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Date Created: 12/20/15
Technical Analysis Basics During the last few weeks, I received a few emails asking me to go over some technical analysis basics. This is not a very unusual request, I regularly get at least 10 emails per week asking me teach more simple strategies and basic analysis techniques. About 90 percent of these emails ask for entry methods. What got my attention and what was so different about this request was a request for clarifications on profit targets and managing winning positions. Not a very common request but a great one. As I have previously mentioned most people who are learning technical analysis basics, want to focus on entry techniques. If you think about it, exits are involved in taking profit as well as managing your risk. Most successful traders focus on exit strategies at least 3 times as much as entry strategies. As you may be aware, there are dozens of different exit strategies. Just like entry strategies, they are based on chart patterns, price action or technical indicators. Today I will cover one of my favorite exit strategies. It's a simple method to learn and to apply to any Stock, ETF, Futures or Currency Market. Keep in mind that this strategy applies to both the long side and the short side. To trade the short side you would reverse these instructions. This exit strategy was created many years ago and is used quite often by large hedge funds and professional traders. I modified it for shorter time frame so that it wouldn’t keep us in trades for years. I will demonstrate this method step by step so that you can get a good feel for how it works in the real world. The first step after you enter the market is to place your stop loss 2 ticks below the low of the entry bar. The second step is to leave the market work for 5 trading days. Do not move your stop loss level or set any profit targets for the initial week of the trade. You can apply this method to day trading; simply switch each trading day for each trading bar. After the position has been entered and had 5 trading day to work, we start counting back 10 day lows each trading day. When the market makes a 10 day low, we will exit the market. Watch how this method keeps you in a trending market. If the stock didn't come down so much, the method would have kept me in a bit longer. This happens often with Stocks or other markets that are trending very strongly and retrace only for a few days at a time. I once thought about a short term trade that kept in in for 6 months because the market didn't want to retrace far enough to trigger my stop. This exit strategy works well with breakouts and other entry methods that are known to produce volatility. One of the first technical analysis basics is to pick stocks and other markets that have good liquidity and volatility. Remember once you are filled, you do not rely on this strategy for the first 5 days or the first week of trading. You rely on your initial stop loss level at this time. Many times beginners get confused about when they should start looking for the 10 day low. You should start on the 6th day after you enter your trade. Notice how the strong trend keeps the stock from making a 10 day trading low. I picked this example specifically because I wanted to demonstrate how a very short term trade can turn into a long term trade. If this happens that's great, because it will make you follow the first principle of profitable trading, cut your losers and ride your winners. That's it for today's tutorial, during the next few weeks I will go over a few more exit strategies including how and when to take partial exits. So stay tuned for more great tutorials from Market Geeks. http://www.marketgeeks.com/technical-analysis-basics/
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