So, by now you should be used to looking at a 5min chart of the Nasdaq Composite intraday, and if you have software that can draw a line on the previous day's close then all the better. If not, just know where the close is.
This 5min chart with MA's=5,20,40 will be the chart that your eyes will look at 89% of the trading day. Read that last sentence again.
Use the daily chart of the QQQ's to see overall trend. This can be done by observing where the QQQ's trade with respect to the 5MA. All you are concerned with at this point is WHAT IS THE MAX VALUE THAT MY STOCK CAN/HAS DIVERGE(D) AWAY FROM THE 5MA?
This usually is a value based on a trendline channel.
Lets go over this in detail. Look at a chart of QQQ's (daily). Any recent downtrend that you look at will obey a trendline channel. It looks as though the highs and lows of each day are "trapped" in a channel, with the 5MA serving as a ceiling for that UPPER channel.
So, now all you have to do is draw a trendline (when you have spotted a trend) below the lows of several candlesticks and the 5MA will guide you all the way down the trend. If your stock trades above the 5MA you will short and when it trades below your lower trendline you will cover (NOT BUY TO GO LONG).
I hope that everyone has a basic knowledge of candlestick charting. Although any chart that represents high/low/open/close can be used.
Now, we are still speaking of being in a trend, we haven't yet learned how to spot a top or a bottom (although you have learned that bottoms and tops can't be spotted until after they have formed, I will prove to you that you can anticipate a bottom and a top, BOTH)
Anyone remember the mid March highs?
Well, at the bottom (start of that move) there was a very important candlestick/gap combination that gave you a heads up on the bottom (an NO it was not the doji)(doji=open and close are equal).
And the top was formed with a gap down day and a screaming rally into the afternoon and a very discrete sell-off into the close. The next morning the market gapped down and never looked back. It trapped all the scared, bullish traders into a capitulating top.
More on these last two paragraphs later, but for now try and figure out how your favorite instrument of trading diverges away from the 5MA. Figure out how many dollars/cents MAXIMUM it CAN move away from the 5MA before it snaps back. And notice the moving averages that act as a pivot (when your stock hits this moving average, usuall the 20,40, it reverses and continues its trend)
Also, take a look at a slow stochastic (on bigcharts.com) and see where your stochastic is in relation to the maximum divergence.
Anyone use Esignal? What platforms do most traders use?
