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TraderEd's Trading Secrets

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Secret 1: Double Tops and Bottoms

This is a reversal pattern. The advance that follows a rally and reaction fails to take the price significantly above the previous rally high. If the second peak does top out well above its predecessor, then the double-top call is invalidated. Assuming we have a legitimate double-top formation in place, the price then subsequently retreats below the previous low, signaling a trend reversal. In terms of spotting a valid double top, it doesn't matter where the second top develops; it can be a little above the first, a bit below or at the same level. Also, volume on the second peak is substantially lower than that of the first. This denotes buyers' lack of interest and makes the price more vulnerable should sellers persist. What is happening with a double top is a reversal in the rising peaks and troughs. A double bottom is the exact opposite. It is pretty much the same thing happening but here you have two reactions developing at around the same level and a rally on strong volume (indicating aggressive buyers) that takes the price above the previous peak - in between the two bottoms. The first leg of the double-bottom formation usually occurs on heavy volume. The second leg down is typically characterized by lighter volume. An air of bearishness sets in as traders get disappointed in seeing the initial rally of the first low all but retraced in the second swing down to the second bottom of the formation. For a valid breakout to occur, volume has to expand as complacency at the second bottom is replaced by enthusiastic buying and the price breaks out beyond the high point between the two bottoms.

Secret 2: Three Day Rally

This setup is very similar to the one above. It involves waiting for the first higher close following a five percent or better rout over the past couple of days. The higher close indicates that the selling is complete, at least for the short-term. Normally, a three-day rally will take hold as sellers back away and traders perceive bargains are available.

Secret 3: Money Flow

Money flow analysis dictates that trades done lower than the transaction before them are "sales", and trades done higher are "buys". There can be net buying of a stock when the price is dropping, or net selling as it rises. Let's suppose a 100-share trade moves a stock down US50 cents to US$49.50, and a 1,000-share trade bumps it back up to US$50. The significance here is that the price is unchanged, but US$45,050 has flowed into the stock. That's what money flow analysis is all about - capturing the "true" trend. However, most of the time, when a stock is going up, the money flow is going up. And, most of the time when the stock is going down, the money flow is going down. What money flow analysis is is just the modern day version of tickertape reading. Several decades ago, before the advent of computers or data retrieval systems, traders would watch "the tape". They would be watching for any unusual activity as they studied this trade-by-trade record of transactions of the New York Stock Exchange.

Secret 4: Watch the Open

Often, the market will tell you what its direction will be. A strong signal is a sharp break or rally shortly after the open. All you have to do is wait for the market to tips its hand. You simply wait for a pullback (in the case of a rally) or a rally (in the case of a break) to make your move. Typically, this signal will be short and fast. Late day momentum in a particular stock, commodity, currency or the overall market typically carries over into the first part of the next day. Watch the close for a good idea of the next day's open.

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About the Author

Hello, I am Trader Ed.  No, not Mister Ed, although at times I feel a bit like a talking horse.  You see, my job is to educate folks about the market, which means talking about (or writing in this case) anything and everything that affects the market.  This means the world is my oyster.  Every day, I read for about an hour or so about the happenings in the world.  Every day, I look for leading indicators that will help me “see the future.”  No, I am not an oracle, nor do I pretend to be, but I do look for macro trends that point in a direction, and I am more than happy to share my “vision” with you.  Keep in mind, though, my vision derives from analyzing the fundamentals of the global economy, as well as looking at current movement in the market.  I shun the doomsayers and I embrace the realists.  I look to the positive without denying the negative.  In short, I paint as realistic a picture of the market as I can.  So, if you have a question in this realm, feel free to ask me.  I will answer you in this column and I will do that to the best of my ability.

Hoping to hear from you.

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