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Descending triangle pattern is a type of chart pattern often used by technicians in price action trading. The descending triangle chart pattern forms at the end of a downtrend or after a correction to the downtrend. The descending triangle pattern is the opposite of the ascending triangle pattern. This pattern is known as the bearish triangle descending pattern.

Chart technicians can make use of the descending triangle pattern in order to trade potential breakouts.

Contrary to popular opinion, a descending triangle can be either bearish or bullish. Traditionally, a regular descending triangle pattern is considered to be a bearish chart pattern. However, a descending triangle pattern can also be bullish. In this instance it is known as a reversal pattern.

Descending triangle stock pattern can be viewed as either a continuation pattern or a reversal pattern. The triangle continuation pattern is your typical bearish formation. This pattern occurs within an established downtrend.

On the other hand, a descending triangle breakout in the opposite direction becomes a reversal pattern.

A very important fact to bear in mind when trading the descending triangle is that, it is very subjective. Therefore if you are new trading the descending triangle stock pattern, you need to have a lot of practice. Familiarizing oneself with the triangle pattern trading can allow the trade to build their own custom triangle trading strategies.

Characteristics of a descending triangle pattern

The classic descending triangle pattern forms with a trend line that is sloping and a flat or a horizontal support line. The pattern emerges as price bounces off the support level at least twice. The descending triangle chart pattern occurs after the end of a retracement to a downtrend.

The downside breakout from the support triggers a strong bearish momentum led decline.

However, this textbook pattern seldom occurs in the real markets. In most cases, a descending triangle pattern can also see a sloping base as well. Instead of a flat support level, you can see higher lows being formed.

The illustration below shows an “ideal” descending triangle pattern and a more commonly occurring descending triangle pattern.

Example illustration of a classic descending triangle pattern

Typically, the breakout from a descending triangle is triggered to the downside. The distance from the support to the first high is measured. This measured distance is then projected to the downside where the target price can be set.

Not all descending triangles breakout to the downside. You can also see an upside breakout from the descending triangle. In this case, it becomes a continuation pattern instead of a reversal pattern. The same concept of measuring the distance from the support to the first high is used.

This is then projected to the upside for the minimum price objective.

In the next section of this article, we illustrate five descending triangle trading strategies that can be used.

1. The descending triangle pattern breakout

As the name suggests, the descending triangle pattern breakout strategy is very simple. It entails that the trader anticipates a breakout from the descending triangle pattern. This strategy uses a very simple combination of trading volumes and asserting the trend. The descending triangle pattern breakout can be used to capture short term profits.

The first step in trading this strategy is to pick a stock that has been in a downtrend or in a consolidation phase. The time frame of the chart is irrelevant as you can use this strategy across any time period. Once you have identified a stock and the time frame wait for price action to consolidate.

The trader needs to allow for some flexibility in charting the descending triangle patterns. Simply watch for lower highs and lower lows being formed. Once you have identified this price action, the next step is to draw or chart the descending triangle pattern.

The basic premise of using this strategy is to look at volume once the triangle pattern has been observed. You can typically observe that volumes begin to fall toward the end of the descending triangle pattern formation.

The chart below shows an example of the Microsoft (MSFT) daily stock chart. In the chart, you can see that the triangle pattern was formed after price action was trading sideways. After a brief spell, price falls lower before breaking out from the pattern.

Descending triangle pattern breakout strategy

Volumes are usually lower closer to the breakout. Once you identify the lower volume, simply measure the distance from the first high and low. Then you simply project the same from the breakout area which becomes your target price.

This simple volume based descending triangle pattern is easy to trade but requires lot of time to watch the charts.

2. Descending triangle pattern with Heikin Ashi charts

Using Heikin Ashi charts along with the descending triangle pattern you can develop a powerful but simple trading strategy. Heikin Ashi charts visually stand out compared to the conventional chart types.

One of the main characteristic unique to Heikin Ashi charts is the fact that they can depict the trend easily. Most traders often struggle when it comes to identifying the trend. You can resolve this confusion by switching to Heikin Ashi charts.

In this strategy, traders simply need to wait for the descending triangle pattern to be formed. Once the pattern has been identified, the next step is to wait for the bullish trend to pick up. In most cases, you will find that the Heikin Ashi candlesticks turn bullish prior to the breakout. This can be used as an initial signal to prepare for long positions in anticipation of a breakout.

The next chart below shows the Heikin Ashi chart for Alcoa (AA) on the 60-minute time frame. You will see that prior to the breakout, the Heikin Ashi candlesticks turn bullish.

Descending triangle pattern with Heikin Ashi candlesticks

The projections are based on the same strategy as before. Measure the distance from the first high to the first low and project the same from the anticipated breakout level.

Wait for the breakout from the descending triangle pattern. Initiate a long position after the first bullish Heikin Ashi candlestick. Project the measured distance from the breakout to get the target price.

Depending on your charting platform, you will notice that volume bars also change. This is because they reflect the bullish/bearish sentiment based on the Heikin Ashi candlesticks. Volume bars serve an additional purpose to alert you to a potential bullish breakout.

This descending triangle strategy with Heikin Ashi charts is effective to trade in the short term.

3. Descending triangle with moving averages

Traders and intraday speculators can also combing price action techniques and chart patterns with technical indicators. Moving averages, as one might know is one of the oldest and simplest of technical indicators to work with. In this descending triangle pattern strategy, we make use of the well known exponential moving average indicator.

It is important to note that in this trading strategy, we use the descending triangle pattern to anticipate potential breakouts. The moving average indicators serve the purpose of triggering the signal to initiate a trade.

In the following example, we use a 60-minute stock chart for General Motors (GM). We use a 10 and 20 period exponential moving average. Traders can experiment with their own settings on the period of the moving average; this depends on the time period that you use. For example, for a daily chart time frame, you can use the 10, 20 or 20 and 50 period settings.

Also note that using small periods (less than 10) could make your moving averages more sensitive to noise.

Descending triangle with moving averages

The above chart shows the 10 and 20 period EMA applied to the chart for GM. Notice that prior to the break out the moving averages signal a buy. The moving averages can be a great source to alert you when to initiate a trade.

There is no need to make use of volumes when trading with this strategy. Also note that you will not always see a bullish signal from the EMA’s prior to the breakout. After you get a bullish EMA signal and a breakout, it is an ideal signal to trade.

Projections and target price level methods remains the same as outlined in the initial strategy.

4. The Descending triangle reversal pattern at top

You can identify the descending triangle reversal pattern at the top end of the rally. This pattern emerges as volume declines and the stock fails to make fresh highs. The pattern indicates that the bullish momentum is exhausting. At the same time price action forms a horizontal support level.

After price bounces off the support level multiple times, posting lower highs, we can anticipate a potential downside breakout. The minimum distance that price moves prior to the breakout is measured from the initial high. This distance is projected lower after price breaks out below the support level.

The descending triangle reversal pattern can be very easy to trade if you spot the pattern ahead of the breakout.

The next chart below illustrates the descending triangle reversal pattern in play. The stock chart for Morgan Stanley (MS) shows that after a strong rally, price stalls near the highs. Notice the support level that also stands out.

The Descending triangle reversal pattern at top

The resulting bounce, off the support level leads to a lower high. Following this, price breaks down below the support with strong momentum. As you can see, the minimum measure distance is nothing but the project from the initial high.

5. Descending triangle reversal pattern at bottom

The descending triangle reversal pattern at the bottom end of a downtrend is the opposite. In this case, you will find that price action stalls at the end of a downtrend. A horizontal support level marks a bottom in price.

Multiple attempts to the upside lead to lower highs. Subsequently price action eventually breakouts to the upside from the descending triangle reversal pattern at bottom. Unlike the strategy mentioned previously, in this set up, you can trade long positions.

Traders can anticipate a potential upside breakout and trade the pattern accordingly.

Descending triangle reversal pattern at bottom

In the above chart set up for Goldman Sachs (GS), you can see how price fall to the lows establishing support. The horizontal support level holds the declines where the bounce off the support level leads to lower highs.

Eventually, price action breakouts from the sloping trend line. Measure the distance from the horizontal support to the initial high and project this distance from the breakout level. The projected distance becomes your target price level.

Tips when trading the descending triangle pattern

Subjectivity is essential when trading the descending triangle pattern. Traders who wait for the “classic” descending triangle pattern will often find themselves on the sidelines.

Familiarity and experience are the best ways to trade with the descending triangle pattern. The descending triangle pattern is also know as a measured move chart pattern. A measured move chart pattern is when you measure the distance and project the same from a breakout.

Many other trading strategies can blend well with the  descending triangle chart pattern. It fits perfectly well within an investor’s buy and hold strategy. The triangle pattern also works with technical analysis which can complement the fundamental analysis as well.

In conclusion, the descending triangle pattern is a versatile chart pattern which displays the distribution phase in the stock. Following a descending triangle pattern, the breakout is often swift led with momentum. This can lead to strong results when one becomes familiar with the trading strategies outlined.

The post Descending Triangle – Learn 5 Simple Trading Strategies appeared first on - Tradingsim.

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Finding the Best Stocks to Day Trade [Video]

 

There are thousands of stocks you can trade on any given day. The potential number of trade opportunities can feel overwhelming to the untrained eye. Do you pick popular stocks like Apple or Google to trade? Do you just play IPOs and shoot for a quick flip based on the hype?

Maybe you scan the market in hopes of finding stocks that best fit your trading methodology. If you were looking for a simple list of high volume stocks that you can trade every day and make boat loads of money, you have come to the wrong place.

Finding the best stocks to day trade requires work and quite a bit of research on your part.  In this article I will illustrate 7 methods you can use to identify the best stocks to day trade.

Start Your Day Early

I am going to cover a number of approaches below that you can use in both the pre-market and during the trading day to identify the best stocks to day trade.  Regardless of which approach best fits your day trading style, the one thing required for each selection process is you must get an early start to the trading day.

Gone are the days where you can arrive at 9:15 am, log on and start placing trades.  The market is getting faster and faster with the increased trading volume from hedge funds.  At a minimum, you should start your prep work at 8 am.

This will provide you enough time to conduct your morning research and configure your monitors with the stocks you are actively tracking for the day.

#1   Find the Best Stocks to Day Trade with Pre-market Movers

Day Trade with Pre-market Movers

For those of you that have been trading for some period of time you will know that the pre-market is one of the street's favorite ways to head fake you.  A stock could be up 6% in the pre-market only to open up 2% at 9:30 am.  The reason for the large price swing is due to the thin volume that can carry a stock either way outside of the regular trading session.

I start my scanning at 8:00 am sharp.  This gives me a full hour and a half before the market opens to conduct my research.  Below is what you want to look for when scanning stocks during the pre-market.

  • Stocks greater than $5 dollars.  Before all you penny stock traders begin yelling, I have nothing against you, it is just I have tight stops on my trades and trading a $1 dollar stock does not leave me much room.
  • Volume needs to be somewhat heavy.  If you see a stock up 20% on 200 shares, then look the other way.
  • Once you see a stock that is up on decent volume and above $5 dollars you will want to check the volume average for the last 30 days.  This step is critical because you can filter out all of the stocks that normally trade thinly and are not good candidates for day trading.
  • Make sure you review the broader value of the futures market for the major indices (Dow, NASDAQ and S&P).  While breakouts can move independently of the market, it's always a good idea to go in the direction of the broad market.

Your trading platform should provide you with the pre-market movers; however, if the scans are not thorough enough below is a list of resources:

  1. NASDAQ pre-market values
  2. Stock Market Analysis - list the pre-market movers every morning
  3. Stock Market Watch - provides top gainers and losers but also displays the pre-market value of the major indices.

There are other high powered scanners out there, but to be honest, all you really need is a method to see the top gainers and losers.

The constant need for more information throughout the day will likely lead to over trading or too much confidence.

Not to mention some of these scanners can get pretty costly. My thoughts are you need to show you are able to make money with the most basic of scans before scaling up to the pricier options.

Examples of these pricier scanning options are Trade Ideas and Finviz. What these sites lack in design they more than make up for in their ability to provide you more scans than you can ever dream of needing.

Open to More Risk?

Now that we have covered the more conservative point of view for pre-market trading, let's delve into the wilder side of trading - low float stocks.

Low float stocks are not for everyone as the price moves are significant. These low float stocks are likely penny stocks that trade under $5 dollars.

Please note, if you go down this path do not use more than 5% or 10% on each trade. This is more of a game where you play the pop, but you are not making a long-term investment. Odds are these stocks are priced cheaply for a reason.

Find a Clean Pattern

As we mentioned earlier, you want to avoid charts that have low volume in the morning. How do you know you are dealing with a chart with low volume - just check out the image below.

Thin Volume

Basically, if you feel like you are looking at stars in the midnight sky, the volume is too thin. When I say stars, I am not talking about candlesticks - I mean literal dashes on the charts.

The pattern you trade is solely up to you. Some of you may like ascending triangles, while others may look for red to green setups (meaning the stock starts lower but later exceeds the morning highs).

