Every month I get numerous requests for swing trading tips from traders who are just starting out.
What I typically do is make a note of the most relevant and frequently asked questions and answer these questions in a monthly article.
This month I received dozens of great questions relating to several different topics and I will do my best to answer these questions in today’s article.
1. In your tutorials you always talk about trends having a slope 20% one way or another.
How exactly do I know if the market is sloping 20% one way or another?
Is there a tool to measure the slope?
Yes, there are two tools that you can use to measure the slope of a trend.
Neither will give you the exact slope but both will tell you if the market is trending or not. The first tool you want to try is the 20 bar or 20 day exponential moving average indicator.
If you are looking for a trend moving upwards you can check to see if the market you are analyzing is trading above the EMA.
If you are trading to the short side you want to make sure that the market you are looking at is trading below the 20 day or 2o bar EMA. You can see in this example how the market is trending above the minimum 20 percent requirement each time the stock rallies above the 20 day EMA.
Each Time The Stock Rallies Above The EMA The Stock Is Trending Strongly
In this second example you can see how the stock rallies below the 20 bar EMA.
Each time the stock rallies below the EMA the stock is sloping minimum 20 percent downwards.
I would guess the slope is greater than 20% in this particular case but as long as you are above 20% either up or down you are in a trending market and that’s what matters the most.
Each Time The Stock Breaks Below The EMA The Trend Is Strong
The other tool that you can use is the ADX indicator. The Average Directional Index is a bit more advanced but works very well in gauging the strength of the current trend.
The indicator has three different lines associated with it including: The Positive Directional Index the
Negative Directional Index and the Average Directional Index.
The only part you need to pay attention to is the Average Directional Index which is not a directional indicator.
Meaning it will react the same way whether the trend is moving up or down; the sole purpose of the ADX is to determine the strength of the trend.
Monitor the ADX which is the Green line you see in this picture. Notice that every time starts to move above 20 the market begins to trend.
As long as the ADX is rising and moving above 20 you should be in a market that’s beginning to trend above 20%.
The ATR Rises Regardless Of Which Direction The Market Is Trending
2. I saw you trading tutorial video about ATR indicator. I don’t understand how to use the ATR for both stop loss placement and profit targets; can you give me an example please?
The ATR stands for Average True Range and it’s one of the few indicators that measures volatility correctly.
Since the ATR measures the average daily movement and changes of such movements it is ideal for stop loss placement in order to avoid being stopped out prematurely due to market noise or random trading fluctuations.
There are three steps to using the ATR for stop loss placement and profit target placement.
Identify ATR levels at the time you enter the position. You can see in this example the ATR level is clearly identified at any given time by looking at the lower section of the chart.
Once you identify the correct ATR level at the time of entry you simply multiply it by 2 and subtract it from your entry price.
In this example the QQQ had an ATR of $1.05 so I would multiply that figure by 2 and subtract from my entry price.
You can see in this example where I enter the market and where I place the protective stop loss level as well.
Double The ATR And Subtract From Your Entry Price
In this example you can see the exact same process applied to a short position. I enter the position when the ATR is $14.00 and I double that amount first.
After my entry I simply add that number to my entry price.
Add 2 * ATR To Your Entry Price
To calculate the profit target for the long position you would simply multiply the ATR by 4 and add it to your long position.
In this case we entered the QQQ at $66.70 so we would add $4.20 cents to our entry price and that would become our stop loss.
The $4.20 was calculated by multiplying the ATR which was $1.05 by 4.
Multiply ATR*4 And Add To Entry Price
For short positions you would subtract 4*ATR from your entry price.
Since Apple Computers was entered at $456 we would add $56.00 to our entry price and our profit target would be $400.00 even.
Subtract 4* ATR From Your Entry Price
I hope this answers some of the questions we received during the last 30 days.