Avoid trading when market is far from MA20, MA100 & MA200

1. Avoid trading when the market is far away from the moving average

When the market is trending, it tends to mean revert towards the moving average.

Depending on the type of trend you’re in:

• In a strong trend, the market tends mean revert to the 20 MA.
• In a normal trend, the market tends to mean revert to the 100 MA
• In a weak trend, the market tends to mean revert to 200 MA

Thus, the last thing you want to do is enter a trade when the market is far away from it’s moving average.

Here’s what I mean:

Pro tip:

You need to identify the moving average that is currently being “respected” by the markets.

In a strong trending market, the moving average value is lower, and in weak trending markets, the moving average value is higher.

If you want to learn how to trade with moving averages, I would recommend reading Moving Average 101, by Steve Burns.

2. Support & resistance helps you identify areas of value to trade from

You want to buy low and sell high, right?

But the question is:

How do you define what’s low and what’s high?

Allow me to introduce to you…

Horizontal support & resistance

This is useful because it helps you identify areas of value on the chart.

Support – Area on the chart where you’re are looking to buy “low”

Resistance – Area on the chart where you’re looking to sell “high”

Here are a few examples:

Also, moving average helps you identify areas of value in the form of…

Dynamic support & resistance

These are Support & Resistance that moves along with the price.

Dynamic support occurs in an uptrend, and dynamic resistance in a downtrend.

They can be identified using moving averages. (I use 20 & 50 EMA).

This is what I mean…

Pro tip:

In a strong trending market, the price may not pullback towards horizontal support & resistance (which cause a lot of traders to miss the trend).

Instead, they tend to pullback towards dynamic support & resistance, which is an area of value you must pay attention to.

3. Trading at support & resistance gives you favorable risk to reward

Here’s the thing…

If you enter trades in the middle of a range, it never gives you a favorable risk to reward (at best 1 to 1).

An example:

But…

If you enter trades at support & resistance, it would greatly improve your risk to reward.

Here’s what I mean:

Pro tip:

The risk to reward profile is only one side of the equation. The other thing you need to take into account is the probability of your trade working out.

4. The longer it ranges the harder it trends

If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try and fade that price move. When you get range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion. – Paul Tudor Jones

If you notice the price has been ranging for a long time, you’re not alone.

Traders all around the world will be seeing the same charts as you.

Some will be queuing to short the resistance, and some will be trading the breakout.

If the price does trade above the resistance, shorts will get squeezed, and breakout traders will hop on the bandwagon.

That’s why price trend for a sustained period of time, due to the imbalance of buying/selling pressure.

Here are a few examples:

You’re probably wondering:

I don’t have the patience to wait this long. I want to capture big moves in the market, now.

And this is what I’ll cover next…

5. Narrow range candles usually lead to explosive moves

You’ve learnt that the longer price range, the harder it’ll trend. Now, you can take this concept further and apply it to the range of candles (instead of time).

The thing you’re looking out for is… narrow range candles.

Why?

Because you can expect an explosive move to occur soon.

Here are a few examples:

So, when you get series of narrow range candles, get ready for an explosive move.

These findings can be validated by the works of Adam Grimes, Tony Crabel, and Mark Minervini.

6. Wide range candles serve as “hidden” support & resistance

A wide range candle is formed due to an imbalance of buying/selling pressure.

This represents “hidden” Support & Resistance in the markets (known as Supply & Demand by Sam Seiden)

Here’s what I mean:

There are traders who swear by Supply & Demand, and some who do just fine, with Support & Resistance.

Here’s the thing…

You don’t want to trade them in isolation, but use them with other technical tools, that add confluence to your trades.

7. False breakout provides one of the best entry to profit from “trapped” traders

First, let me explain what is a false breakout.

I define false breakout when price breaks support or resistance, only to close back into the range.

Here’s what I mean…

Why is this one of the best times to enter a trade?

Because you’re taking advantage of traders who are being “trapped”.

Imagine:

A trader, called Michael, went long on the break of resistance because he expects a rally.

After a few candles, price traded against him and closed under resistance.

At this point…

Michael is “trapped”. And chances are, there are many traders like Michael, who took the same breakout trade and are “trapped”.