Low Float

Next up, after you find a stock in pre-market with decent volume, you will want to find the stocks with low float. Why low float?

These are the stocks that can really fly in the morning.

Now on average I find between 2 and 5 stocks that have both the volume and the necessary float requirements.

The key for you is only trading one or two of these setups per day.

You will likely see a list of stocks like the one below:

Movers

As you can see there are a few stocks on both the long and short side that are likely good candidates for opening range breakout or breakdown trades.

Now that we have covered pre-market at length, let's shift our focus back to other ways to identify great day trading opportunities.

#2 Only Trade Stocks with High Volume

Fans of the Tradingsim blog know my thoughts around the amount of capital required to make it in this game. So, assuming you have hundreds of thousands of dollars at your disposal you will need a stock with enough volume to allow you to quickly enter and exit the trade with ease. My personal minimum is 40,000 shares per 5-minute bar.

If you have a brokerage account your respective firm should have a most active list. This is a good start but will only contain the top 20 or so stocks. You will need a scan that is a little broader and provide you trading opportunities that is not being tracked by every investor. You will want to also find stocks that are rising on high volume relative to themselves.

For example, if a stock normally trades 2 million shares a day but has 5 million shares traded before 10 this is something of note. You may be saying to yourself, well these will show up in the most popular in my trading platform, but this is not always the case because again your brokerage platform may only return a maximum number of stocks (i.e. top 10, 20).

If your trading platform does not provide you with a robust screener for high volume stocks below are some great resources:

  1. Unusual Volume provided by Yahoo Finance.
  2. Bar Chart provides a list of over 200 symbols
  3. The Street provides not only the high volume stocks but also has a scan for stocks trading under $5 for all you penny stock lovers out there
#3 Develop your Own Watch list

You will need to develop your own list from stocks you follow on a daily basis.  Again, due to the large number of stocks on the exchanges, it's best to focus on specific sectors.  Below is a list of popular ones:

  • Banking
  • Precious Metals
  • Semiconductor
  • Automotive
  • Pharmaceuticals
  • Retail
  • Internet

Once you have one or two sectors you would like to follow, begin to track the movement of the top issues.  Give yourself a few months of consistently watching the stocks and the sectors in terms of their price movements.

As a follower of the Richard Wyckoff method you know that each sector and stocks will have an 'operator' that is in control of the market action.   This operator is the investor with the most money in your stock; therefore, they have a controlling interest.  To give you a tangible example, during the summer of '08 I began to track the gold market heavily.

Every day like clockwork stocks Royal Gold (RGLD) and Golden Star Resources (GSS) would have sharp reversals at 10 AM.  My system of buying or selling short on breakouts of the morning's trading range would fail consistently with these precious metal stocks.

While experience taught me to avoid this particular sector for 6 months, you could use the watch and learn approach to understand how a particular market moves in order to gain an edge over other traders.

The one challenge with building a list is limiting the number of stocks you watch within 1 or 2 sectors.  Sine you are manually tracking these stocks and building a sense of touch for how they trade.  At most you should only track 10 stocks per sector, so this gives you a maximum of 20 stocks you can follow at any one point.

#4 Look back over your trade history

Look Back Over Your Trade History

Instead of looking to someone else for advice on what the best stocks to day trade are, how about looking at your own trade performance.  I guarantee there is at least one stock you trade on a regular basis for one reason or another.

Funny thing is you will not be able to explain why you keep gravitating to that particular security.  Call it your soul mate or just your stock of choice.  Your comfort level with the stock will make you feel like you "own" its movements.  You can move in and out of the stock with ease and generally make a profitable trade on each attempt.

For me I couldn't get enough of Baidu Incorporated (BIDU).  For all of you fans of the show Scandal she was my Olivia.  I would track BIDU everyday even if she wasn't moving much.  For some reason I was able to predict her movements and never found myself fighting the trade.

So, look back over your trade history, is there one stock that keeps popping up on your list of trades?

#5 Social Media

This is a more recent technique for scanning the market and I haven't tried it personally (I guess I'm too old), but I will give it a shot to illustrate exactly how you can go about searching the social world to find stocks to day trade.  The reason I avoid searching social media sites or read news events is because I do not want anything positively or negatively impacting my view on a stock.  I base my trade decisions solely on the price and volume action of the stock.  Now that I have my disclaimer out of the way, let me try boosting your comfort level and talk about how I would scan the social arena.

StockTwits

StockTwits streams the hopes and random thoughts of investors for each security.  They even have a market sentiment factor which displays at the top of each wall for the respective stock.  In terms of which stocks to best day trade, if you visit the homepage you will see a list of stocks across the top which are trending.

These are stocks that members are actively discussing.  You will quickly notice that these are the stocks in the news, but there are times where members are discussing a move in a stock during the middle of the day before a news publication is able to produce an article.

The best method for using StockTwits without a doubt goes back to the list of pre-market movers. You can of course look at the news event which is pushing the stock higher or read the latest press release from the company, but StockTwits allows you to get a real pulse of the market.

You can actually use StockTwits as a method to validate exactly how much interest there is in the stock.

If you see a stock up 10% but with only two tweets, it's likely not in play.

However, if you can find the stock that is up on heavy volume and the board for the respective security on StockTwits is very active, you likely have a stock in play.

Remember, it's not about the level of bullishness or bearishness on the board - all you care about is if people are talking about the stock you have an eye on.

Stockcharts

Similar to StockTwits but with a twist, is the popular list charts being viewed on Stockcharts.com.  Two things I like about Stockcharts are the site provides a time stamp of when the data was last pulled.  This sounds simple, but this is critical when minutes can mean the difference between winning and losing.  The other cool feature is Stockcharts displays which stocks are consistently popular over time with their user base.

Tradingsim

I would be re-missed if I did not mention Tradingsim.  We are weeks away from deploying a new version of the market movers component for our trading simulator.  Market movers provides a list of the top 20 losers and gainers for every session in the market.  For me when I would do my historical scans, I would have a tough time identifying which stocks were trending on a given day.  Market movers will allow you to pick a day 6 months in the past and you can actually see what the hot stocks were for the day.  Just as you would research and track the hot stocks for each morning, market movers automatically provides this function for you on historical days, so you can just focus on practicing day trading.

#6 Monitor the Earnings Calendar

Monitor the Earnings Calendar

One event that is sure to bring about increased volatility is the reporting of earnings.  You will want to keep track of who is up on deck for the week, that way you can start to monitor how the stock is trading going into the earnings announcement.  I AM NOT advocating you place a trade before the earnings are reported, because this is another form of gambling.  You will however want to know who are the likely movers, so you can add them to your watch list.  This will reduce the amount of research required prior to the market open.  Below is a list of sites that publish earnings calendars:

#7 Focus on One or Two Stocks

Focusing on one or two securities is all about keeping it simple.  In all of the above examples, you would need to scan, watch and react quickly on a daily basis to a number of issues.  If this is something that you feel is too much and you want to become a master of something simple, then look to trade the same one or two issues everyday may be the answer.  When selecting a stock to trade you have two approaches: (1) select the most popular stock or (2) pick your favorite stock based on your past trading performance.  #2 will largely depend on your own trading preferences, so I will cover a few top stocks for day trading:

  • AAPL (Apple) - high volume and great price action.  The popularity of the company has transferred over to the stock's popularity in the trading community
  • S&P 500 Spiders - While this is not a stock but an ETF that follows the S&P index, the volume is huge and provides the means for you to trade the index without trading futures
  • QQQ - formerly known as the QQQQ has been a fan favorite of active traders for over a decade
  • GOOG (Google) - need I say more?
  • TSLA (Tesla Motors, Inc.) - if you like volatility the stock moves as fast as its cars
  • NFLX (Netflix) - the CEO is willing to make bold decisions, this has translated into significant price swings in the stock
  • FB (Facebook) - there are few stocks that have polarized traders as much as Facebook

I think it's safe to say I am a little biased towards the NASDAQ when it comes to day trading.  The NASDAQ's ability in the late 90's to facilitate order flow has in my mind forever stamped them as the preferred index for active traders.

Below are the benefits of trading one or two stocks:

  • Learn the trading pattern
  • Identify the technical indicators best suited for the security
  • Less Stress
  • Less work to do before and after the market close
In Summary

There are multiple ways to select the best stocks for you to day trade.  Remember trading is a journey, so don't try to figure it all out in one day.  Just make sure your scan provides you the means to trade high volume stocks with a sound system that consistently makes you money.

If you do decide to create custom scans you will want to focus on the following key areas:

  • high volume plays
  • gappers
  • pre-market movers
  • red to green and green to red
  • consecutive number of red or green candles
  • biggest gainers and losers

Results for these 6 scans will provide you more than enough as a new trader.

I hope you found this article to be helpful in your quest of finding the best stocks to day trade.  If you would like to see how we can help you further, come over to Tradingsim.com and give our market movers a shot. I'm sure you will find it useful.  Good Luck Trading.

- Al
Photo Sources

Stock Ticker - francisco.j.gonzalez

The post How to Find the Best Stocks to Day Trade appeared first on - Tradingsim.

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In this article, we will cover everything you need to know about 5 minute charts. First, we will touch on the basics of the 5-minute chart. Next, we will move onto two popular chart patterns comprised of 5 minute charts that print every day. Lastly, we will cover advanced trading techniques of combining indicators and multiple time frames.

Contents

5-Minute Bar Definition
So, How Exactly Do You Trade 5 Minute Charts?
Trading with Indicators
Using Multiple Timeframes

5-Minute Bar Definition

How to Trade 5 Minute Charts

5 minute charts illustrate the summary of a stock's activity for every 5 minute period within the trading session.  The stock market is open for 6.5 hours per day; therefore, a 5 minute chart will have 36 five minute bars printed for every full trading session.  Day traders are commonly trading 5 minute charts to identify short term trends and execute their trading strategy of choice.

Where to Select the 5-Minute Time Frame

Most trading applications will allow you to select the time frame to analyze price data. Within the Tradingsim platform, you can select the 5-minute interval directly above the chart.

Select 5 Minutes

The close on 5 minute charts gives insight into the immediate market direction of trend for a stock.  When a stock closes at the low or high of the 5-minute bar, there is often a short-term breather where the stock will go in the opposite direction.  The psychology behind this is that the stock has been pushed to an extreme as other active traders chase the price trend.  This breather can mark a major reversal, but in the majority of cases, it creates the environment for a .25% - .5% counter move.

So, How Exactly Do You Trade 5 Minute Charts?

I have not performed any exhaustive scientific study as I am a trader, but I would dare to say the 5-minute chart is the most popular time frame for day traders.

5-minutes provides you the right mix of monitoring the details, without scalping, and conversely allowing you to avoid waiting 60-minutes to pull the trigger as well.

It's that fine wine where call it the universe, or just human psychology, most traders feel comfortable within this time unit of measure.

In this article, I will cover a number of general topics and strategies that you can use to help you when trading on a 5-minute timeframe.

By the shear definition of a 5-minute timeframe, the strategies and topics covered in this article will focus on the art of day trading.

Morning Reversal

Morning Reversal

In the morning stocks will trend hard for the first 20-30 minutes into the 10am reversal time zone.  Day traders that are looking to go opposite to the trend can wait for a close at the high or low of the 5 minute bar to go opposite to the morning move.

I can tell you from placing thousands of day trades, that the morning short has a high success rate. There is something about the retail trading market in the morning that brings a fresh batch of bag holders chasing the market for quick gains every morning.

The smart money will grab the breakout and ride the market for quick profits. However, new traders will either hold on too long or jump on the bandwagon too late.

The problem with 5-minute charts is that the time frame is too large to capture the volatility of the move heading into the 10 am reversal , hence the morning reversal

Morning Reversal

Let's review another chart example of a morning reversal where the stock climbs higher, only to reverse lower. This pattern is actually more common than you would think.

Morning Reversal Play

This is the 5-minute morning reversal you are going to see most often. There is a slight pop in the morning and then after  a move higher, a sharp reaction lower. I don't say this to frighten you, you just need to be prepared to cut your losses quickly with tight stops if things go against you.

Just know trading 5 minute charts in the morning should be treated with the upmost seriousness.

Trading Breakouts

In addition to pullback trades, breakout trades are also a big part of active trading. For these setups you want to find stocks that are up huge in the pre-market.

Next you want to make sure they have little to no overhead resistance.

If you are open to more risk and would like to reap more rewards, then you will want to set your eyes on low float stocks.

If you are looking to play things a little safer, then look to stocks with a float north of 100 million shares.

But no matter your risk appetite, the key to success is cutting your losers and letting your winners run.

Morning Breakout of 5 Minute Chart

If you trade pre-market, then your range can develop in the early am and you could be in a trade as early as 9:31 in the morning. However, if you do not use pre-market data, you will want to focus on the opening range.

Next you want a stock with volume that can push the price higher.

