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Brandon Wendell: Online Trading Academy Senior Instructor and Trader Mentor As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his trading classes and lectures. A wealth of knowledge, he has held NASD securities series 7 and 63... More
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Online Trading Academy
  • Pluses Of Trading The Right Way

    Most traders have heard that saying "the trend is your friend" before. In our classes at Online Trading Academy, we teach students not only how to trade with the trends, but how to identify the potential beginning and the end of those trends. One of the unique advantages of the Professional Trader Course is that we allow our students to trade live with our capital. This serves many benefits. The most obvious benefit is that the student gets real life experience in trading live and can feel the emotions that go with every push of the mouse click. The second, more important benefit though, is the ability of the instructor to monitor the students' grasp of the skills taught and to be able to identify and correct trading errors before the students risk their own capital.

    In analyzing many new traders' performances I have seen a disturbing pattern. I notice that they are willing to enter long and short positions in the same security, in the same trading day. When I analyze their trades with them they quickly see how one side of the market was much more profitable than the other. So, why do we try to fight the trend instead of embracing it and trading in the safer, more profitable direction?

    The trend can be divided into two distinct parts: the impulse and the correction. The impulses are the smaller moves in the direction of the larger trend, and are what we should be trading. The corrections are the pauses in the trend and may move sideways or opposite of the trend. These corrections allow traders the opportunity to re-enter into the dominant trend direction before the new impulse.

    Impulses demonstrate several characteristics: they have fast moving prices, they tend to have larger candles and they may have gaps in the trend direction. Overall, they are violent moves that cover large price advancements in a short time period. Kind of sounds like you would want to trade with them, right?

    (click to enlarge)

    Corrections differ greatly in that they are slower moving and cover less price action. These are riskier to trade in that if traders do not exit in time they will be on the wrong side of the new violent impulse. Corrections can usually be measured by supply and demand levels on the current time frame, a return to a moving average or trendline, or even Fibonacci retracements.

    (click to enlarge)

    There are many techniques we teach in our classes to identify the current market environment. If you do not take the time to do this before putting your money into the market you greatly reduce your chances for success. Take the time to see where you are trading and trade with the direction that offers the greatest profit potential with the least amount of risk… the impulse. Use the corrective periods to set up for the next trade. If you are not sure how to identify these environments come to one of Online Trading Academy's classes and learn. Trade with your friend, the trend!

    Brandon Wendell

    bwendell@tradingacademy.com

    May 23 11:32 AM | Link | Comment!
  • That Figures – Using Point And Figure Charts To Stay In The Trend

    In a recent Online Trading Academy Mastermind Community Clubhouse session I was teaching some advanced stock charting techniques. A few of the students asked if I could revisit an old topic I had written about called Point and Figure charting. I had learned this trading chart technique as I was studying for my Chartered Market Technician's exams and have used it on occasion to identify dominant trends and to keep myself from exiting positions too early.

    Free WorkshopLong before we had computers to chart price, traders were making a living and doing it by watching price movement. One of the earliest types of stock trading charts was called point and figure charting (P&F). It started from traders who would tick off prices as they watched the trading. Eventually the ticks changed to X's and O's to note movement in price and even see trends.

    Today, many chartists have switched to candlestick charting to make their decisions to buy or sell. A drawback to this style of charting is that many people are prone to exiting early from profitable trades when they see small pullbacks or corrections. An advantage of point and figure charting is that it allows the trader to see the trend and stay in the trend even through minor corrections. For this advantage we may sacrifice some profits with a larger stop, but with the larger profit potential it may be worth it.

    Another interesting feature of point and figure charting is that it does not take time into account when charting. On a candlestick chart, you will have a candle for every period. For instance, on a five minute chart you would have a candle every five minutes whether the price moved or not. In a P&F chart, a new notation is made only when price moves by a certain amount. If there is no trading or if price does not move enough, no notation is made.

    To create the trading chart, you will use an "X" to note when prices rise by a certain amount and an "O" when they decline by an amount. You only put either X's or O's in a column. If you need O's due to a reversal in price, you would start a new column. You do not put X's and O's in the same column. You must first decide the minimum amount of movement to note. This is referred to as the box size. You can set the box size for anything you would like but remember, the smaller the size the more sensitive the chart will be. This may be good for short term traders but it can cause you to overreact to slight corrections. As a rule of thumb, you should set the box size at about 1% of price. You could use 2% when charting indexes like the S&P 500 and the NASDAQ.

    You also need to decide the reversal setting. This will be the multiple of the box size that would create a reversal signal. For instance, if you set the box size at $1, a 1×1 chart would change from a column of X's to a column of O's when price reversed by $1. On a 1×3 chart, you would continue to mark X's for the upward movements until you have price reverse by at least $3 ($1×3). Once that happens, you would start a column of O's to the right of the previous column.