Now, a proficient trader can take advantage of this.

How?

By shorting the false breakout, with expectations that the “trapped” traders would cut their trade, and fuel further price decline.

And this my friend is the power of false breakout.

8. Trading with the trend gives you greater profit potential

A mistake made by many traders is that they become so involved in trying to catch the minor market swings that they miss the major price moves. – Jack Schwager

One of the best ways to improve your trading performance is, trading with the trend (and not against it).

This greatly increases the odds of your trade working out, and gives you a greater profit potential.

Here’s what I mean…

Now…

If you want to learn how to define a trend, go watch this training video below:

So, when is the best time to trade continuation patterns?

You guessed it, in a trending market.

An example:

Moving on…

10. How to tell when a trend is ending

These are 3 things I’ll look out for:

• A “respected” moving average is broken
• Break of structure
• Break of trendline

An example:

Let’s look it one by one…

1.     Price broke and closed below the 50 EMA, which was a dynamic support that has been “respected” by the  markets

2.     Price broke and close below the trendline

3.     A new structure low in the market is formed. Now you’ve got a lower high and lower low

When you’ve got all 3 factors lined up, it increases the odds that the trend is over.

Here’s another example:

From http://www.newtraderu.com/2016/05/10/10-price-action-trading-tips-can-learn-10-minutes/

To recap, these are 10 price action trading tips you’ve learned today…

• Avoid trading when the market is far away from the moving average
• Support & resistance helps you identify areas of value to trade from
• Trading at support & resistance gives you favorable risk to reward
• The longer it range the harder it trends
• Narrow range candles usually lead to explosive moves
• Wide range candles serve as “hidden” support & resistance
• False breakout provides one of the best entry to profit from “trapped” traders
• Trading with the trend gives you greater profit potential
• Continuation patterns work best in trending markets
• A break of structure, trend line, and moving average usually indicates the trend is coming to an end

Trade first 30min S&P Opening Range for breakout

How to Trade the Opening Range to 
Identify Breakout Opportunities

Geoff Bysshe, MarketGauge.com

Bigger Profits Are Easier When Your Trades Are Immediately Profitable

Welcome, if you’re a day trader, swing trader or options trader this article is for you because…  

You’re about to discover a focused approach to anticipating the markets’ next move, along with trading tactics that lead to immediate profits and trade entries you can be confident in trading whether you are a new trader or have years of experience.  

Think about how you feel, and how you tend to trade, when a new trade is substantially profitable immediately after you enter it.  

Now contrast that feeling with how you feel, and tend to trade, when the market is about to close and you’ve been in a trade for a few hours that is trading at a loss.  

If you’re like most traders, the immediately profitable trade creates a desire to “trade this one right.” Your thoughts are on how to make the most of the apparent opportunity. You’re also enjoying trading.  

The losing trade scenario, on the other hand, is disappointing. You’re more likely to be thinking about how to change the trade, rather than confidently sticking with your initial plan. This is common even among experienced and disciplined traders who know that losses, when managed properly, are not a problem.  

Regardless of our trading style or instrument (day trading, swing trading, investing, stocks, ETFs, options, forex, etc.) I believe that we all enjoy trading more when our trades are immediately profitable.  

More importantly, I also believe that immediate profitability makes it easier to be more disciplined, which in turn leads to more trading success.

Immediate profits are only one important result of having great entry strategies and tactics. 

Even more important than immediate profits is having enough confidence in your trade to ensure you trade with discipline. When you have enough confidence in your trade, “immediate” profits becomes a relative term. This means that even if a trade initially trades at an unrealized loss, you won’t have that feeling of disappointment.  

How To Create The Confidence In Your Trade That Eliminates The Frustrating Feelings Of Unrealized Losses And Reduces Real Losses!  

Successful traders confidently believe they are doing the right thing when they take a loss.  

Since beginning my trading career in 1990 on the floor of the New York commodities exchanges, and spending years in a multi-billion dollar hedge fund, I’ve worked with hundreds of professional traders and thousands of active individual investors. In this time I’ve found that confidently taking a loss is a common theme among successful traders at every level – floor traders, fund managers, and active individual traders.  