The last thing I will leave you with is you should not fall in love with these high flyers. Most of them will run their course in ten to thirty minutes.

So, remember to keep your stops tight and remember to take profits as the stock goes higher.

5 Minute Breakdown

These breakout trades also work on short positions as well. In the above chart, notice how GEVO broke down after already having a strong move to the downside.

The key takeaway from this section is that in addition to understanding you need to trade the ranges, you also want to learn the patterns.

After a while certain patterns will emerge that you can use to improve the accuracy of the trades you place.

In the next section, we are going to go beyond chart patterns and dig into various indicators you can use with 5 minute charts to find profitable setups.

How to Enter and Exit Trades on a 5-Minute Chart with Oscillators and Fast Lines

How to Enter and Exit Trades on a 5-Minute Chart

Oscillators do just that, they oscillate between high and low extremes.

Yet, oscillators give many fake signals. Since they are leading indicators, they point out that a trend might emerge.

Thus, oscillators are one of the most attractive tools for day traders as timing is of the essence.

Nevertheless, if not used properly, they often lead to failure. Therefore, I recommend combining two oscillators when trading on a 5-minute timeframe in order to validate trade signals.

Personally, I like oscillators only for trade entry and not trade management.

Therefore, I recommend you include a fast line on your chart in order to attain exit points on 5-minute stock charts. Some of these lines could be a regular Moving Average, DEMA, TEMA, Hull MA, Least Squares MA, Arnaud Legoux MA, etc.

In this section we will cover 3 simple strategies you can use with 5-minute charts.

Strategy #1 - Stochastic Oscillator + RSI + Triple EMA

This simple strategy uses a three-pronged approach across two oscillators and an on-chart moving average indicator.

Entering a Trade

Trade entry signals are generated when the stochastic oscillator and relative strength index provide confirming signals.

Trade Exit

You should exit the trade once the price closes beyond the TEMA in the opposite direction of the primary trend.

There are many cases when candles are move partially beyond the TEMA line. We disregard such exit points and we exit the market when the price fully breaks the TEMA. Have a look at the example below:

5-minute chart with oscillators

This is the 5-minute chart of General Motors for Sep 9 – 10, 2015. The two instruments at the bottom of the chart are the Stochastic Oscillator and the RSI. The TEMA is the green curved line on the chart. The green pairs of circles are the moments, when we get both entry signals.

First, we spot overbought signals from the RSI and the stochastic and we enter the trade when the stochastic lines have a bearish crossover. We go short and we follow the bearish activity for 15 full periods, which is relatively a long period of time for a day trader. Good for us!

We exit the trade once the price closes above the TEMA. This short position generated a profit of $0.43 (43 cents) per share, which is a decent amount even for advanced trading strategies.

Later, we receive a few more overbought/oversold signals from the stochastic, but they are not confirmed by the RSI. Thus, we stay out of the market until the next RSI signal.

Our second trade comes when the RSI enters the oversold area just for a moment. This long signal is confirmed by the stochastic, so we go long. The bullish move that ensued is minor, but still in our favor!

We hold this trade for 9 periods before closing the position. We exit the market when a bigger bearish candle closes below the TEMA with its full body. This long trade brought us a profit of $0.09 (9 cents) per share.

On the next day, we manage to identify another long signal from the stochastic and the RSI.

We hold the long position open for 14 periods before one of the bearish candles on the way up close below the TEMA. This long position generated a profit of $0.46 (46 cents) per share.

The overall results from this strategy are:

  • 3 Positions
  • 2 long
  • 1 short
  • Time in the market: 3 hours and 10 minutes
  • Total profit: $0.98 (98 cents) per share
Strategy #2 - MACD + MFI

For this next strategy, we will combine the Moving Average Convergence Divergence with the Money Flow Index. We will enter the market when we receive confirming signals of the MACD and the MFI.

However, for how long will we hold the trades?

Notice that in this stock trading setup we have no on-chart trading indicator for identifying exit points.

The reason for this is that the MACD does a pretty good job of this itself.  We will simply exit the market whenever the MACD has a crossover in the opposite direction!

Notice that when using the MACD for exit points, you stay in the market for a longer period of time.

5-minute chart + MACD + MFI

This is the 5-minute chart of McDonalds for Sep 30, 2015. The two instruments at the bottom of the chart are the MACD and the Money Flow Index. The green circles indicate the entry signals we receive from the two indicators. The red circles indicate the moment when the MACD tells us to get out of the market. Notice that in this example, the exit point of a position is the entry point of the next one. Thus, the red and the green circles match in three cases.

In the first case, we have matching bearish entry signals from the MFI and the MACD. This is what we are waiting for and we short McDonalds. Although there is strong hesitation in the price movement, no exit signal is provided from the MACD and we hold our position. Later on, the price moves in our favor and we close the trade when the MACD has a bullish crossover. We were short for 34 periods and generate a profit of $0.33 (33 cents).

That’s not very persuasive, uh. Let’s go through the next case.

As we said, in this strategy example, we often open a contrary position right after closing the trade. Therefore, once we received the exit crossover from the MACD, the MFI gave us a long signal.

We stay in the market for 36 periods until the MACD gives us a bearish crossover. We collect a profit of $0.56 (56 cents) per share from this trade – slightly better than the previous example.

The MFI is already high and we immediately open a short position after the MACD crossover from the previous position. McDonalds starts to move in our favor, but the direction changes rapidly. Yet, the two lines of the MACD interact, but they do not create a crossover. Thus, we hold our short position for 39 periods. In this trade, we accumulated a profit of $0.81 (81 cents) per share – much better!

With the exit of the previous position came the entry point for the next trade. This is so, because the MFI was already down when the MACD exit crossover appeared. Thus, we go long and we enter the best trade of the four cases! We hold McDonalds for 27 periods before the MACD gives us a bearish crossover. This long position generated a profit of $0.88 (88 cents) per share. Well, that my friend is a good trade!

The overall results from this strategy are:

  • 4 Positions
  • 2 long
  • 2 short
  • Time in the market: 11 hours and 20 minutes
  • Total profit: $2.58 per share
Strategy #3 - Klinger Oscillator + RVI + 12-Period Least Squares MA

This 5-minute chart strategy involves the Klinger Oscillator and the Relative Vigor index for setting entry points. We try to match long and short signals with the two oscillators, which will be an indication to trade the equity. When we get these two signals, we open a position and we hold it until we see a candle closing beyond the 12-period LSMA.

5-minute chart + KO + RVI + LSMA

This is the 5-minute chart of Yahoo for Dec 8, 2015. The two instruments at the bottom are the RVA and the Klinger. The blue curved line on the chart is the 12-period LSMA. On this chart, we have four trades. The green circles show the four pairs of signals we get from the RVA and the Klinger.

First, we get a bullish signal from the Klinger, which is confirmed by the RVA after 4 periods. When we get the confirmation, we go long. We manage to hold the trade for four candles before we see a bearish candle below the LSMA. We get $0.10 (10 cents) per share from this trade.

Four periods later, the Klinger and the RVA give us bearish signals at once and we go short. We get a slight bearish move of four periods before a candle closes below the LSMA. We generate $0.12 (12 cents) per share more.

The third trade is the most successful one. Six periods after the previous position, we get matching bullish signal from the Klinger and the RVA. Thus, we go long with Yahoo. We manage to stay for 9 periods in this trade before a candle closes with its full body below the 12-period LSMA. Notice that at the end of the bullish move, there is another bearish candle, which closes below the LSMA, but not with its full body. Therefore, we disregard it as an exit signal. This long position brings us a profit of $0.37 (37 cents) per share.

With the next candle, we get bearish signals from the RVA and the Klinger and we go short with the closing of the previous long position. We get out of this trade after 5 periods when a bigger bullish candle closes above the LSMA. This trade generated profit of only $0.03 (3 cents) per share.

The overall results from this strategy are:

  • 4 Positions
  • 2 long
  • 2 short
  • Time in the market: 2 hours and 10 minutes
  • Total profit: $0.62 (62 cents) per share

Which 5 minute bar trading setup is better?

The trading strategy I prefer when trading 5-minute charts is the MACD + MFI. The reason for this is that this strategy distributes the trading along the entire trading day. In the example above, we covered the whole day with only 4 trades. Furthermore, we generated an impressive amount per share! In the other two strategies, the amount of trades per day will be significantly more. As you see with MACD + MFI we traded 4 positions for 11 hours, while with Klinger, RVI and LSMA, we traded 4 positions for only 2 hours.

Yet, some of you will like fast paced trading and will like to exit the market more frequently.  Just remember in trading, more effort does not equal more money.

Using Multiple Timeframes

One thing you will want to do with 5 -minute charts is to use multiple time frames to help support your point of view.

The reality 5 minute charts is it's great for stocks with lower volatility. However, if you are trading low float stocks you will want to use a one-minute chart to track price movement.

At the same time where you need to monitor price movement on a lower level, you also will need to monitor the bigger trends.

To do this you will want to look at a daily or hourly chart.

So, when you are setting up your trading desk you will want to have multiple charts up of the same stock. Below is a screenshot from Tradingsim of an example of how you need to view stocks on multiple time frames.

Multi-time Frame View

In the above chart, notice how GEVO has three time frames, 1-minute, 5-minute and daily.

The 5-minute chart is your anchor and was showing a consolidation was taking place. The one-minute chart also displayed a similar consolidation pattern.

Lastly, the daily chart shows that after a nice run-up, GEVO was starting to stabilize after a retracement of the rally.

So, in this example, as a trader the big thing you are looking for is alignment of the same narrative across multiple time frames.

Summary

Even if you are not trading 5 minute charts, it is essential that you keep an eye on them.  The majority of day traders are using 5 minute charts to make their trading decisions.  Therefore, these traders tend to control the action.  If you are a trading with 15 minute charts, be mindful that a sharp counter trend move can occur at the close of a 5 minute bar.

Remember, a close at the high or low of a 5-minute bar is a potential indication that a minor reversal is in play.  Day traders should not immediately exit their winning position but should rather look at this as a sign of a potential trend change.

Also, the morning is where all the action takes place in the market. If you are going to trade during this time of day, remember the two most common setups - pull back and the breakout.

Lastly, 5 minute charts can't do it all by themselves. You will need to assist help from other time frames. The one minute chart for very volatile stocks and the daily charts to identify long-term trends for support and resistance levels.

The post How to Trade with 5 Minute Charts – Learn the Setups appeared first on - Tradingsim.

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We have discussed numerous trading strategies on the Tradingsim blog.  From the very basic, to the ultra-complicated.

Today we are going to cover one of the most widely known, but misunderstood strategies – scalp trading, a.k.a scalping.  If you like entering and closing trades in a short period of time, then this article will definitely suite you best.

This article is broken up into three primary sections. Section one will cover the basics of scalp trading. The second section will dive into specific trading examples. Lastly, section three will cover more advanced scalp trading techniques that will help increase your odds of success.

Section 1 - Scalp Trading Overview Scalp Trading Definition

Scalp trading is one of the most challenging styles of trading to master. It requires unbelievable discipline and trading focus. Scalp trading has been around for many years but has lost some of its allure in recent times. Traders are attracted to scalp trading for the following reasons:

  • less exposure to risk
  • you can place up to a hundred trades or more per day
  • ability to fight the greed, since your profit targets are very small
  • greater number of trading opportunities
Decimal System

Years ago, when stocks were quoted in fractions, there was a standard spread of 1/16 of a dollar or a "teenie". This spread allowed scalp traders to buy a stock at the bid and immediately sell at the ask. Hence the teenie presented clear entry and exit levels for scalp traders. The scalp trading game took a turn for the worst when the market converted to the decimal system. The decimal system closed the "teenie" often times to within 1 penny for high volume stocks. This overnight shifted the strategy for scalp traders. A scalp trader now had to rely more on their instincts, level II, and the time and sales window.

How to Scalp Trade

A scalp trader can look to make money in a variety of ways. One method is to have a set profit target amount per trade. This profit target should be relative to the price of the security and can range between .%1 - .25%. Another method is to track stocks breaking out to new intra-day highs or lows and utilizing Level II to capture as much profit as possible. This method requires an enormous amount of concentration and flawless order execution. Lastly, some scalp traders will follow the news, and trade upcoming or current events that can cause increase volatility in a stock.

Winning is Critical

Unlike a number of day trading strategies where you can have a win/loss ratio of less than 50% and still make money, scalp traders must have a high win/loss ratio. This is due to the fact that losing and winning trades are generally equal in size. The necessity of being right, is the primary factor scalp trading is such a challenging method of making money in the market.

Now that we have covered the basics of scalping, let’s explore a few trading strategies you can test for yourself.

Section 2 - Scalp Trading Strategies #1 - Scalp Trading with an Oscillator

One of the most attractive ways to scalp the market is by using an oscillator as the indicator leads the price action.

Yes, it sounds pretty simple; however, it is probably one of the hardest trading methodologies to nail down.

