more than 20% or it’s becoming over optimized and will not deliver those types of results in live trading.  

All indicators can be customized almost as much as the trader desires.  The customization should help the trader feel more confident, not change the results.  It’s like a trader eating an apple vs cutting it into sections.  Either the way the apple gets eaten, it’s just a personal preference.  Changing inputs should be viewed the same way for 98% of the traders out there.

Rule #3. Different Indicators Can Accomplish

This rule is imperative if a trader is using a checkmark system for entry.  Some traders like to use 5-7 things that allow entry when they get a majority.

The issue with this is you have to understand (which we’ll discuss in detail) that indicators can accomplish the same purpose.  And if that’s the case, then using multiple indicators on your chart will not add any edge.  You want your indicators to each add significant value to your chart.  If we go back to our produce example, if the goal was only to eat enough fruit to get 100% vitamin C, you could eat an orange and be done.  

You could also eat any combination of other fruits or vegetables to hit that goal, but if you eat them AND the orange, you may not get an added benefit if your main purpose was vitamin C.  You would have been better off having a different goal for the other fruits and vegetables.

As you learn about what the types of indicators and their purposes are, you’ll soon find out which indicators are worthwhile, and which are simply overlapping and unnecessary.  The key to rule #4 comes from thoroughly understanding rule #3.

Rule #4. More Indicators On Your Chart Are

Think of your chart like an expensive leather couch.  You’re proud of this couch, you want to use it constantly, it’s the most comfortable couch you’ve ever had.

Yet for whatever reason, you or your significant other start adding pillows to this couch.  Fancy throw pillows that help the couch work even better, look even better, smell even better.  Whatever the reason, you just keep adding these pillows until suddenly that amazing couch isn’t recognizable nor usable.  The pillows which were supposed to supplement the couch have taken over entirely.

Indicators on a chart should be no different.  When you build your perfect chart, with all the right colors and lines, you feel like you’re in the zone.  Yet some traders read a blog post, watch a video, read a book, or whatever else, and suddenly add an indicator.  Here and there, they really do help.  Yet before too long, most traders end up with a screen so covered in indicators it’s no longer recognizable or usable.  

Don’t let this happen to you.  Remember the end goal of a chart is to help you make a trade.  If you can’t thoroughly explain why every single indicator on your chart is there, start taking them off.  Back to our couch example, what happens when you take off all those pillows?  You get to use the couch again.  The same can be said of your charts.  

If you want to build a separate chart with tons of indicators for research purposes, fine, do so with gusto.  But your trading chart, the chart that is responsible for making decisions, requires better.  Explain why that indicator is there, or take it off.  What you’ll be left with is what you truly decided you need to trade.  And that is a decision that no one else can make for you.  

Trading Indicators Come in Different Categories

Trading indicators come in all varieties and fashions.  The end results, however, tend to accomplish only a handful of things.  Indicators are mathematical formulas that are based off of the High, Low, Open, Close, and Volume.  These combinations along with other mathematical parts have created thousands of combinations, each named after the trader that discovered them.

Yet for all the different combinations, they function for a very few set of purposes.

Trend, Momentum, Volume, & Volatility.  Many guru’s say you should have one from each category in your plan, some require that you have multiple from each.  If you want to chart the CTP Way, then remember it’s your money, it’s got to be your plan.  You get to decide how many and what goes on the chart, just make sure it follows the rules above.

Trend Indicators

Trend Indicators are those that help determine the trend.  Trend strength is very subjective to the timeframe you are on, but when you hear someone ask what’s the trend, and you want to answer them with an answer involving technical analysis, these are the indicators to use.  A few of the indicators that fall into this category are:

  1. Moving Averages
  2. MACD
  3. ADX
  4. Ichimoku Cloud

There are hundreds of them out there, but the majority of traders can find what they need simply using this list.  

We will discuss in detail these indicators on our advanced section indicator 202.  If you prefer to skip ahead, you may do so now, this link will be available at the end of this article as well.

Momentum Indicators

Momentum Indicators are those the help determine the momentum of the trend.  These can also be used as excellent pullback opportunities back into the existing trend.  The final use of these indicators is gauging when a trend could be coming to an end by means of divergence.  

A few of the indicators in this category are:

  1. RSI
  2. Stochastics
  3. CCI

One of the most important factors in using these indicators is remembering what Livermore said, “Markets Can Stay Irrational Longer than You Can Stay Solvent.”  This means, just because you’ve got an overbought signal does not mean the trend cannot keep going.  Look at the general markets since 2012.  