One goal of this book is to show you how you can have the confidence of a pro in determining and executing on your stop losses, so you can improve your profitability. There are several ways to accomplish this level of confidence, but this book is narrowly focused on a very specific way of identifying great trade entries with stops you can have confidence in.  

A great trade entry is one that has a risk level (a stop loss)and three important qualities:  

1. You believe that you should exit the trade when the stop level is hit. This leads to consistently executing your plan.  

2. The potential loss is small relative to the expected return when profit targets are hit. This leads to more profitable system.  

3. The frequency of getting stopped out is in line with frequency and expected return when profit targets are hit. This leads to a     more predictable equity curve and more confidence in trade execution. 

A simple starting point for selecting a stop level that can provide all three of these critical qualities of a great trade entry is to have your stop loss be outside of the current day’s range.  

The low or high of the day creates an emotionally powerful “line in the sand” that seems to naturally command the respect of traders. Think about how you feel when markets make new highs or lows. Are you more inclined to pay attention and respect the “trend of the day” at this point?  

In my experience of working with successful traders, most traders are more likely to feel confident that their stop is safe when it’s beyond the current day’s trading range. This alone can improve your trading because it leads to less second guessing and moving stops prematurely.  

Additionally, traders tend to feel more accepting of the fact that their trade is not working and exit the trade as they planned when it corresponds with a break of the current day’s range. This leads to more disciplined trading and less second guessing your stops when they are hit.  

However, better trading is not simply placing your stop below the low of the day if you’re long, or above the high of the day if you’re short! You need more of an edge to determine when the high or the low of the day has been put in, and which days you should use this tactic.  

In other words, you must identify the RIGHT DAY and TIME to use the day’s range as your stop.  

You’re about to discover a reliable way to determine the day’s high or low early in the day. This creates powerful opportunities for all trading styles to use these levels for great stops that are quick and easy to identify and, as discussed above… leads to less second guessing.  

For example:  

If you’re a day trader… when you are able to buy near the low of the day, you’ll find many opportunities for trades that will have very profitable reward-to-risk ratios that don’t require the market to do much more than simply return to the high of the day!  

If you’re a swing trader… you’ll be able to pinpoint the exact days to take very low risk trades that are more likely to enable you to avoid holding positions overnight that are not yet profitable. In addition to having more of your first days in the trade be profitable, you’ll be able to identify trades that have multi-day or more trend potential, creating huge profits relative to your initial stop level.  

If you’re an option trader… you’ll be able to identify market turning points for precise timing of directional option strategies, and enjoy the benefits just listed for the day traders and swing traders.  

Use This Floor Trader’s Secret Charting Tactic To Anticipate The Market’s Highs, Lows, Trends & Reversals  

It may seem hard to believe, but this trading tactic can be so simple that I used it to “chart the market” without a computer! I didn’t have a computer standing on the trading floor in the early 1990’s.  

Despite its simplicity, the principle works because it is based on the driving force behind the most important price points of any trading day. That force is human emotion – fear and greed.Remember your feeling of excitement when the market in which you hold a position goes racing your way right as the market opens? How about the feeling when the market gaps open in the direction of your position? Nice way to start the day.  

And have you also had the frustrating experience of the excitement from a market open in your direction turn to disappointment as the market suddenly reversed? If you’ve traded for any period of time then you’ve certainly felt the anxiety of a profitable trade swinging into a losing position in the opening half hour of the trading day.  

Fortunes and egos are inflated and burst during the opening several minutes in many markets all the time. Even if you have or don’t have a position in the market, the opening minutes of the trading day can be an emotional roller coaster. This is exactly why the first 30 minutes of the trading day turns out to be very statistically reliable in determining the day’s high or low.  

In fact, 50% of the time the S&P 500 will make its high or low of the day within the first 30 minutes of the trading day. 

I’m using the S&P 500 as the example, but you will find other markets (stocks, ETFs, and futures) to have a similar statistical bias that you can profit from and here’s how…  

Stop and think about some of the implications of this data.  

● The first 30 minutes is only 8% of the trading day, yet 50% of the time it determines the day’s high or low. This makes it a           very significant time of the day for anticipating reversals and setting price levels that will likely remain as the high or low for         the entire day.  