Since oscillators are leading indicators, they provide many false signals. The reality is that if you scalp stocks with one oscillator, most likely you are going to accurately predict the price action 50% of the time.

Literally the equivalent to flipping a coin.

While 50% may prove a profitable ratio for other strategies, when scalping, you need a high win to loss ratio due to the increased commission costs.

Let’s dig a little deeper.

#2 - Scalp Trading with the Stochastic Oscillator

The slow stochastic consists of a lower and an upper level. The lower level is the oversold area and the upper level is the overbought area. When the two lines of the indicator cross upwards from the lower area, a long signal is triggered. When the two lines of the indicator cross downwards from the upper area, a short signal is generated.

The below image further illustrates these trade signals.

Stochastic Scalp Trade Strategy

This is the 5-minute chart of Netflix from Nov 23, 2015. At the bottom of the chart, we see the stochastic oscillator. The circles on the indicator represent the trade signals.

In this case, we have 4 profitable signals and 6 false signals. The 4 profitable signals generate $2.40 per share of Netflix. However, the losses from the 6 false signals generate a loss of almost $3.00 per share.

You are probably asking yourself, what went wrong?

The bottom line is the stochastic oscillator is not meant to be a standalone indicator.  You need some other form of validation to strengthen the signal before taking a trading opportunity.

#3 - Scalp Trading with Stochastics and Bollinger Bands

In the next trading example, we will combine the stochastic oscillator with bollinger bands.

We will enter the market only when the stochastic generates a proper overbought or oversold signal that is confirmed by the bollinger bands.

In order to receive a confirmation from the bollinger band indicator, we need the price to cross the red moving average in the middle of the indicator. We will stay with each trade until the price touches the opposite bollinger band level.

Stochastic and Bollinger Band Scalp Strategy

Above is the same 5-minute chart of Netflix. This time, we have included the bollinger bands on the chart.

Trade Signals

We start with the first signal which is a long trade. Notice that the stochastic generates a bullish signal. However, the price does not break the moving average on the bollinger band. Therefore, the signal is false.

The second signal is also bullish on the stochastic and we stay long until the price touches the upper bollinger band.

At the end of this bullish move, we receive a short signal from the stochastics after the price meets the upper level of the bollinger bands for our third signal. A price decrease occurs and the moving average of the bollinger bands is broken to the downside. We have a short signal confirmation and we open a trade.

The fourth trade provides a long opportunity after the selloff.

The stochastic generates a bullish signal and the moving is broken to the upside, therefore we enter a long trade. We hold the trade until the price touches the upper bollinger band level.

As you can see on the chart, after this winning trade, there are 5 false signals in a row.  Talk about a money pit!

The good thing for us is that the price never breaks the middle moving average of the bollinger band, so we ignore all of the false signals from the stochastic oscillator.

After the 5 false signals, the stochastic provides another sell sign, but this time the price of Netflix breaks the middle moving average of the bollinger band.

We go short, holding the trade until the price touches the lower bollinger band.

If we compare the two trading methodologies, we realize that with the bollinger bands we totally neutralized all the false signals.

With a $10,000 bankroll with day trading leverage of 1:4, we have a buying power of $40,000. If we then invest 15% of our buying power in each trade ($6,000), below are the results:

First trade: 6,000 x 0.0042 = $25.20 profit.

Total bankroll: 10,000 + 25.20 = $10,025.20

Second trade: 6,015.12 x 0.0082 = $49.32 profit

Total bankroll: 10,025.2 + 49.32 = $10,074.52

Third trade: 6,044.71 x 0.0093 = $56.22 profit

Total bankroll: 10,074.52 + 56.22 = $10,130.74

Fourth trade: 6,078.44 x 0.0017 = $10.33 profit

Total bankroll: 10,130.74 + 10.33 = $10,141.07

We were able to generate $141.07 of profit with four scalp trades. Each of these trades took between 20 and 25 minutes.

While these trades had larger percentage gains due to the increased volatility in Netflix, the average scalp trade on a 5-minute chart will likely generate a profit between 0.2% to 0.3%.

As you can see, the stochastic oscillator and bollinger bands complement each other nicely.  The stochastic oscillator says “get ready!” and the bollinger bands says “pull the trigger!”

#4 - Scalp at Support and Resistance

This is really my favorite of all the strategies. Simply put, you fade the highs and buy the lows.

You really need the following two items (1) low volatility and (2) a trading range.

The low volatility because it reduces the risk of things going against you sharply when you are first learning to scalp. The trading range provides you a simple method for where to place your entries, stops and exits.

In the next example, let's take a look at the S&P Futures E-mini contract to identify scalping opportunities.

Why the E-mini contract? Well it has low volatility, so you have lower risk of blowing up your account if you use less leverage and the E-mini presents a number of trading range opportunities throughout the day.

E-mini Scalp Trades

Notice how the tight trading range provides numerous scalp trades over a one-day trading period. Later on, in this article we will touch on scalping with Bitcoin, which presents the other side of the coin with high volatility.

Section 3 - Advanced Scalp Trading Techniques Risk Management when Scalp Trading

We discussed a profitable scalp trading strategy with a relatively high win/loss ratio. We also suggested leveraging 15% of the buying power for each scalp trade. Now we need to explore the management of risk on each trade to your trading portfolio.

Since you are a scalp trader, you aim for lower returns per trade, while shooting for a higher win/loss ratio.

Therefore, your risk per trade should be small, hence your stop loss order should be close to your entry.

To this point, try not to risk more than .1% of your buying power on a trade.

Let’s see how a tight stop would impact the stochastic/bollinger bands scalp trading strategy.

Stop Loss Orders - Scalp Trading

This is the 2-minute chart of Oracle Corporation from Nov 24, 2015. There were three trades: two successful and one loser.

For the first trade, the stochastic crossed below the overbought area, while at the same time the price crossed below the middle moving average of the bollinger band.

We shorted Oracle at $39.06 per share, with a stop loss at $39.09, 0.1% above our entry price. The price began decreasing and 14 minutes later, ORCL hit the lower bollinger band. We exited the trade at 38.95, with a profit of 0.28%.

After hitting the lower bollinger band, the price started increasing. The stochastic lines crossed upwards out of the oversold area and the price crossed above the middle moving average of the bollinger band.

We went long on this signal at $39.04. Our stop loss is located at $39.00, 0.1% below the entry price. This trade proved to be a false signal and our stop loss of .1% was triggered 2 minutes after entering the trade.

The third and final signal took over 40 minutes to develop.

After the price crossed above the oversold territory and the price closed above the middle moving average, we opened a long position.

We entered the market at $38.97 per share with a stop loss at $38.93, 0.1% below our entry price.

This time Oracle increased and we closed a profitable trade 2 minutes after entering the market when the price hit the upper bollinger band, representing a 0.17% price increase.

So, if we had a $10,000 bankroll leveraged to $40,000 buying power, these are the results from a 15% investment per trade:

First Trade: 6,000 x .28% = $16.80 profit.

Total bankroll: 10,000 + 16.80 = $10,016.80

Second Trade: 6,010.08 x -0.1% = $6.01 loss

Total bankroll: 10,016.80 – 6.01 = $10,010.79

Third Trade: 6,006.47 x 0.17% = $10.21 profit

Total bankroll: 10,010.79 + 10.21 = $10,021

These three trades generated a profit equal to $21. The total time spent in each trade was 18 minutes.

Usually, when you scalp trade you will be involved in many trades during a trading session. Sometimes, scalp traders will trade more than 100 trades per session.

Scalp Trading and Commissions

I would be remised if I did not touch on the topic of commissions when scalp trading.  If you look at our above trading results, what is the one thing that could completely expose our theory?

You guessed it right, commissions.

If you have a flat rate of even 5 dollars per trade, this would make the exercise of scalp trading pretty much worthless in our previous examples.

This is why when scalp trading, you need to have a considerable bankroll to account for the cost of doing business.  You are going to find it extremely difficult to grow a small account scalp trading after factoring in commissions and the tax man at the end of the year.

The only thing you will end up doing after thousands of trades is lining your broker’s pocket.

Unlimited Monthly Trading

Just having the ability to place online trades in the late 90s was thought of as a game changer. Now fast forward to 2018 and there are firms popping up offering unlimited trades for a flat fee.

So, if you are looking to scalp trade, you will want to give some serious thought to signing up for one of these brokerage firms. Let's say you place on average 10 trades per day. This would translate to approximately 2.400 day trades per year.

Assuming the average commission per trade is $4, this could run you over $12,000 per year.

You can use brokerage firms like Choice Trade or EF Hutton.

Now it's not all perfect with these brokers. What I mean by this statement is for Choice Trade you cannot execute orders for more than 10,000 shares and for stocks below $1.00.

However, if you are going to trade small in size you can literally save over $11,600 dollars in commissions.

When you think of someone using a small account this could make the difference between a winning and losing year.

Focus on Profit to Risk Ratios and Limiting Your Number of Trades

This is going to sound counter to the entire idea of scalp trading.

What comes to mind when I say scalp trader? You are likely going to think of a trader making 10, 20 or 30 trades per day.

Well what if scalp trading just speaks to the amount of profits and risk you will allow yourself to be exposed to and not so much the number of trades.

There was a study conducted of 43 million FXCM trader accounts and guess what it showed? That if traders use proper risk reward expectations - they will make more money over the long run. It's not about the high winning percentage, as trade data from their account holders showed that on average their account holders placed more winning trades than losing trades.

Here is another story that references a study from FXCM where after analyzing the desk to see if going counter to the worst trader's picks would be profitable only showed profitability often came down to trading less.

So again, as a scalper or a person looking into scalp trading - you might want to think about cutting down on the number of trades and seeking trade opportunities with a greater than 1 to 1 reward to risk ratio.

Competing with the Trading Robots

We can't get through an article on scalp trading and not touch on the topic of algorithmic trading. 20 years ago, you were trading against other humans.

Now there are open source algo trading programs anyone can grab off the internet. These algorithms are running millions of what-if scenarios in a matter of seconds.

It's to the point now large hedge funds have entire quants divisions setup to find these inefficiencies in the market.

Now I'm not going to tell you whether this should matter to you or not. The only point I am going to make is you need to be aware of how competitive the landscape is out there.

Now we all have to compete with the bots, but the larger the time frame, the less likely you are to be caught up in battling for pennies with machines thousands of times faster than any order you could ever execute.

Taking Money Out of the Market

This is one positive regarding scalp trading that is often overlooked. In trading you have to take profits in order to make a living.

This is much harder than it may seem as you are going to need to fight a number of human emotions to accomplish this task.

Well this is where scalp trading can play a critical role in building the muscle memory of taking profits. Scalp trading requires you to get in and out quickly.

The key word in that last sentence is out.

Scalp Trading with Bitcoin

Scalp trading did not take long to enter into the world of Bitcoin. Traders in this growing market are forever looking for methods of turning a profit.

To this point, let's review a few characteristics of Bitcoin that may prove challenging for scalp traders.

  • Bitcoin is really volatile. Therefore, scalp trading will provide a number of trading opportunities, but you will need to adhere to strict stops to avoid getting in a jam.
  • There are many brokerage firms offering 15 to 1 leverage. Some even offer up to 50 to 1 leverage. While this may sound super exciting, in reality this could expose you to the risk of blowing up your account.

So, as stated throughout this article, you will need to keep your stops tight in order to avoid giving back gains on your scalp trades.

Conclusion:
  • Scalp trading involves entering trades for a short period of time to catch swift price moves.
  • When you scalp trade you:

- are less exposed to risk

- place many trades per day

- control your inner greed because you aim for small profits.

  • If you scalp trade, you need a win/loss ratio greater than 50%.
  • Oscillators could be very useful for your scalp trading system, because they are leading indicators; however, oscillators are not meant to be a standalone indicator.
  • Try to find indicators that complement each other so you can validate trade signals.
  • Scalp trading money management is crucial:

- Invest around 15% of your buying power in each scalp trade.

- Put a stop loss 0.1% from your entry price.

- Stay in the trades until the price hits the opposite bollinger band

- You will usually make between .2% and .3% per trade if you trade lower chart frames.

  • If you scalp on higher chart time frames (5-minute, or more) you targets might be higher.
  • You must have a solid bankroll to scalp trade. Small accounts will be eaten alive by trading commissions.

To practice scalp trading strategies and topics detailed in this article please visit the homepage https://tradingsim.com to see how we can help.

You can also simulate trading commissions to see how different tiers of pricing will impact your overall profitability.

The post 4 Simple Scalping Trading Strategies and Advanced Techniques appeared first on - Tradingsim.

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Introduction to the Marijuana Sector

Marijuana or Cannabis; be it the use or production was once clouded in controversy. However the industry has gone through major leaps and bounds in recent years. The still nascent industry is forecast to reach $97 billion globally by 2021.

Over the past few years, the marijuana industry has become somewhat of a gold rush. In 2016 alone, the legal marijuana market had an estimated revenue of over $7 billion. The next few years are expected to see further room for growth.

