Swing Trading– Rules first

Rules of swing trading:

A swing trader must always remember the fact that he is risking a huge cash pile on a single trade. The consequences can be either extremely rewarding or completely disastrous. So, a swing trader cannot succumb to psychological influences like greed, ego, hope that make a trader behave like a loser, only to realize it later. I strongly believe in six golden rules whenever I pursue a swing.

If the trade moves in your favor, carry it overnight–the odds favor follow-through.

Yes. you heard it right. The prima-facie motto of the swing trader is to ride the swing. So, let the profits run for the next day. Remember that any swing will happen with a series of gap-up openings for 3 to 5 day period. Why let the profits go away when you are already in a commanding position.

If your entry is correct, the market should move favorably almost immediately. It may come back to test and/or exceed your entry point a little, but that’s OK.

You understand the point here. As said in the previous post(Usine de Largent Securities: What trader are you ?–Swing Trader), swing traders have an edge over the others because their entry is the first when compared to other traders. So, a swing trader needs to capture the momentum right at its inception and the position should immediately reflect profits. If it is not, get out of it with out any qualms. Don’t let your ego or greed make you hold a losing position.

Do not carry a losing position overnight. Exit and play for better position the next day.

Yes. A swing trade is not meant to give you a loss on the first day. If it does, you misjudged the swing inception. Get out of it and wait for another chance. Doesn’t matter how much loss you book. Simply Get-out.

A strong close indicates a strong opening the following day.

Yes. The momentum of a swing sustains for 3 to 5 days on a minimum. Every closing is as important as the next opening. The closure which is nearer to the day highs is termed as a strong closure and such a strong close will only amplify your profits the next day.

If the market doesn’t perform as expected, exit on the first reaction.

If at any given point, the market doesn’t meet the expectations of a swing, it is the time to exit. No more thinking – Just exit.

When in doubt–get out! You have lost your road map and your game plan!

A swing trader must take up a position with extreme confidence and high caution(have a stop-loss. ALWAYS). Once you lose the confidence in your trade or the position you are holding, it’s the moment you lost the trade. Get out of it. No matter you are in profit or a loss, just GET OUT.

Understand that swing trading is subjected to extreme risk and can give a trader enormous amount of profits if applied effectively.

Come back here later to learn about how to ride a bull swing or a bear swing, how to develop a cautious yet effective approach to handle a swing. until the, “Happy Trading”

 

Heikin-Ashi : How to Trade it ?

 

The previous post Heikin-Ashi gives the reader an overview of what the candle is and how better it is than a normal candlestick. This post explains about how to interpret the Heikin-Ashi candle and how to use the interpretation effectively in differentiating trending and trading regions.

Heikin-Ashi candle has the same properties as of the normal candlestick, i.e. a body, lower and higher shadows, OHLC etc., The fact that this candle is derived from previous candles and their OHLC values gives ample weightage to trust the behavior of this candle better than a regular candlestick.

There are five primary patterns to observe in the Heikin-Ashi Candlestick chart.

1. Green Candles with no lower “shadows” or a minimal shadow compared to the body of the candle indicate a stronger uptrend, which means that you can let your long positions ride on the profits.

2. The green candles with long higher shadows signify the strength of the market and remember the trader to add to long positions.

3. As in the case of normal candlesticks, Dojis are also formed in the Heikin-Ashi charts. A candle with a very small body and long upper and lower shadows indicate a trend change. (Fig 2). Those who like to take risk can always buy or sell at this point while Defensive traders do wait for confirmation.

 

4. The red long candles indicate a strong down trend, whereas green long candles indicate a stronger uptrend.

In Brief,

1) Bullish candle with an upper wick indicates a strong up trend
2) Bearish candle with a lower wick indicates a strong down trend
3) Bullish candle with a lower wick indicates a weak up trend
4) Bearish candle with an upper wick indicates a weak down trend.
5) A candle shorter than the previous candle indicates a slow down in the trend
6) A short candle with upper and lower wicks indicates a change in the trend.

The main advantage of Heikin-Ashi candlestick is that it doesn’t give you a false signal or avoids you from getting trapped in false breakouts. Moreover, the Candles also helps you to let your profits learn and doesn’t let you to exit early from your position. Heikin-Ashi candles, if used effectively, will help a trader to maximize his profits and also minimize his trades because the three phases of the market – Bull Phase, Bear Phase and Trend Changing phase are always marked and can be observed easily without the help of any other indicators.

Adding more positions is a fantastic way to take advantage of a long trend that develops and the Heiken Ashi candles can really help you do this. This is perhaps their greatest asset if used with proper money management. Obviously not every trend lasts a long time but if you can catch the long, several hundred pip moves (or most of them) and have multiple positions opened along the way you can really start to see you balance increasing.

That said, Advanced users of Heikin-Ashi correlate it with normal candlesticks and certain oscillators to know the exact nature of the market and take their trend in the right direction. Customization of Heikin-Ashi candles is possible in all ways and this will be discussed in the next weekly meeting.

All the possible interpretations of Heikin-Ashi Candles can be observed in the below chart

  Image courtesy: Chartschool.

Share it if you like it.

Heikin-Ashi : How better it is than a Normal Candlestick ?

      For a trader, most of the profits or losses are experienced only during the trending periods. As a matter of fact, certain traders lose more money in trading periods rather than trending periods. Because, A trending period lets you realize the direction of the trend and your stop loss may save you from incurring huge losses. But, during a trading period, it is never an easy task to setup the stop loss or escape from the nuances of periodic fluctuations all day, sometimes spanning over multiple days.



So, It is important for a trader to differentiate between Trending periods and Trading periods (consolidation periods).  Though there are many indicators which assist a trader in determining the nature of the market phase, none of them prove to be worthy enough to bring him out of the trading phase.

Under this condition, the Japanese developed an advanced version of candlestick charts, i.e. the Heikin-Ashi Candles. The Heikin-Ashi candles, if used effectively will help a trader determine the current phase of the market and help him in making most of the trending phases and preserving his capital in the trading phase. Heikin-Ashi candles are the better derivatives of normal candles and are mostly used in Stock and Commodity trading.

What is the difference between a normal candle and Heikin-Ashi candle?

Heikin-Ashi or Average bar is the technique developed in order to smooth out the trend and differentiate it from trading phase and assist the trader to set the target price more easily and accurately.

A normal candlestick chart is the combination of OHLC candles spread through the time frame. But, a Heikin-Ashi candle is an advanced version of the normal candle stick chart, using a smoothed out formula to calculate its parameters.

The Heikin-Ashi formula:

Current Candle Open = (Previous candle open + Previous Candle Close)/2   (Mid-point of previous candle)

Current Candle High = Max (High, Open, Close)         (All values of the present candle)
i.e the highest of the above three values.

Current Candle Low = Min (Low, Open, Close)           (All Values of the Present candle)
i.e. the lowest of the above three values.

Current candle Close = (Open + High + Low + Close)/4   (All values of the present candle).

The below images give you a clear picture of how Heikin-Ashi candlestick chart differs from a normal Candle stick chart.

Normal Candle Stick Chart

Heikin-Ashi Candle Stick Chart

How to trade a Heikin-Ashi Candle stick …… (to be continued)