● If you are going to set your stop below the low of the day, you give yourself a big statistical edge by waiting for the first 30          minutes of trading to finish.  

Plus, you can make this statistical edge even stronger by combining it with a few simple indicators.  

We’ve found easy ways to identify market conditions that indicate with 83% accuracy that the high or low will be determined in the first 30 minutes of a particular day. Even more impressive is that when these same criteria are used, you can determine that the low of the day has been set after the first 30 minutes 62% of the time. These are the best days to use the low of the day in your stop.  

The Opening Range Defined  

From this point forward in this book I’ll refer to the high and low of the first 30 minutes of the trading day as the “Opening Range” or the “O.R.” The Opening Range can be calculated using other time frames as well. Common time frames include 2, 5, and 15 minutes, and even the first hour.In our trading at MarketGauge we focus on the 2, 5 and 30-minute Opening Ranges. They all serve specific purposes. For example, the 30-minute O.R. is the best place to start for buying against the low of the day (or selling against the high) for day traders and swing traders.  

Of course you’ll use charts on your computer to figure out the day’s Opening Range, but now you can see how floor traders could use this tactic even without access to a computer. As illustrated in Chart 1, the OR high is simply the high for the day after the first 30 minutes of trading, and the OR is the low of the day at that time.  

Chart 1: O.R. Defined

How To Objectively Evaluate Any Trading Day To Anticipate the Day’s Trend For Bigger Profits & Avoiding Losses

Every day in the market is different. It presents its own trend, opportunity and challenge depending on your perspective. The direction and magnitude of the market’s moves from day to day can seem random to the untrained eye, but the market does follow patterns and leave clues indicating its most likely direction.  

The Opening Range is a trading tactic that pros have used for decades to read the market’s mood so they can anticipate and profit from the market’s intra-day moves.  

When you “chart the market” or look at it through the lens of the Opening Range, you’ll have an objective perspective on whether the bulls or bears are in control on any given day. This perspective begins with a very powerful understanding that the O.R. high and O.R. low levels will be critical support and resistance levels for the rest of the day. 

With this understanding of market behavior you can anticipate that these levels will also represent levels where markets will reverse or accelerate into big moves. If you look at the trading day with this process you will be on the right side of the biggest market moves, and avoid getting hurt by them. 

How To Read The Market With The O.R.  

To begin using the O.R. to anticipate the market’s next move follow these simple rules.  

First, let the market establish its 30-minute O.R. high and low. Even after the Opening Range period, keep a neutral bias while the market trades within its O.R.. As you learn more you’ll know if an O.R. has a bullish or bearish bias.

Don’t Miss, or Get Hurt By Trend Days  

Next, wait for the market to attempt to trend by breaking the O.R. range. A successful breakout beyond the O.R. will indicate a trend day is forming. For example, if the market breaks below its O.R. low, you should consider it a trend down day unless and until it rallies back over its O.R. low level.  

Too many traders lose money in big down days because they don’t have an objective method like the O.R. rules to determine that the market is in a down trend which should not be bought, and in fact, it should be expected to continue lower. 

Chart 2: Downtrend Day

You will NEVER GET CAUGHT IN A MAJOR MARKET DECLINE if you only initiate your long trades above the O.R. low and stop out if a new daily low is hit. Buying markets that are under the O.R. low is equivalent to trying to find a bottom when the bears are in control. 

This is much riskier than finding a bottom when the market is in a neutral to bullish mode (i.e. over the O.R. low).

Additionally, any rally from below the O.R. low will have to get through the resistance of the O.R. low (see chart 2).  

As you now know, the O.R. low is often significant support until it is broken, and becomes a significant area of resistance once broken.  

As a result, it is very common for rallies during a down trending day to roll over at the O.R. low, and resume the day’s down trend.  

Use Opening Range Reversals To Buy Near The Low, Or Short Near The High  

When you combine Opening Range Reversal tactics with the emotional benefit, and statistical edge of placing your stops outside the day’s range as discussed earlier…  

You have a very effective approach to entering low risk trades that have a high probability of working consistently!  