Marijuana and the United States of America

In the United States, Marijuana is going through the legalization process at an extremely slow pace state-by-state.

The District of Columbia, along with nine other states in the U.S. has legalized marijuana for recreational use. Even more states are expected to join in legalizing marijuana. As a result, investors are hoping to take advantage of the market early before it reaches mass hysteria.

Well, In this article, we will take a step-by-step approach for how to invest in Marijuana ETFs, so you also take advantage of this investment opportunity.

I mean who wouldn't want to invest in the next Budweiser of marijuana?

Canada - Legalization of Marijuana

One nation that is keeping investors excited is Canada. Canada was the world's first nation to legalize medical marijuana in 2001.

Canada is also expected to legalize the use of marijuana for recreational purposes this year. At the time of this writing, Canada's House of Commons has already approved the legislation..

Despite the legalization, there are quite a few details to be chalked out. But this has not deterred market watchers and marijuana investors alike from staying optimistic.

A number of companies have already prepared plans in the run up the legalization of Marijuana for recreational use.

Global spending is expected to grow by over 200% to $32 billion by 2020 in the United States alone, data from market research firm Arcview/BDS analytics show.

Estimated Consumer Spending in Legalized Marijuana (Source: Arcview Market Research/BDS Analytics)

It is not just Canada, but Germany as well. Germany allows the use of medical marijuana through its 20,000 pharmacies.

Many more nations are expected to follow suit. This makes marijuana investment uniquely positioned.

What are the Top Three Companies in the Marijuana Sector?

Before you invest in Marijuana ETFs, it is important to become familiar with the top publicly listed companies in the sector.

Scotts Miracle-Gro

Scotts Miracle-Gro (NYSE:SMG) is a NYSE listed marijuana stock. It has a market cap of $4.85 billion with price to earning ratio of 20.56. The stock also has a 2.43% dividend yield.

The company is domiciled in the United States. After losing over 20% since early February 2018, the stock is currently a hold. Trading $86.31, analysts estimate a one year price target of $93.

The decline in the stock is attributed to temporary factors such as regulation and implementation issues in California. The company had recently acquired Sunlight Supply making it the largest hydroponics supplier in the U.S.

The potential opening up of markets in Michigan and Massachusetts are expected to push the price higher in the coming months.

Canopy Growth Corp

Canopy Growth Corp (NYSE:CGC) is another NYSE listed marijuana stock. The company has a market cap of $5.95 billion and has generated strong returns since going public.

Canopy Growth is a Canadian based grower and on a year-to-date basis, the share price has surged 25%. The company focuses on the use of recreational marijuana which is expected to open up this year. With its main focus in Canada and the speculation of Canada easing rules on cannabis use, the company is expected to keep the momentum going.

Besides Canada, Canopy Growth also has a presence in Germany. The fiscal fourth quarter results showed record sales in the country.

Looking forward, Canopy Growth is currently working on a marijuana infused beverage which is keeping investors excited.

Aphria Inc.

Aphria Inc. (TSX:APH) is a Canadian marijuana company that trades on the Toronto Stock Exchange. The business model is similar to that of Canopy Growth. The stock has been down over 30% this year.

Aphria Inc. has a market cap of $2.48 billion with a higher price to earnings ratio of 58.48.

The strong point for the company is its retail distribution network. Along with Canopy Growth, Aphria Inc. is also expected to surge once Canada passes the bill on recreational use of marijuana.

The recent deal with Southern Glazer's a wine and spirits distribution company is also expected to follow in the footsteps of Canopy Growth with a beverage.

Some reports suggest that Aphria Inc. is in talks with Molson Coors Brewing for a potential deal in the cannabis infused beverage business.

The North American Medical Marijuana Index

As with any sector, an index is the best place to start if you are not very familiar with individual stocks.

The North American Medical Marijuana Index, as the name suggests, tracks the performance of a basket of listed companies. The companies in the composition of the index have significant business exposure to the marijuana industry.

Companies need to be a producer or a supplier to be listed on the North American Marijuana index. It also includes biotechnology companies focusing on research and development of cannabis.

At the time of this writing, the North American Marijuana index has 49 companies listed.

Almost all of the companies listed in the index are domiciled in Canada (74%), the U.S. (16%) and Great Britain (10%). The index also reinvests the dividends.

Since its inception in 2017, it has yielded impressive returns of 35% per annum.

North American Medical Marijuana Index

A Primer on Marijuana ETFs

As of the first quarter in 2018, there are just five marijuana ETFs that investors can choose from.

Below we have provided a write-ups on all five.

#1 Horizons Marijuana Life Sciences Index ETF (HMMJ)
  • The HMMJ ETF trades on the Toronto Stock Exchange (TSX).
  • It has a portfolio of U.S. publicly listed life sciences companies active in the Marijuana sector.
  • The ETF currently boasts $80.9 million Canadian dollars in assets under management.
  • The HMMJ fund has a management fee of 0.75%.
  • The Horizons Marijuana Life Sciences Index ETF tracks the performance of the North American marijuana index, minus expenses.

HMMJ – Total Returns

  • Companies listed in the HMMJ fund must have a market capitalization of C$75 million.
  • Besides the market cap, the listed companies also need to meet some liquidity requirements.
  • In terms of daily average volume, the listed companies should have an excess of C$250,000.

The fund’s top three holdings are:

  1. Aurora Cannabis Inc. (TSX: ACB) – 16.6%
  2. Canopy Growth Corp. (NYSE: CGC) – 14.8%
  3. Aphria Inc. (TSX: APH) – 11.6%
#2 Horizons Junior Marijuana Growers Index (HMJR)
  • As the name suggests, the Horizons Junior Marijuana growers index ETF tracks companies that cultivate or produce marijuana.
  • The companies listed here are small cap companies in North America.
  • The HMJR marijuana ETF has an inception date of February 2017.

HMJR – Total Returns

  • Currently, the Horizons Junior Marijuana Growers index ETF has C$10 million in assets under management.
  • This marijuana ETF is unique as it focuses on companies generating revenue from distribution and cultivation.
  • Companies listed in this ETF have a market cap from $50 million up to $500 million.
  • The Horizons Junior Marijuana Growers Index ETF has an expense fee of 0.85%.

HMJR allocates 20% of its holdings toward companies based outside the United States. Compared to HMMJ ETF, you won’t find the traditional stalwarts of the industry.

Due to the small market cap and the rather small assets under management, this ETF yields higher returns. But the higher returns also come at the risk of higher volatility.

#3 Evolve Marijuana ETF (SEED)
  • The Evolve Marijuana fund aims to provide investors with long term capital appreciation by investing in a diversified set of stocks.
  • The SEED ETF is an actively managed fund.
  • The SEED ETF has a portfolio distribution of 94% from Canadian companies and 6% from Australia. This offers a certain level of safety when it comes to the SEED ETF.

The top three holdings in SEED ETF are:

  1. Aurora Cannabis Inc. (TSX: ACB) – 16.6%
  2. Canopy Growth Corp. (NYSE: CGC) – 12.6%
  3. Medreleaft Corp. (TSX: LEAF) – 10.3%

SEED ETF – Total Returns

  • SEED ETF has high expense ratio of 1%, made up of 0.75% in management fee and 0.25% in administration fee.
  • There are a total of 23 holdings in this ETF with $4.95 million in assets under management.
#4 AdvisorShares Vice ETF (ACT)
  • ACT is a unique ETF due to its composition. For one, ACT invests in companies that are listed in the U.S. stock exchange.
  • The companies selected in the ETF have at least 50% of revenue from alcohol, tobacco or cannabis products.
  • As part of a balance, the ACT ETF also invests 25% of its assets into the consumer stables sector.
  • The ACT ETF also pays dividends.
  • On a year to date basis, ACT has a return of 0.60%.

AdvisorShares Vice ETF (ACT) - Total Returns: 0.60%, (ytd)

Although ACT is not a pure marijuana ETF, the composition helps to ensure bringing diversity. The ACT ETF was issued in December 2017 and is an open ended fund. AdvisorShares Vice ETF has an expense rate of 0.75% with $13.14 million in assets under management.

#5 Alternative Harvest ETF (MJ)
  • The Alternative Harvest ETF is an open ended ETF which invests in a market cap weighted list of firms.
  • The companies listed in this ETF are involved in cultivation, production and distribution of Cannabis.
  • The MJ ETF is a pure marijuana ETF but it also holds stocks of fertilizer companies, plant food and pesticides.

Alternative Harvest ETF (MJ) - Total Returns: 5.08% (1-year)

  • There are about 30 stocks currently listed in the MJ ETF.
  • The Alternative Harvest ETF has an expense ratio of 0.75% and boasts of $387 million in assets under management.
How to Purchase Marijuana ETFs?

It is obvious that most of the companies in the marijuana sector are based in Canada or outside the U.S.

In the U.S., to purchase marijuana ETF's, you need to have an account with an online broker.  You can of course purchase the U.S. based ETFs - Alternative Harvest ETF (MJX) and AdvisiorShares Vice ETF (ACT).

In order to purchase the Canadian ETFs, you will need the assistance of a local broker who can then execute the order on your behalf.

Marijuana ETF investors who are non-residents of Canada cannot hold more than 40% of the ETF's units.

Most marijuana ETFs, such as the Horizon ETFs are not regulated by the Securities and Exchange Commission (SEC).

Risks of Investing in Marijuana ETFs

Although the industry is still in the early stages and that it offers a great potential, there are some risks.

U.S. Legislation

A great example of this is the ETFMG Alternative Harvest ETF. The marijuana ETF started off with a bang in early 2018. The ETF attracted over $400 million of net inflows. A few months later, the ETF's net inflows began to fall.

A major part of this decline of inflows is due to the legislative efforts in the U.S. A few months ago; the Trump administration announced that it would let the states decide on whether to legalize marijuana use.

Investing in Marijuana ETFs - Conclusion

Investing in marijuana ETFs does offer investors a way to earn higher returns. Due to the volatility in the marijuana ETFs it is not advisable for all investors. The uncertain regulatory environment, possible consolidation and the high beta of the stocks are some things to consider.

Still, for investors who are willing to take risks, jumping on board the marijuana train can certainly offer benefits.

As with anything, it is imperative that investors understand their risk profile before investing in marijuana ETFs.

The post How to Invest in Marijuana ETFs appeared first on - Tradingsim.

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Introduction to the Marijuana Sector

Marijuana or Cannabis; be it the use or production was once clouded in controversy. However the industry has gone through major leaps and bounds in recent years. The still nascent industry is forecast to reach $97 billion by 2021.

Over the past few years, the marijuana industry has become somewhat of a gold rush. In 2016 alone, the legal marijuana market had an estimated revenue of over $7 billion. The next few years are expected to see further room for growth.

In the United States, Marijuana is going through the legalization process at an extremely slow pace state-by-state.

The District of Columbia, along with nine other states in the U.S. has legalized marijuana for recreational use. Even more states are expected to join in legalizing marijuana. As a result, investors are hoping to take advantage of the market early before it reaches mass hysteria.

Well, In this article, we will take a step-by-step approach for how to invest in Marijuana ETFs, so you also take advantage of this investment opportunity.

I mean who wouldn't want to invest in the next Budweiser of marijuana?

Canada's potential legalization of Marijuana

There has been even more buzz created around the marijuana industry. One nation that is keeping investors excited is Canada. Canada was the world's first nation that legalized medical marijuana in 2001.

Canada is also expected to legalize the use of marijuana for recreational purposes this year. The bill would effectively make recreational marijuana use to be legal. At the time of writing, Canada's House of Commons had already approved the legislation..

Despite the legalization, there are quite a few details to be chalked out. But this has not deterred market watchers and marijuana investors alike from being optimistic.

A number of companies have already prepared plans in the run up the legalization of Marijuana for recreational use.

Global spending is expected to grow by over 200% to $32 billion by 2020 in the United States alone, data from market research firm Arcview/BDS analytics show.

Estimated Consumer Spending in Legalized Marijuana (Source: Arcview Market Research/BDS Analytics)

It is not just Canada, but Germany as well. Germany allows the use of medical marijuana through its 20,000 pharmacies.

Many more nations are expected to follow suit eventually. This makes marijuana investment uniquely positioned. Of course, it would be medical marijuana industry that is most likely to make inroads compared to recreational use.

What are the top three companies in the Marijuana sector?

Before you invest in Marijuana ETFs, it is important to gain familiarity with the top publicly listed companies in this sector.

Scotts Miracle-Gro

Scotts Miracle-Gro (NYSE:SMG) is a NYSE listed marijuana stock. It has a market cap of $4.85 billion with price to earning ratio of 20.56. The stock also has a 2.43% dividend yield.

The company is domiciled in the United States. After losing over 20% since early February, the stock is currently a hold. Trading $86.31, analysts estimate a one year price target of $93.

The decline in the stock is attributed to temporary factors such as regulation and implementation issues in California. The company had recently acquired Sunlight Supply making it the largest hydroponics supplier in the U.S.

