A guide to getting started, basic technical analysis, & strategy.(Follow me on stock twits for updates when I add more information.)
Before I get into my strategy, I would like to express that I’m not claiming to be some stock market expert or day trading guru, and truth is, I’m just a dreamer like you. A dreamer of a brighter future, a dreamer of everyday being a Sunday afternoon, and every night, a Friday night. I’m not saying making money in the stock market is effortless. I can tell you from my experience and my journey over the last few years, it’s far from it; however, when you find something you love that is also profitable…that is freedom! I want to keep it 100 so to speak. Not sure what that means? That’s ok, you may be behind on the times, but you’re not too old to get into investing the right way! All jokes aside, this is primarily aimed towards the younger generation, for being in one’s youth is the best time to take risks, but dont worry, I am going to go more in-depth about how social media is shaping the future of investing.
I want to make this very clear. Not everyone is cut out for investing in the stock market. If you just watched that stock video with the guy telling you how anyone can do it with his simple formula… vague I know, for I just described the majority of the ads for discords and various other forms of trading services. Proving true with all aspects of life, one may never know if they will succeed at something if they do not try. I simply want to show you how I got started and provide tools to expedite the process. How one learns is being redefined by technology and the ability to have questions answered by simply reaching into ones pocket for their cellphone. The amazing thing about this is the majority of the resources you need are free, but knowing where to look amongst the plethora of information online can be difficult and learning anything can be overwhelming. I do not want these obstacles to hinder you from reaching your potential, so I will do my best to help you get started on what could be the most exciting journey of your life!
The title of this section is somewhat misleading, for I do not follow any one set strategy. The stock market is ever changing and ones plan should be just as adaptive. Having multiple strategies can be viewed as “the strategy”, and I will go more in depth in this section about what exactly I mean. It is also important to forge ones own strategy, but this quick guide can help you get started! Now, before I get into that I would like to add that even with the changes in the market, and the different strategies that I use, I tend to try to stick to these rules to the best of my abilities. (as always bolded terms can be found in the terminology section).
Rule #1 Always have an entry and exit strategy. The best analogy I have heard for this is to think of the stock market as “Mr. Market”. As a trader, you work for Mr. Market, he does not work for you. Here is an example of what I mean: WRONG WAY 1.”This stock is currently @ $1.00 per share and based on what I see in the chart, it is going to $1.50 per share.” This could be a reasonable evaluation, but here is the right way. RIGHT WAY 2. “This stock is currently @ $1.00 per share and based on what I see in the chart, it is going to $1.50 per share; however, I will continue watching my indicators and gauging the overall sentiment along the way, and if it loses momentum before my PT (price target) I will take my gain, AKA sell the stock. Trader one could very well miss selling this stock @$1.35 for a 35% gain only to have the price drop back to $1.00 simply because he thought he was right. Trader two will monitor this trade from the time he enters to the time he exits, and if things go south according to his indicators, he will be more likely to see this in time, still managing to cash a gain. There is no such thing as a “bad gain”. Would you rather be trader one or trader two? DO NOT let greed get the best of you. For more information and a great example, check out this article here.
Rule#2 Always use at least 3 different technical indicators when creating the entry and exit strategy. Technical analysis is not always right, so to be on the safe side one wants to see multiple buy or sell signals.
Rule #3 Cash a 10% gain on a momentum play unless it is moving upwards with such momentum that one can hardly put a sell order in without the price continuing to climb upwards. Now, this one will certainly come with some debate, so I will add this. One can chase 50-100% gains, but take it from me, it is much easier to predict a 10% move, and if you do this consistently, it will add up.
Rule #4 Always do your own analysis and never go by what others say. When exchanging ideas with other traders, look for the similarities you share with the individual or individuals. This can be a great tool to give you confidence in your trade, and trust me.. you are going to need it!!
Rule #5 Never jump into a trade without doing your research, for even if it seems to be moving upwards quickly, you have probably already missed it. One should wake up early, preferably at least 7am eastern time, before the market opens to scan for news and review a quick scan of the fundamentals of the particular stock. Look for real news, and avoid what I consider fake news. I do not mean it is some falsely written article. What I am referring to is news that does not “hold enough weight” to create any sort of real movement. As time goes on you will learn the difference, but don’t worry I will be putting together a section for the different types of news soon! A great example on this article, check it out here!