An Opening Range Reversal (ORR) describes a condition when the market has reversed against an O.R. high or low sufficiently to anticipate that the low or high of the day has been set, and it can therefore be used effectively as a stop for your trade.  The basic ORR trade setup that I’ll cover here occurs when the O.R. low is touched or broken followed by a rally back over the O.R. low. As you become more familiar with how markets trade near their O.R. lows you’ll discover many profitable trading patterns, but to get started you only need to know one simple pattern. 

A Simple Pattern That Puts Money In Your Trading Account Quickly Because It Pinpoints Reversals 

Chart 3: Higher Candlestick Close

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If you own a share in this company, 
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This pattern is so effective at spotting intraday reversals that I use it for more than identifying O.R. Reversals, but right now our objective is to understand when to buy markets near their low of the day using the ORR and this pattern.

I use 5-minute charts for this pattern.  

At MarketGauge we call this pattern the Higher Candle Close (HCC). It occurs when a 5-minute bar closes over the high of the prior bar.  

Yes, the pattern is that simple, and it works extremely well. But the secret to why it works so well is that we’re using it when it occurs near the O.R. low!  

WARNING: Like most good trading tools, this pattern works well when used in the right market conditions. If you use this pattern randomly it can be frustrating, and even be as annoying as turning on your car’s windshield wipers when the sun is shining! You must combine it with the O.R. Reversal setup.

When I share this secret setup I’m often asked… 

Does it work on 1-minute charts? (probably because traders are always looking to act quicker, and cut risk tighter).

Well, at MarketGauge we also trade with, and teach how to use 1-minute charts for more advanced O.R. patterns along with price and time confirmation, but we DO NOT use this HCC pattern on 1-minute charts.  

So, to get started all you need is a 5-minute bar chart or candlestick charts, which you can find on any charting platform, and the next step - a simple way to identify the best Opening Range to trade with the HCC.  

The Best Opening Range Conditions For Consistent Profits  

When you’re looking at an O.R. for a potential trade think of it like finding a place to live. You’ll ask yourself 3 basic questions.  

1. What does it look like?  

2. Where is it located? 

3. What’s the price?  

A “good looking” O.R. for an ORR trade has a well-defined O.R. low price level. Remember from earlier in this article, the O.R. works best when the market is active and emotionally charged with either fear or greed.

This is demonstrated in the charts by the existence of volatility and/or big volume. Therefore, a welldefined
O.R. low is one that has multiple 5-minute bar lows near it, or a big range bounce from it, or big volume near the O.R. low level. All of these indicate that traders are reacting to the O.R. low, and imply that if the market breaks the O.R. low, and then begins to rally (as defined by the HCC), it is time to trade! Chart 3 above is a good example of this.

“Good location” for an ORR has two considerations 

1. The low of the day should be close to the O.R. low. The reason you want the low of the day to be relatively close to the O.R.     low is because a good ORR trade defines its risk with a stop under the low of the day, and its entry over the O.R. low. In an       ideal situation the distance from the entry point to the low of the day should be a fraction of the market’s average daily               range. 

2. The O.R. low and/or the low of the day should be in a good location relative to important daily chart key reference points.           This is very easy criteria to use to filter out the best ORR trades, and one of the most powerful determinants of the                     predictable profit potential.  

Simply put… The best ORR trades occur in the direction of the daily trend and at support and resistance levels that can be identified on the daily charts.  

Chart 4: AMZN’s location lined up with support from the prior day and the important key reference point of the Floor Trader Pivot (not visible on this chart).

“The price” is your entry price and your risk! It doesn’t take long to become good at quickly
identifying good looking Opening Ranges in good locations.  

This is a skill and tactic you can apply to almost any market and easily adopt into your existing trading rules, or simply trade it as described here, which is to apply the HCC pattern to determine the trade entry.

The Simple Entry Trigger That’s Been “Hidden” in Your Charts All Along 

As you start looking at the markets using the O.R. along with the HCC pattern in the way I’ve described in this book, you’ll find that some trades are such obviously great opportunities that you’ll want to be more aggressive, and get into the trade as quickly as possible.  

You’ll also find trades that look great, but you’d like to have a little more confirmation before entering (i.e. general market conditions may be bearish).  