The potential opening up of markets in Michigan and Massachusetts are expected to push the price higher in the coming months.

Canopy Growth Corp

Canopy Growth Corp (NYSE:CGC) is another NYSE listed marijuana stock. The company has a market cap of $5.95 billion and it has generated strong returns since going public.

Canopy Growth is a Canadian based grower and on a year to date basis, the share price has surged 25%. The company focuses on the use of recreational marijuana which is expected to open up this year. With its main focus in Canada and the speculation of Canada easing rules on cannabis use, the company is expected to keep the momentum going.

Besides Canada, Canopy Growth also has a presence in Germany. The fiscal fourth quarter results showed record sales in the country.

Looking forward, Canopy Growth is currently working on a marijuana infused beverage which is keeping investors excited.

Aphria Inc.

Aphria Inc. (TSX:APH) is a Canadian marijuana company but trades on the Toronto Stock Exchange. The business model is similar to that of Canopy Growth. But the stock has been down over 30% this year.

Aphria Inc. has a market cap of $2.48 billion with a higher price to earnings ratio of 58.48.

The strong point for the company is its retail distribution network. Along with Canopy Growth, Aphria Inc. is also expected to surge once Canada passes the bill on recreational use of marijuana.

The recent deal with Southern Glazer's a wine and sprits distribution company, the company is also expected to follow in the footsteps of Canopy Growth.

Some reports suggest that Aphria Inc is in talks with Molson Coors Brewing for a potential deal in the cannabis infused beverage business.

The North American Medical Marijuana Index

As with any sector, an index is the best place to start. The North American Medical Marijuana Index, as the name suggests, tracks the performance of a basket of listed companies. The companies in the composition of the index have significant business exposure to the marijuana industry.

Companies need to be a producer or a supplier to be listed on the North American Marijuana index. It also includes biotechnology companies focusing on research and development of cannabis.

At the time of writing, the North American Marijuana index has 49 companies listed. The top three marijuana companies in terms of weighting are:

  1. Aurora Cannabis Inc. – 10.30%
  2. Canopy Growth Corp. – 10.08%
  3. Scotts Miracle-A 9.91%

Almost all of the companies listed in the index are domiciled in Canada (74%), the U.S. (16%) and Great Britain (10%). The index also reinvests the dividends. Since its inception in 2017, it has yielded impressive returns of 35% per annum.

North American Medical Marijuana Index

A Primer on Marijuana ETFs

As of the first quarter in 2018, there are just five marijuana ETFs that an investor can choose from. Marijuana ETFs are either active or passive managed funds.

The top three marijuana ETFs are:

Horizons Marijuana Life Sciences Index ETF (HMMJ)

The HMMJ ETF trades on the Toronto Stock Exchange (TSX). It has a portfolio of U.S. publicly listed life sciences companies active in the Marijuana sector. The Horizons Marijuana Life Sciences Index ETF has an inception date of April 2017. This was the first marijuana ETF to hit the markets.

The ETF currently boasts of $80.9 million Canadian dollars in assets under management.

The HMMJ fund has a management fee of 0.75%.. The Horizons Marijuana Life Sciences Index ETF tracks the performance of the North American marijuana index, minus expenses.

Investing in the HMMJ is as good as investing in companies that make money from the medicinal use of marijuana.

HMMJ – Total Returns

Companies listed in the HMMJ fund must have a market capitalization of C$75 million. Besides the market cap, the listed companies also need to meet some liquidity requirements. In terms of daily average volume, the listed companies should have an excess of C$250,000.

The fund’s top three holdings are:

  1. Aurora Cannabis Inc. (TSX: ACB) – 16.6%
  2. Canopy Growth Corp. (NYSE: CGC) – 14.8%
  3. Aphria Inc. (TSX: APH) – 11.6%

The Horizons Marijuana Life Sciences Index ETF is ideal if you simply want to track the performance of the marijuana index. This means that investors have exposure to the companies dealing with the production and supply of medical marijuana.

Horizons Junior Marijuana Growers Index (HMJR)

As the name suggests, the Horizons Junior Marijuana growers index ETF tracks companies that cultivate or produce marijuana. The companies listed here are small cap companies in North America. The HMJR marijuana ETF has an inception date of February 2017. The performance of this ETF is relatively new.

HMJR – Total Returns

Currently, the Horizons Junior Marijuana Growers index ETF has C$10 million in assets under management. This marijuana ETF is unique as it focuses on companies generating revenue from distribution and cultivation. Companies listed in this ETF have a market cap from $50 million up to $500 million.

HMJR allocates 20% of its holdings toward companies based outside the United States. Compared to HMMJ ETF, you won’t find the traditional stalwarts of the industry.

Due to the small market cap and the rather small assets under management, this ETF yields higher returns. But the higher returns also come at the risk of higher volatility as well.

The Horizons Junior Marijuana Growers Index ETF has an expense fee of 0.85%.

Evolve Marijuana ETF (SEED)

The Evolve Marijuana fund aims to provide investors with long term capital appreciation by investing in a diversified set of stocks. The SEED ETF is an actively managed fund.

The SEED ETF has a portfolio distribution of 94% from Canadian companies and 6% from Australia. This offers a certain level of safety when it comes to the SEED ETF.

The top three holdings in SEED ETF are:

  1. Aurora Cannabis Inc. (TSX: ACB) – 16.6%
  2. Canopy Growth Corp. (NYSE: CGC) – 12.6%
  3. Medreleaft Corp. (TSX: LEAF) – 10.3%

SEED ETF – Total Returns

SEED ETF has high expense ratio of 1%, made up of 0.75% in management fee and 0.25% in administration fee. There are a total of 23 holdings in this ETF with $4.95 million in assets under management.

AdvisorShares Vice ETF (ACT)

ACT is a unique ETF due to its composition. For one, ACT invests in companies that are listed in the U.S. stock exchange. The companies selected in the ETF have at least 50% of revenue from alcohol, tobacco or cannabis products.

As part of a balance, the ACT ETF also invests 25% of its assets into the consumer stables sector. The ACT ETF also pays dividends. On a year to date basis, ACT has a return of 0.60%.

AdvisorShares Vice ETF (ACT) - Total Returns: 0.60%, (ytd)

Although ACT is not a pure marijuana ETF the composition helps to ensure bringing diversity. The ACT ETF was issued in December 2017 and is an open ended fund. AdvisorShares Vice ETF has an expense rate of 0.75% with $13.14 million in assets under management.

Alternative Harvest ETF (MJ)

The Alternative Harvest ETF is an open ended ETF which invests in a market cap weighted list of firms. The companies listed in this ETF are involved in cultivation, production and distribution of Cannabis. The MJ ETF is a pure marijuana ETF but it also holds stocks of fertilizer companies, plant food and pesticides.

Alternative Harvest ETF (MJ) - Total Returns: 5.08% (1-year)

There are about 30 stocks currently listed in the MJ ETF. The Alternative Harvest ETF has an expense ratio of 0.75% and boasts of $387 million in assets under management.

How to purchase Marijuana ETFs?

It is obvious that most of the companies in the Marijuana sector are based in Canada or outside the U.S. Marijuana ETFs are traded on the Toronto Stock Exchange. Some of these ETFs trade over the counter in the U.S. exchanges.

In the U.S., to purchase marijuana ETF's, you need to have an account with an ETF broker. The cost of purchasing marijuana ETFs varies from one broker to another. Most online brokers based in the U.S. allow you to purchase the marijuana ETFs easily. Some of the well known brokers include names such as Interactive brokers.

Some of the U.S. based marijuana ETFs are:

  • Alternative Harvest ETF (MJX)
  • AdvisorShares Vice ETF (ACT)

You can also purchase Canadian ETFs through a local broker who can then execute the order on your behalf. Once you find a local broker, purchasing the marijuana ETFs are straight forward if you stay within the guidelines. Marijuana ETF investors who are non residents of Canada cannot hold more than 40% of the ETF's units.

Most marijuana ETFs, such as the Horizon ETFs are not regulated by the Securities and Exchange Commission (SEC).

Risks of investing in Marijuana ETFs

Although the industry is still in the early stages and that it offers a great potential, there are some risks. Simply because the marijuana industry offers great potential is by no means a yardstick for marijuana ETFs to reflect the same returns.

A great example of this is the ETFMG Alternative Harvest ETF. The marijuana ETF started off with a bang in early 2018. The ETF attracted over $400 million in net inflows initially. A few months later, the ETF's net inflows continued to fall.

A major part of this decline in inflows is due to the legislative efforts in the U.S. Few months ago; the Trump administration announced that it would let the states decide on whether to legalize marijuana use.

Despite the news about the possible legalization in Canada, the ETF failed to make any significant returns. Part of this comes due to the fact that the ETF is down 2.25% on a year to date basis. This is in stark contrast to the North American Medical Marijuana index. Even the stock prices of the companies in the top sector of the ETF fared better.

The regulator environment remains very certain and any good or bad news could affect the prices significantly. For example, the Obama administration relaxed the rules, but the Trump administration is promising to take a hard stance.

Last but not the least, there is also the aspect of volatility. Marijuana ETFs can tend to be very volatile as they are relatively new and the average volumes are historically lower to traditional ETFs. Most marijuana ETFs tend to diversify their holdings. However, this doesn’t prevent them from the volatility of the stocks in this industry.

Investing in Marijuana ETFs - Conclusion

Investing in marijuana ETFs does offer investors a way to earn higher returns. Due to the volatility in the marijuana ETFs it is not advisable for all investors. The uncertain regulatory environment, possible consolidation and the high beta of the stocks are some things to consider.

For conventional investors, marijuana ETFs is certainly not your traditional investment vehicles. And it is quite likely that many traditional investors will shun marijuana ETFs. Still, for investors who are willing to take risks, jumping on board the marijuana train can certainly offer benefits.

As with anything, it is imperative that investors understand their risk profile before investing in marijuana ETFs.

The post How to Invest in Marijuana ETFs appeared first on - Tradingsim.

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Every stock chart contains two axes -  x-axis  to plot time and y-axis to plot price.

There are basically two ways to plot price - linear and logarithmic.

While most traders are unaware of how the price scale is set, there are some key points every traders should consider.

In this article, we will discuss the five key differences between semi-log and linear scale on price charts.

1. Measuring Price - Linear vs. Log-scale Linear Scale<.h3>

There are some traders who expect to see an equal distribution of price values on the y-axis - linear scale.

For example, a linear price chart could have an equal distance of 5 units on the y-axis (i.e. 0, 5, 10, 15).

The chart below shows an example of the linear scale chart for Apple (AAPL). You can see that the price chart has a y-axis with a .20 unit of measure.

Example of linear scale chart with distance of $0.20

Logarithmic Scale

Conversely, the logarithmic chart displays the values using price scaling rather than a unique unit of measure.

With a logarithmic chart, the y-axis is structured such that the distances between the units represent a percentage change of the security. For example, this percentage difference can be 5%, 10% or 15%.

The next chart shows the same Apple stock chart but with logarithmic scale enabled.

Example of log scale chart with distance of 0.30% approximately

While prices look rather congested at the bottom, such as 140.40, 140.70 and so on, the distribution becomes spread out further apart as price values progresses.

This is because as the values increase in size, the preceding units of measure are smaller and thus visually look smaller on the chart.

Now imagine a stock that first traded at $50 dollars and over time trades north of $300 dollars (i.e. Netflix). The early years of trading at the lower price levels will look like rooftops when you are looking out of the window of an airplane before you land.

2. More Volatility = Logarithmic Scale

If a security has small price moves and choppy trading action, a linear chart would probably be the best method for charting the stock.

However, we know price movement for penny stocks and biotechs is anything but boring.

For these types of securities, the logarithmic price chart makes more sense as it is able to visually capture the significance of the larger price moves.

The next chart shows a comparison of a linear and logarithmic chart for Intel (INTC).

Comparison of the linear and logarithmic scales for INTC price chart

Although both the linear and the log-scale might look very similar, the differences stand out when you closely review the the distribution of the price on the y-axis.

It is evident that the linear price chart shows a more curved line. You can also see the linear chart somewhat depicts the idea that price moved rather slowly in the initial periods before price started to move more rapidly in the latter parts.

This distortion occurs because the price is in absolute dollar terms. On the other hand the logarithmic chart shows a steady 1% approximate percentage change in the values and shows a more uniform scale of price change over the period of time.

Therefore, a logarithmic chart is more suited in the above example as it depicts the growth of the stock price on a steady note with a fairly straight trajectory. When the pace of growth starts to change, the logarithmic chart also adjusts accordingly and depicts the change accordingly, which isn't the case with a linear chart because the values remain the same, regardless of whether price moved  just $0.50 or 5%.

3. Logarithmic Scales are Useful for Long-Term Perspective

To quickly recap, the price scale is equal with linear charts. This means that a move from $100 to $150, which represents a 40% move is the same as a move from $200 to $250.