Volume Indicators

Volume is the most important thing after price.  If you had to have only one indicator on your chart, volume would be it.  Volume tells you when there’s a large move starting, when there’s no one left to continue, when to ignore a pullback, and when to pay attention.  Many traders that don’t believe in indicators still use plain volume because it’s that powerful.

A few of the indicators in this category are:

  1. Volume (typically includes a 50 day average of volume to show when it’s stronger than normal)
  2. Chaikin Money Flow
  3. On Balance Volume

Volume is one of those things that some traders simply like to ignore, but when used properly, it can greatly improve the results of some of your trades.  This indicator cannot be ignored.

Volatility Indicators

Volatility is extremely important in trading.  If you buy a stock at $10, and you want to sell it at $11, what’s the potential it will get there?  If you want to place a stop on that same stock, how far away should you place it?  Volatility answers these types of questions.

Examples of Volatility Indicators are:

  1. Average True Range
  2. Bollinger Bands
  3. Keltner Channels
  4. Price Channels

Volatility may sound confusing and some traders may simply want to avoid what they don’t understand.  However, once you see it in action, it may become something you simply can’t live without.

Putting It All Together

Now that you know what categories indicators come from and a few types from each, take a look at your chart.  Are you heavy on one category?  Do you have something from each?  Do you see a need to adjust?

Let’s use one quick hypothetical example before calling it a day here.

The picture shown is NVDA.  We have incorporated one or more indicators from each category.  The red solid line is a 50 simple moving average, the white lines are a 20 range price channel, the indicator with vertical lines that looks sort of like a cloud is called the Ichimoku Cloud, and the three indicators at the bottom from top down are volume, MACD, and Stochastics.

If we were looking for a pullback trend continuation setup, we’d want to see a combination of things confirming a high probability edge.

These indicators will all be discussed in detail in indicators 202, but for now, we are simply trying to show a finished product.  We will go back and dissect each part over future posts.

From our trend indicators, we’d want to see an uptrend.  This happens by price still being above the 50sma, the MACD still above zero, and price still above the cloud.  All options are checked yes.

From our momentum indicators, we see the stochastics has reached oversold by getting below 20.  When looking for pullbacks, stochastics needs to get as close to oversold in an uptrend as possible.  Check & Check.

From our Volume Indicators, we see price spiked near the end of the run-up roughly 2-3 weeks before giving our pullback entry.

On the pullback however, there was no volume strength.  A low volume pullback is an excellent sign that when price starts to turn, the trend will continue.  If the volume was strong on the pullback it could be a sign that traders are getting out.  Since the volume was weak however, the odds were high that there was simply no one left to buy in the short term, not that traders were exiting existing positions.

From our volatility indicators, we can see price got below it’s 20 day range.  A stop below this low by a % of the 20 day range could be an excellent risk reward setup.  

If the trend is to continue, a new 20 day low could become an excellent false breakdown point.  Traders that only used volatility here may be tempted to fight the overall uptrend.

Traders that used multiple categories however were able to see the stronger uptrend and use this short term new 20 day low as a reason to place a high probability buy setup.

 

And there you have it.  Four categories, four different approaches.  When you put them all together, they can create something powerful.

This is what a trading indicator or indicators should do.  When you dump so many on the chart you can’t read the chart, it’s time to change.  When you trade just the right amount for just the right reasons, you can build a consistent and powerful edge.

To learn more training like this, don’t forget to join the CTP Group.  It’s free to sign-up and we only send 1-2 emails a month with training like this delivered straight to your email.

Should This Be Part of Your Plan?

Now that you’ve learned something new, you’ve got to ask yourself if this should be part of your custom trade plan.  Is this new knowledge something that could help take your trading to the next level?  Or is this something that is nice to know but ultimately does not have a place in your CTP.
You have to decide for yourself.  Your Plan can only encompass so much, and every piece that’s in there has to have a purpose.  This does not mean that once it’s written it cannot be changed, but if it’s being changed, it should only be done so for a very specific purpose.  The plan is your key to the kingdom, only put into it what helps you get there.
If you do not yet have a custom trading plan or simply don’t know where to start, we can help.  Head over to our CTP Premium Section to see how we built a swing trading system with a plan from start to finish.  This is the end all systems for plan and trade development.  No matter what part of trading you’re lacking in, this is the answer.
Or if you’re not ready to spend anything on your future, head over to the CTP trading strategies section and see if you can start building something out of that.  We’re always here if you need us, but in the end, you’ve got to be willing to put in the work.
After all, it’s your money; why isn’t it your plan?

Facebook
Google+
Twitter
LinkedIn
Email