Rule #5 Trading psychology should be part of every trade you enter, and I will be going into more details about this in another section coming soon titled, “Trading Psychology”.
Rule#6 Try not to buy a stock when the price is well above VWAP, for it will often pullback to these levels and create a better buy opportunity. (if the VWAP level holds)
Basic technical analysis
Now that you have familiarized yourself with these rules, I will get more into strategy. First off one needs to have an understanding of basic technical analysis, so I will do a quick review of some of the indicators I find most useful.
Simple moving average
The first indicator I would like to discuss is the simple moving average, often referred to as SMA. Personally I use four different variations of the SMA, these work in pairs of two, and each has their own purpose. I use the 5 day SMA overlapping with the 20 day SMA for shorter term trends, mostly for day trades. The 50 day SMA overlapping with the 200 day SMA to judge the overall strength of the price movement longer term. More information on SMA can be found here. The overlapping of the two different simple moving averages can be used to determine whether or not the stock is currently in or heading towards an up or downtrend. When overlapping the two different moving averages, one wants to always use the lower number. Lets use the 5 and 20 day for this example.
In the example above the 5 day SMA is represented by the light blue line, and the 20 day SMA is represented by the dark blue line, Of course when this is set up the color scheme is optional but I prefer to represent the lower day SMA with the lighter color and the higher with the darker. when the lesser SMA crosses the greater from below this will represent an uptrend, as in the example above. When the lower SMA crosses, or begins to cross over the greater SMA this can mark the beginning of a down trend. To recap, The 5 day overlapped with the 20 day is what one will want to use when monitoring a short term trade, and when in an active trade I prefer to use chart timeframes of 1 minute, 5 minute, 30 minute, 4h, and a daily charts, but we will get more into that next.
More on timeframes.
Timeframes represent blocks of time in chart data, and these different timeframes can give you an overall better picture of how the stock is behaving. The 1 & 5 minute timeframes are especially beneficial when preparing ones entry & exit strategy. The 1 minute can be used to determine how the next 5 minute block will look and can help better predict price movement combined with ones technical indicators. More on timeframes here.
Another great indicator is VWAP.
One may have heard of other traders referring to ” a bounce off VWAP” and this is because generally it can be a great indication of a support level when a stock is having strong upwards movements in a single trading day. I prefer to use my VWAP indicator on a five minute timeframe. More information on VWAP here.
MACD or (moving average convergence divergence) is a momentum indicator used to judge the overall strength of the movement whether it be bullish or bearish. Generally colors green and red are used to indicate more buying or more selling.
In the picture above, MACD is the indicator on the bottom. As you can see this mirrors the price action on whichever timeframe you are using, and when the MACD crosses from Green to red in general indicates a price decrease, and the opposite holds true as well.
For more information on MACD, just visit this link here!
RSI or (relative strength index) is another momentum indicator and this can be used along with MACD. It shows in a more graphical version, if the stock is overbought or over sold. If you use this along with your MACD indicator, and remember to think ahead and look for patterns. An example would be the RSI coming to a peak then returning to a support level. Watch to see if this peak is in the oversold range for this could be a good indicator of when to buy then sell for a quick profit. For more information on RSI visit this link here!
RSI is the indicator below the MACD, and as you can see it mirrors it as well. All these indicators work together like a well oiled machine.
This is by far one of my most used patterns when it comes to charting. Below will be an example of this and how it played out in real time during a trade on a ticker called $TLRY .
The black line is the level I purchased, the green is the flag pole, the yellow is the bottom of the wedge channel, the purple is the top of the wedge channel, And the red represents how the price should breakout and go up from there. The yellow and purple lines make up the wedge, and once the downward and upward pressure meets at the end of the wedge, generally you can expect a breakout. If it can surpass the high of day, generally you can expect the new upward price movement to be the same length as the pole of the flag.