You can see that the distribution here is $50 per unit, but in percentage terms, you have a 40% move initially (from $100 to $150) and a 22% approximate move from $200 to $250.

In such cases, large price movements are better with logarithmic charts which focus on the percentage of the move.

4. Linear Scale for Day Traders

On the other hand, a linear price scale is more applicable to analyze a security that is moving in a tight range or within a short time frame such as intraday trading sessions.

Linear scale is ideal for intraday charts or short term charts

The above chart example shows a 10-minute price chart for AAPL using a linear price scale. Again, the units are an equal distance of $0.20 cents. You can also see an example of a simple breakout method relatively easy to spot and trade.

Because of the equal distribution in absolute dollar terms, the $0.20 price range that was established in the sideways market gives the upside and the downside target at a distance of $0.20 making it relatively easy to trade the short term price charts.

Even if you would use a logarithmic scale on the intraday charts, because the price movements are typically confined, you will get the same results as using the linear scale chart.

5. Which Price Scale to Use?

When it comes to analyzing stocks, the price of the security is usually analyzed in relative terms. Metrics such as price earnings ratio, price book values are popular financial ratios. Thus, when depicting the price of the security in question, it makes more sense to represent or analyze the security's stock movement in percentage terms rather than in absolute values.

Therefore, chances are that traders are automatically shown the appropriate price scale without even knowing the difference between the two types of price scales.

At the end of the day, the security dictates whether you should choose a linear price scale or a semi-log chart or a logarithmic scale chart.

Even within stocks, not all securities behave similarly. While on one hand there are stocks that have explosive price movements, there are also stocks that are typically confined to a range over years.

Bonus - 6. Trends are Better with a Log-scale Chart

I decided to update this article with a sixth section covering trend lines on two chart types.

Let's start with a simple example of drawing trend lines for the same security and compare how the trend lines evolve between a linear and logarithmic chart.

Trend lines plotted on a linear and a logarithmic chart

The above chart shows Intel Corp (INTC). On the left we have a linear price chart and on the right is the logarithmic chart.

The trend lines plotted on both charts are exactly the same.

This brings us to the question of which of the two charts depicts the trend accurately? It is the logarithmic price scale chart on the right side which shows the trend lines much better as compared to the trend lines from the left.

The answer to this question I'm going to leave up to you.

In Summary - Which Scale is Better?

The answer to this question depends on a number of factors such as the security in question and how price behaves and of course the time frame as well. However, the log scale or the semi-logarithmic price scale is more popular than the linear scale.

Nearly all charting platforms default to the logarithmic scale as the units are equally spaced in percentage terms, making it easier to use the log scale as a base chart across any security that a trader wants to analyze.

As illustrated above in some of the examples, there are clearly certain scenarios where using one type of price scale is definitely better. At the end of the day the type of and its price behavior will determine the right price scale.

The post 5 Key Differences between Logarithmic Scale and Linear Scale appeared first on - Tradingsim.

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Before we cover the top performing silver ETFs we will first discuss the basics of silver ETFs. Then after we have established a common understanding, we will review the best silver ETFs.

Silver ETFs – Quick Facts
  • Silver has often been referred to as poor man’s gold. Despite this nickname, silver ETFs have a real purpose in that they can be used as a a hedge to diversify portfolios into precious metals.
  • Silver is measured in ounces and in most cases tracks the spot price of the commodity.
  • Silver ETFs have been around since the early 2000s and offered investors an attractive investment product and being relatively cheaper.
  • It was however, the iShares Silver Trust (Ticker: SLV), managed by Barclays Global Investors and launched in 2006 that started the popularity among investors in silver ETFs.
Why are Silver ETFs Popular?

Silver ETFs are easier to manage for investors compared to futures or other derivatives because of accessiblity and less competition from savvy investors..

Another attractive feature of Silver ETFs is they are usually held in the physical form. For example, the iShares Silver Trust (SLV) are held in the bullion form in London as good delivery bars. SLV also holds the bullion in New York and other locations. This will prove useful for all your Walking Dead fans that feel the end is near and electronic records will vanish.

Lastly, silver is one of the preferred safe haven assets during times of economic, political or financial uncertainty. Investors turn to investing in silver (besides gold) and many view it as an alternative currency to central banks.

Why Invest in Silver ETFs?

Investing in silver ETFs offers a more afforadble way to gain exposure to the metal compared to owning the physical commodity outright.

Silver ETFs also offer more diverse means to gain access to the Silver market. For example, some ETFs track the raw commodity. Other ETFs track the silver miners which are the bloodline for silver on the production side. Other unique silver ETFs include leveraged as well as inverse ETFs.

Therefore, investors can gain exposure to the silver commodity in different ways using various silver ETFs.

What are the Key Considerations Owning Silver ETFs?

As with any ETF, there are three important factors to consider related to costs:

  1. Expense ratio
  2. Daily average volume
  3. Underlying assets to which the ETF is exposed to
Expense Ratio

Expense ratio for any exchange traded fund is the annual fee paid by the holders of the ETF. It is expressed as a percentage of the assets which is deducted during the fiscal year as part of the ETF's fee.

For example, the iShares Silver ETF charges an annual expense ratio of 0.50%. This means that the fund will cost $5.00 in annual fees for every $1,000 invested.

Daily Average Volume

When it comes to investing in silver ETFs it is important to take into account the daily average volume. Generally, the higher the daily average volume, the lower the expense ratios and other costs.

Choosing a silver ETF with higher daily average volume can also protect investors from abrupt price movements. Higher volume also makes it easier to buy or sell with ease and at your desired price.

Underlying assets

Not all silver ETFs are the same. There are many different silver ETFs to choose from. The most conventional silver ETFs are those that directly track the spot price of silver. Besides this, investors can also invest in silver ETFs on mining companies tracking production and silver ETFs tracking the derivative contracts.

There is no definite answer as to which silver ETF is the best. Investors need to understand their investing needs and then choose the most appropriate silver exchange trade fund to invest in.

Top five most popular silver ETFs

There are many silver ETFs to choose from these days. Each type of silver ETF can cater to a particular need of the investor.

Silver ETFs can be direct or indirect ETFs. Direct silver ETFs either track the underlying spot price or invest in mining or production companies. Indirect silver ETFs track the various derivatives. Common examples of indirect ETFs are inverse or leveraged silver ETFs.

Investors seeking higher returns (with the higher risk) can of course also invest in leveraged and inverse silver ETFs. The leverage can be 2x or even 3x. Similarly, inverse leveraged ETFs gives the investor the ability to also profit during bear markets without having to short sell.

The table below shows the top five silver ETFs based on total assets under management expense ratio and spread.

TICKER FUND NAME ISSUER EXPENSE RATIO AUM SPREAD % SEGMENT
SLV iShares Silver Trust BlackRock 0.50% $5.17B 0.06% Commodities: Precious Metals Silver
SIL Global X Silver Miners ETF Global X 0.65% $411.10M 0.16% Equity: Global Silver Miners
USLV VelocityShares 3X Long Silver ETN Credit Suisse 1.65% $361.21M 0.10% Leveraged Commodities: Precious Metals Silver
SIVR ETFS Physical Silver Shares ETF Securities 0.30% $328.49M 0.07% Commodities: Precious Metals Silver
AGQ ProShares Ultra Silver ProShares 5.28% $208.46M 0.11% Leveraged Commodities: Precious Metals Silver

When investing in silver ETF, look at the annual expense ratio and the daily average volume. These variables will give a brief idea on the costs of holding the silver ETF. They also help you to understand the liquidity of the ETF that you want to invest in.

Some silver ETFs are also cheaper but they come at the risk of low liquidity and higher spread.

If you want to trade or invest in silver ETFs it is important to understand the outlook for the market as well.

What is the outlook for the Silver market?

We make use of the spot silver market to gain a rough outline of where the silver commodity is heading.

After reaching a peak of $48.02 in early 2011, silver prices have dropped significantly. Since 2011, silver prices, especially over the past four years have settled to trade in a range established between the highs and lows of $21.20 and $13.88.

This partly comes from the fact that central bankers, especially in the past few years have turned more hawkish. With tightening interest rates, improving global trade and the economy, the demand for silver as a safe haven has fallen quite a bit.

Spot Silver – Market Outlook

With economic policies aimed at reducing corporate tax, the stock markets have been the best place to be in.

Despite the optimism, the current economic cycle is either mid-way or near the far end of its boom. This means, that a possible bust cycle in the global economy is around the corner.

This translates to a potential increase in demand for silver as a safe haven asset. However, no one can predict when then economy will turn the corner.

From a technical stand point, the spot silver prices are basically trading flat within the said range. A breakout from the range could potentially establish the next leg of direction in the precious metal.

To the downside, a breakdown below $13.88 could trigger sharp selling. This could push silver prices back to $9.85. This marks a level that was briefly tested during the early part of 2008 when U.S. sub-prime crisis quickly snowballed into a global crisis.

Alternately, to the upside, silver prices will be looking at a stiff resistance level of $21.20 - $19.82. This level needs to be cleared in order to establish a strong uptrend.

Investing in silver ETF based on market outlook

At the moment, the silver market along with most other precious metal commodity markets have been trending lower. This is evident from the table below. You can see the list various silver ETFs and their performance over a period of time.

TICKER FUND NAME 1 MONTH 3 MONTH 1 YEAR 5 YEAR
ZSL ProShares UltraShort Silver 4.54% 4.69% -3.36% -7.11%
SLV iShares Silver Trust -3.43% -4.73% -5.09% -4.41%
SIL Global X Silver Miners ETF -6.29% -6.78% -15.68% -2.89%
USLV VelocityShares 3X Long Silver ETN -11.49% -17.10% -27.11% -30.77%
SIVR ETFS Physical Silver Shares -3.32% -4.69% -4.93% -4.21%
AGQ ProShares Ultra Silver -7.15% -10.56% -15.11% -15.40%

 

The ETFs have all been yielding negative results. However, you can see that the top of the table, the UltraShort Silver ETFs from ProShares has managed to yield positive returns. This is due to the inverse nature of the ETF.

What silver ETF investors need to understand is that by choosing the right ETF (long or short), investors would be able to aim for positive yields, based on the silver market outlook.

How to use Silver ETFs as a hedge?

As a hedging tool, silver ETFs are ideal. It is known that silver alongside gold are considered an effective hedge against inflation.

Most investors often tend to also hold the physical bullion as well, despite the higher costs. Holders of silver in the physical form can use the silver ETFs as an effective hedging tool. The hedge can offset an investor's exposure to stocks during rising risk appetite.

When compared to gold, it is important to remember that silver has a higher volatility. So, investors need to be aware of this fact when using silver ETFs to hedge their portfolio's exposure.

For investors, silver (alongside gold) makes for good value especially to hedge against the loss of purchasing power in the fiat currency. This was evident in the immediate aftermath of the global financial crisis where central banks across the world started to pump trillions worth of currency into the markets in order to revive their respective economies.

The iShares Silver Trust (SLV) chart illustrates this point very well. After initially bottoming near $9.58, SLV increased 389% in a span of two and a half years.

iShares Silver Trust (SLV) Performance from 2008 - 2011

Instead of purchasing silver in the physical form, silver ETF is a better alternative when accounting for expenses.

What to consider when investing in Silver ETFs?

One of the things to consider when thinking of investing in silver ETF funds is that the metal is not a foolproof hedge for inflation. This is due to the known fact that silver also has strong use in industrial applications as well.

Therefore, silver tends to fluctuate alongside the economic upturns and downturns. This is something that is quite unique to the commodity in question.

For example, during an economic downturn, the industrial and manufacturing sectors also play a role. Weaker demand could potentially influence the price of silver and thus the silver ETF funds too.

Investing in silver ETFs is a direct but a cheaper investment in the underlying commodity. But this depends on the type of ETF you want to invest in. Silver alongside similar commodities do not earn any dividends. The returns are merely based on their intrinsic value given by the markets.

What to look for when investing in Silver ETFs?

Still, one of the biggest benefits of investing in Silver ETFs is the fact that they can offer diversification to one’s portfolio. While many often tend to pick gold over silver, silver ETFs offer some valuable uses when it comes to a portfolio based in the U.S. dollars.

When considering investing in Silver ETFs, investors also need to pay attention to the economy as well. Silver and silver ETFs are valued in U.S. dollars. So, the strength of the currency also plays a big role. This in turn means that investors need to pay attention to the currency strength of the USD. Central bank and government policies often dictate the value of the exchange rate.

Investing in Silver ETFs - Conclusion

In conclusion, unlike the fiat currency, silver as a commodity is unique and is free from the government’s policies.

Silver might be a poor man’s gold, but at the same time, there are some unique characteristics that also sets it apart from gold as well. Thus, when considering investing in commodity of precious metals ETFs, it is worth considering exploring silver ETFs as an investment vehicle.

The post What are the Best Silver ETFs? appeared first on - Tradingsim.

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This is the question I have pondered over the years. How much trading is over trading? At which point should you stop for the day?