    The larger reversal size will filter out many small corrections that might have otherwise scared traders out of positions.

    Buy and sell signals can be as simple or as complex as you would like. You can take a simple buy signal when a column of X's rises above the previous column of X's. You could stay long until a sell signal has been generated. The simple sell signal comes when a column of O's breaks below a previous column of O's.

    When we trade, we should know at least three things about the position before we take it. We need to know our entry, the stop, and the target we hope to achieve. A point and figure chart can offer all of that to us. We can place our stops for longs just under the last column of O's. As long as there is no reversal that breaks that low, we stay in the trade.

    The system would be similar for shorts. We would enter a short on a sell signal and place our stop above the previous column of X's. We would stay in our short position until we have breached that previous high.

    If we happen to be long or short in a large move we may not want to wait for a large reversal to exit. If we were to wait, we may give back too much profit. So, instead of waiting for the typical sell signal, stop yourself out when you have the first three box reversal.

    For the target price, we can use a horizontal box count. When prices move, they usually originate from a basing area. We can project the width of this basing to offer probable targets for the trend when we are in. The target does not have a timeframe and can take time to reach. Remember, only price movement matters, not the passage of time.

    If we are using a larger reversal size, 1×3, 20×3 or so, we can still use a horizontal projection. In this case, we would multiply the horizontal box count by the box size and the reversal size to determine the projection length.

    So, these are the basics of point and figure charting. Next week I will explore more advanced techniques and patterns that you can trade using this style of charting.

    Until then, trade safe and trade well.

    Brandon Wendell

    bwendell@tradingacademy.com

    Apr 29 1:15 PM | Link | Comment!
  • A Perfect Pair Of Stocks

    I wanted to extend a special thank you for all fellow Veterans on this Veteran's day. Your sacrifices will never be forgotten.

    The majority of trading skills that are learned in one asset class can often be applied in another. In the Professional Futures Trader Course at Online Trading Academy, we teach students the skill of spread trading. Spread trading reduces the risk in trading securities and also takes advantage of mispricing between two related securities.

    Spreads in futures, options, and also stocks involve buying one security while at the same time shorting another. Since you are both long and short, the overall movement of the market doesn't matter. There is no directional risk. If the market moves upward, both securities move up. The long will profit while the short loses. If the market drops and the prices of the securities drop, then the short profits while the long loses.

    So how does one make money in these spreads? Well the pace that one security will move should be faster than another. If you pick the correct direction for the spread you make profits.

    In the equity markets, this style of trading is called pairs trading. There are many publicly traded companies that do similar type of work or produce similar products. It makes sense that their stock prices should also move in similar manners. When one stock's price moves faster or slower than their related company's stock, then there is an opportunity to profit on the mispricing between the two.

    You first need to select a pair of stocks (hence the name pairs trading) that are related. Their chart movement and correlation should be high. In the following example I used Exxon Mobil (NYSE:XOM) and Chevron Corporation (NYSE:CVX).

    xom pairs

    In the last six months, CVX and XOM have moved together approximately 87% of the time. This is most of the time but not ALL of the time. Prices are mean reverting. When the relationship between one stock's price and another changes due to one of them becoming overbought or oversold, you can use a pairs trade to profit as the prices return to their normal relationship, (mean reverting).

    xom correlation

    In the following example I have charted the price difference between CVX and XOM under the charts of the two stocks. On October 15th, XOM had become overbought (expensive), versus CVX. This caused the spread (price of CVX minus XOM) to narrow.

    A pairs trader would have noticed the opportunity as the spread chart was also coming into demand and could have bought the oversold CVX at $108.57 and shorted the overbought XOM at $89.00.

    xom spread

    Notice that the price of both securities moved upward. Your long would have made money while the short would have lost. The success in this trade relies on the spread between the two stocks widening. This happened when CVX moved up faster than XOM. By October 29th, the spread widened and hit a supply zone and the trader could have exited at the close of that day. The XOM position was shorted at $89.00 and closed at $94.59 for a $5.59 loss. The CVX long made $8.57 for a total of $2.98 profit on the spread. Both stocks moved higher but with the spread widening the trade profited. Even if both stocks moved down it could have been a profitable trade as long as the spread widened.

    Before you go out and start jumping into pairs trades on related stocks, I must warn you that there is more to it. This was a simple spread because the two stocks had a similar Beta and also price point. In pairs trading, you want to be dollar and or market neutral. That is a little trickier and will be the topic of a follow up article. Until then, trade safe and trade well.

    Brandon Wendell

    bwendell@tradingacademy.com

    The original article can be viewed here

    Tags: stocks, Exxon, Chevron
    Nov 16 1:31 AM | Link | Comment!
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