Now that you know what the HCC pattern is, and where to best apply it, we can focus on the actual “entry price” trigger point for what I’ll describe as the HCC-ORR trade.  

There are actually 3 potential trigger points for an entry. They are all slight variations of the same basic pattern of trading over the prior bar’s high, but they give you the ability to be more aggressive vs. waiting for more confirmation that the market has turned up.  

IMPORTANT: For the purposes of this lesson, it is assumed that any entry trigger point described here is also above the O.R. low.  

Maximum Confirmation  

The entry trigger with most confirmation, and the one I’d start with, is to wait for the 5-minute bar to close over the prior bar’s high, AND then enter when the market trades over the HCC high. This means your entry trigger is actually a trade over the high of the HCC bar.  

I will almost always use this trigger if the close of the HCC is not convincingly above the prior bar high, or if the high of the HCC bar is very close to the closing price. In these cases you’re not increasing your risk by very much, yet you’re getting some extra confirmation the price is moving your way.  

Chart 5 below shows an example of a big range HCC reversal with confirmation.  

Chart 5: A good wide range HCC with confirmation

No Confirmation

There are times where you will not want to wait for maximum confirmation described above. In this case the trigger is simply the close over the prior bar high and the entry is on the open of the following bar.  

This is can be used for situations where the HCC bar’s close is significantly above the prior bar’s high, and it may even have good volume. In other words, the market has clearly demonstrated a reversal.  

In fact, sometimes you will get this pattern, and have the opportunity to wait for a pullback in price to the high of the prior bar to be able to enter a lower price.  

However, if you do not have a good demonstration of range expansions and or volume this can be risky. Chart 6 above is an example of a HCC at the ORR that did not confirm and continued lower. 

“Jumping The Gun”  

As the subtitle “jumping the gun” suggests, this is getting in before the HCC is complete. With some experience in trading ORR patterns you’ll be able to get away with this, and get in early on some trades, but be careful. I would prefer to have unusual volume in situations where I use this approach.  

The trigger when you jump the gun is to enter when the market trades over the prior bar high. So you’re not waiting for the close in what you expect to be a HCC bar.  

6 Steps To Identifying and Executing Low Risk, High Profit Potential ORR Trades With Confidence  

It’s time to pull everything together, summarize the key steps to initiating an Opening Range Reversal trade.  

1. Let the 30-minute O.R. form.  

2. Focus first on the Opening Ranges that are in a good location relative to the daily chart’s trend and support levels.  

3. Identify the Opening Ranges in a good location that also look good for an ORR trade. This means they have well-defined           support at the O.R. low.  

4. Use the HCC as your entry trigger.  

5. Define your risk as being under the low of the day. Give the market room to break the low of the day by a small margin and       reverse without stopping you out!  

6. Set your initial profit targets. If you are a day trader, take at least partial profits near the high of the day, and move your stop       to no loss after the market moves in your favor. If you’re a swing trader, you’re initial target may be higher (and your stop           may be lower). 

Identifying Trade Opportunities In Seconds With This Simple Chart Display  

In my charting platform I have a window that shows both the daily chart and a 5-minute candle chart with volume. As you know the candles on the 5-minute chart are not required, but they make it easier to see where a bar closes relative to the prior bar high.  

With these two charts in plain view it only takes a few seconds to spot when the O.R. low lines up with key daily levels, and when a HCC forms. 

Don’t Sabotage Yourself By Setting Your Trades Up To Fail  

You can evaluate every day’s price action with the perspective of the O.R. to anticipate the market’s next move, but the key to profiting from it is knowing how to spot high probability setups like the one I’ve revealed in this article.

Remember my analogy from earlier – You don’t use your windshield wipers on a sunny day!  

The ORR combined with the HCC entry is an incredibly powerful pattern, but every O.R. low will not reverse. However, you now know how to select good looking ORR patterns. And you know that the location of the O.R., in the context of a bullish daily chart, is the easiest way to identify the most reliable and highest potential ORR trades for both the day trader and swing trader.  

Be selective! If all the trade ingredients are not there, wait for the next one.  

Chart 7: With a daily chart display next to the 5-minute you can see “good location” easily.