There are literally dozens of scenarios you can dream up which ultimately determine how many day trades you can make in one day.

The straight forward answer to this question for me is one.

That's right - just one trader per day.

Well, in this article I'm going to make the case of why placing only one trade per day may help your bottom line.

Learn Your Trading Edge

Trading Edge

The first thing in the market you need is a system or strategy that works. You as a trader are nothing more than a scientist attempting to run tests to see which method works the best.

Now you have a few ways you can figure out what works for you. You can use Tradingsim to run hundreds or thousands of tests, depending on how much time you have to perfect our craft.

You can buy a course from a "trading guru" and then tweak to match your trading style.

Another option is you can place real day trades in the market to see how it feels. Well speak with any winning trader and they will tell you that at one point or another they actually blew up their account.

Or you can just do a combination of all three.

Regardless of what you decide to do, the most important thing is for you to learn how to win consistently and not placing trade after trade.

To this point, by placing just one trade a day, you are able to build up your skills while reducing the risks of blowing up your account.

As you place more trades, you can begin to track the results to see what makes you money.

Discipline

Discipline

Focusing on Your Daily Profit/Loss

I can say this with 100% certainty, whenever I try to make money back that I loss earlier in the day, I end up losing more money.

You might hear from your trading guru that they were down some huge amount but managed to claw back their losses by end of day.

For each one of these hero stories, I can tell you that I have managed to reach my daily stop loss limits trying to make money back.

Now it is not always about making back what you loss in the morning, but there is also the harsh reality of trying to make more.

If you have been trading for a while, you will realize that if you have a big win in the morning, it's unlikely you will have greater success in the afternoon. Call it not being able to strike lighting twice in one day.

It could be the fact you are up and begin to relax on your rules or how selective you are with which stock you trade.

Regardless of the reason, things just get trickier with that second, third and fourth trades of the day.

Honoring Your Rules

Rules

Judgement based trading is really difficult. I can think of 6 key things I look for in a setup off the top of my head. Since you are not using a computer to place your trade, these rules are all items you could mistakenly overlook.

Now take this and multiply it across three or more day trades in a day. This just raises the odds you are going to make a mistake as the day goes on. It doesn't mean you are a bad trader, it just means human beings are not meant to have hyper focus looking at computer screens for over 6 hours a day.

Less Trading Commissions

The only thing certain to happen when you place more day trades is you will pay more trading commissions. If you begin to trade heavily you can easily rack up commissions in the thousands over the course of a year.

By placing one trade a day, you can likely limit your daily commissions to under $10 dollars. This number could be even lower if you trade with an online discount broker.

Now take that same scenario and multiply this by 4 trades a day over 20 days. You are now up to $800 dollars a month on just commissions.

If you have an account that is barely over $25,000 dollars, which is required to avoid day trading pattern rules, you could be losing 3.2% of your total account value a month.

More Focus

When trading you need to focus on what is in front of you. I have been in winning trades and losing trades for that matter, but did not take the necessary precautions to protect my equity because I was busy looking for the next trade.

If I wasn't looking for the next trade I was busy managing two or three positions. When you are looking for more or managing too much, it opens you up to missing the small things which separates winning day trades from losing day trades.

You also run the risk of being up on one position and by having that profit secured, letting losers run further than they should.

Now please do not mistake this to mean you should get in one stock and stay married to it no matter how it performs. What I am recommending is that you give the stock your undivided attention since we are talking about your hard-earned money after all.

Learning to Lose

Learning to Lose

I am a sore loser. This goes back to my childhood where I punched a hole in my parent's insulation of their unfinished basement because my Dad beat me in a game of table tennis.

I'm still that same 12-year old kid wrapped inside the body of a grown man.

So, for me placing one trade a day forces me to take the loss. It forces me to say out loud - I loss today. Not I'm going to get it back or let me just try this one quick trade before lunch.

So, if you also suffer from the need to win or be right - learning to lose is a blessing. What you will realize is that a losing trade is actually a winning trade.

If you can avoid the big losers, you will in time make more money than you can count.

In Summary

Never feel like you need to do what everyone else is doing. If placing one trade a day makes sense to you, then you do it. It doesn't mean you are any less of an active trader or day trader.

As always, feel free to visit Tradingsim.com to see how our platform can help you become a better trader.

The post How Many Day Trades Should You Place Per Day? appeared first on - Tradingsim.

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Direxion - Overview

Exchange traded funds have become as popular as the assets they track. The main benefit of trading or investing in an ETF is investors can handpick sectors and stocks they want exposure to.

With many ETF providers coming into the market, the competition has also led to cost cutting. These costs cuts make most ETFs quite affordable for retail investors.

Direxion is one of the world's leading ETF providers. Founded in 1997, the company boasts over $13.4 billion in assets under management (AUM) as of December 2017.

Direxion offers exchange traded funds, Direxion leveraged ETFs, Direxion inverse ETF and Direxion mutual funds. That's quite a bit of products uh? Well remember, Direxion has been at this since 1997.

The wide choice of ETFs to choose from makes Direxion's ETFs widely favored among investors with a greater appetite for risks.

Typically, short-term investors prefer to make use of the 3x leveraged ETFs and the inverse ETFs which allows investors to speculate on both the long and short side of the underlying asset.

Before we go into detail about how to trade Direxion ETFs, let's first ground ourselves on these financial products.

#1 - What is a Leveraged ETF?

A leveraged ETF is an exchange traded fund that makes use of both financial derivatives and debt in order to amplify the returns of the underlying index or assets tracked.

This is quite different compared to traditional ETFs which simply track or mirror the performance of the underlying indexes or assets.

The aim for leveraged ETF is to simply offer a constant amount of leverage at all times. Typically, this leverage is around 2x or 3x. In other words, it is the ratio of 1:2 or 1:3.

For example, a 3x (three times) leveraged ETF aims to offer investors and speculators additional exposure to the underlying asset or index without any additional costs.

For example, Direxion's Gold Miners Bull 3x (NUGT) leveraged index offers 300% daily investment result before fees and other expenses. It is the same with the inverse ETF DUST.

Direxion’s NUGT (Leveraged Bull ETF) and DUST (Inverse Leveraged Bear ETF)

The most important thing to understand about leveraged ETFs is the fact that they offer daily returns.

Therefore, the typical buy and hold strategy finds no place when it comes to leveraged ETFs, which understandably, makes for a strong topic of disagreement in the investing community.

The keyword here is "daily" as leveraged ETFs offer 300% of the return on the underlying index or assets over the day. However, the returns do not hold ground if one starts to look over the longer-term period.

#2 - What is an Inverse ETF?

Some traders will refer to an inverse ETF as a short ETF or a bear ETF.

Such ETFs are widely used during bear markets and offer investors the advantage of "staying long" while shorting the assets or the index.

An inverse ETF is built by using derivatives that include futures contracts among other derivatives.

Inverse ETFs are in fact a suitable alternative for investors who want to stay on the short side of the market. This brings immense benefits for investors who would otherwise need to hold a margin account in order to short sell the asset.

When combining leverage to an inverse ETF, investors can potentially look at making strong profits. However, despite the promise of huge returns, inverse ETFs are no doubt risky to trade.

#3 - What are Direxion Inverse ETFs?

Direxion's inverse ETFs are perhaps one of the most widely used exchange traded funds especially in a bear market.

The inverse ETF is also known as the Direxion bear ETF or Direxion bear 3x ETF.

Direxion DUST Bear 3x ETF

The above chart is of the DUST ETF. This is a bear ETF which tracks 30 firms in the precious metals mining industry - primarily in the gold market.

As you can see, the 1-month and year-to-date returns on the NYSE Arca Gold Miners ETF are - 2.24% on the month and 5.98% year-to-date.

If the investor would have instead purchased the DUST ETF and thus shorting precious metals, the inverse ETF holder would have gained 5.03% on the month and 7.54% on a year-to-date basis.

Do you see how not only does an inverse ETF protect your money in bear markets, but it also presents the opportunity to get you ahead.

#4 - Direxion ETF List (Inverse and Leveraged)

The below table shows some of the most popular and widely traded exchange traded funds from Direxion. This list includes the top 10 Direxion ETF assets and their year to date returns.

Symbol ETF Name Total Assets* YTD*
FAS Direxion Daily Financial Bull 3X Shares  $  1,886,805.00 -7.53%
NUGT Direxion Daily Gold Miners Bull 3X Shares  $  1,233,701.00 -26.68%
SPXL Direxion Daily S&P 500 Bull 3X Shares  $      972,693.00 0.05%
JNUG Direxion Daily Junior Gold Miners Index Bull 3x Shares  $      833,798.00 -26.41%
TNA Direxion Daily Small Cap Bull 3X Shares  $      730,443.00 17.38%
TECL Direxion Daily Technology Bull 3X Shares  $      688,489.00 19.49%
SOXL Direxion Daily Semiconductor Bull 3x Shares  $      668,843.00 2.36%
ERX Direxion Daily Energy Bull 3X Shares  $      445,404.00 7.89%
TMV Direxion Daily 20-Year Treasury Bear 3X  $      368,043.00 7.11%
LABU Direxion Daily S&P Biotech Bull 3x Shares  $      358,972.00 17.98%

*as of 06/28/2018

One key point to call out is that the top 10 list is made up of the 3X product and not the 2X. This tells me investors are chasing potential profits, but I would love to see how many of these investors are profitable.

If you are looking to purchase a Direxion product, I would say it makes the most sense to start with this list. You can then dig deeper to see if there are other products which may offer a better expense ratios and less volatility.

#5 - Direxion Biotech Bull (Bear) ETF Example

Most investors know that the Biotech sector always makes for an interesting play.

However, when one commonly talks about Biotech ETFs, some of the names that come to mind are IBB (iShares NASDAQ Biotechnology ETF) or XBI (SPDR S&P Biotech ETF). These are the traditional ETFs that offer investors exposure to the sector.

Direxion Biotech Bull and Bear ETFs such as LABD (3x leveraged ETF) or LABU (3x inverse leveraged ETF) are not as popular. These ETFs offer investors the ability to stay long the sector with tremendous upside.

The LABU/LABD tracks the S&P’s Biotechnology Select Industry Index (SPSIBITR). and the LABU ETF.

LABU v/s IBB ETF Comparison

The chart above might look similar with both the ETFs tracking more or less the same sector and nearly the same set of companies from the Biotech sector.

But, when one looks at the daily return that is where the similarity ends. While the IBB shows a 0.09% increase, Direxion Bull leveraged ETF has an over 3% range on a daily basis.

Now before you dive into the Biotech ETF, you need to ask yourself why?

Meaning biotechs by themselves are extremely volatile and if played properly will net you big gains.

So again, do you really need the additional risk exposure of a 3X ETF?

#6 - Why Direxion leveraged and inverse ETFs are not for everyone

It is obvious that higher leverage cuts either ways. Investors can expect strong returns while at the same time their risk also increases significantly.

For the short-term investor or speculator, Direxion ETFs offer a great way to quickly realize higher profits especially when they are right. Used wisely, the inverse leveraged ETFs can offer investors the ability to short the market and not only protect their portfolio's but grow them during downturns.

There is no doubt however inverse and leveraged ETFs carry somewhat higher expense ratios compared to traditional ETFs.

If you are trading Direxion's leveraged or inverse ETFs  for the first time, then exercise caution. This is due to the volatility and the returns that are specific to these ETFs. Investors need to have a strong background and familiarity when trading Direxion ETFs as they can be risky.

The volatility and the daily ranges can lead to significant losses quickly. For example, if you are in a short 3X ETF, every point move is magnified by 3.

Imagine if the ETF has a 20% move, this means you are literally down 60% of your money.

Does this make sense to you? Again, only you can answer that financial question for yourself, but the risk is just insane of you have trouble balancing your portfolio.

However, for seasoned investors, Direxion's ETFs are the perfect instruments for hedging against potential market volatility. But to think of Direxion as purely a way to make more money is likely a recipe for disaster.

#7 - Leveraged and Inverse ETFs Are for Day and Swing Traders

Leveraged and inverse ETFs are often the cause of polarizing opinions among both investors and speculators alike.

The reason I believe stems from the fact traders begin to look at these ETFs as a means to make three times the return of the market over the same period of time.

The reality is that the swings down will shake the trunk of the most confident trader.

To this point, Direxion themselves have publicly stated these 2X and 3X products are for position/day trades and are not intended for long-term investing.

This means if you have the chops to put on one of these trades, then you need to be a person actively monitoring and trading the markets.

These are not get rich quick products that you can fire and forget.

In the United States alone, there are over 1,800 exchange traded funds listed. Of these, one out of seven ETFs are a leverage or inverse ETF product.

So, with so many choices and needing to know the setups you are trading, if your window is longer and you have no desire to actively manage your account on a daily basis - then purchase a standard ETF.

Leave the volatility to those traders that have the time and capacity to manage these opportunities.

The post Direxion ETFs – 5 Key Things to Know Before Investing appeared first on - Tradingsim.

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