People have been trying to predict the stock market for years. Making algorithms,
studying years of stock data, going through each any every statistic,
that could possibly predict the direction of where the market is going to head next.
But what if I told you there was an easy way to see when a market is losing momentum
and know when there is high probability it s about to reverse in the opposite direction.
A strategy so simple even your dog could do it. Well I found one, and it works pretty damn good.
To first understand the strategy, we first have to dig deep and understand
the trend of the chart. (Minecraft meme)
See what I did there. I said did deep and it s Minecraft. God I spent way too much time on this.
You should be constantly asking yourself. What is
the trend most likely to do next? To do that, I give myself three options.
Is the trend most likely to continue heading the direction its going? Is more likely to
end and start consolidating? Or does it look like its about to reverse.
Now you maybe saying to yourself. How the f should I know.
As an example, we will be using this chart. Now when looking at this chart,
I m sure most of you are thinking. Yeah, that s just a normal down trend.
While it is a downtrend and its making lower lows, you have to
look at it more closely. (zoom in meme) What I see, are three drops within the
downtrend. If we measure each one of these drops, we can clearly see the drops are
slowly getting smaller in size, meaning that the downtrend is losing momentum.
So we now clearly see this downtrend is slowing down, but how do we find the point
of where this downtrend is most likely to reverse and change to an uptrend?
The answer? Divergence. Divergence is basically when the price of a
market is heading one direction, but an indicator is heading in the opposite direction. Divergence
can warn when the trend is weakening, and in some cases may lead to the price changing direction.
In order to see if divergence is happening we have to add an indicator to our chart.
Now there are many different indicators that can measure divergence. As long
as it s a momentum indicator, you re good. For this example we will be using just a simple
RSI indicator. Click the indicators tab, type in RSI,
and Click this relative strength index one. Now that we have the RSI on our chart,
lets see if there is divergence occurring. So as we can see at this most recent weakest drop,
the chart made a lower low. But if we take a look at the RSI,
it just made a higher high. What do you call this? Divergence. It can be a really
great sign the chart is about to reverse and change direction. In this case head upwards.
Now as a side note. Just because there is divergence doesn t guarantee the price will
reverse. There are no guarantees in trading. NONE. But you can use divergence as a pretty nice sign
the market is thinking about changing direction. So we have 1, 2, 3 lower lows that are shrinking
in size (this is very important), and then at the last weakest low,
we have divergence occurring. All great signs the market is thinking about reversing.
So we know the market is losing its downwards momentum and it s thinking
about reversing, but how do we confirm its actually going to start heading upwards.
We need whats called a trend filter. One nice easy way I like to filter
trends with this strategy is just a ordinary moving average. So go to the indicators tab,
type in ema, for exponential moving average. Going to the settings, and change the length
to 50. I m also going to make mine Blue. So its pretty simple. If price is below the
50 ema, it s a downtrend. If its above, it s an uptrend. One key rule I like to go by
is I will never take a long in a downtrend, and I will never take a short in an uptrend.
That s just how I like to trade and everyone has their own style of trading,
but this works really well for me. So we have one confirmation signal right there,
but we should add some more just to really confirm the trend reversal.
What I like to do for that is what s called pivot points. Go to the indicators section.
Type in pivot point. Make sure you click this standard one right here.
Spongebob think I made my point Once you add it on your chart, you ll get this.
(screams) I know,
its pretty ugly. Let s clean it up a bit. Go to the settings of the indicator. You
re going to want to change the pivot timeframe to daily. Then
uncheck all of these boxes besides P. Then you will be left with 1 pivot point line per day.
It s kind of the same as the exponential moving average. If price is below the pivot point,
don t even think about going long. If its above, don t think about going short.
Then finally for the icing on the cake we have this level right here, where price used it as a
support and is now using it as a resistance. So we have 3 key factors in this area. The 50
exponential moving average, the pivot point, and this resistance level. And
what s even better is all three of these points are pretty close together. The
closer they are together, the better. We can confirm the reversal is happening
if price passes all three of these points. Once that happens, we can enter a trade confidently
and take advantage of the reversal. So what happens is price ends up break
the 50 ema and that resistance level we drew earlier. But it hasn t quite broke
the pivot point yet. So we wait and be patient. A few more candles go by and it actually uses the
pivot as a resistance. The next day comes, and since we are using daily pivots, a new pivot
was made. And it was made below the price. So price has now passed all three of our
check points which gives us the confirmation that the price is starting to trend upwards.
So we enter a trade. I set my stop loss here. If you want to learn more about placing stop
losses and how to choose where to put them, I ll leave a link in the description to a video I
made about how to place better stop losses . Watch that after this if you need some help
choosing where to place your stop losses. So by this point, we are in the trade. We
have our stop loss placed, and we watch to see what the market does next.
Just as planned, price ends up trending upwards, then it retests the 50 ema and the next pivot
point. Now this is a very key area. If price would break downwards through these levels,
we would exit our position as the that means the trend is now in a downtrend.
But as long as the pivot and ema are holding and as long as the price is
above these points, we hold. But let s see what It does.
It then bounces off these points and makes a huge upwards movement. Which is great because
that means more profit for us. So at this point you can take some profit off the table and sell
25 or 50% of your shares, or keep holding your position. Really depends on your risk
tolerance and what type of trader you are. But then look what happens. It starts getting
a little weaker. How can we tell? Well, its making lower highs, which is never a good sign.
On top of that, the price is now below the 50 ema, and its tested the pivot point twice
now. Which is usually not a good signal. Then price starts consolidating and moving
sideways. So at this point you could start thinking about exiting the trade,
since its giving a lot of signs of weakness and its starting to move sideways.
But if you re one of those biker dude risky traders. There is still a slight glimmer of hope
though, as price is still above the pivot point. We then watch what the chart does, and the next
day comes around and a new pivot point is made. And it was made above the price.
We are suddenly below the pivot. So now that the pivot is above the price,
the situation has changed completely, and these are all signs that the market
is about to head downwards. Then just as an extra tip the
market is slowing down, the price tests this pivot point, and gets reject.
So by now, we are definitely out of the trade. And look what happens the market falls.
But as you can see we got a really nice profit. And what s even better is that we really mitigated
our risk with all the confirmation signals and in general entered in a very confirmed trade.
You can get a lot more advanced with this trading strategy by adding volume,
chart patterns, level 2 data, other indicators, and so many other trading tactics.
But I thought id give you the short and simple strategy, to show you don
t have to be a trading genius to get winning trades. It s all about getting your head is
the right style of thinking when trading. I actually posted this trading strategy in
my discord first before making a video on it. So if you want to see other trading strategy,
my backtest results, or even just talk to other like minded traders. You should join and come say
whats up. I ll leave a link in my description. Hopefully this video helped you out and like
I said if you want some help placing better stop losses, watch this video,
it ll really help you out. Thanks for watching, and I ll see you guys next time.