Educational Articles

Assessing the intraday trading risk using daily time frame multiple moving average analysis

A simple daily moving average analysis can give us a very reliable source of risk management during our intraday trading planning period.

Short-term and long-term moving averages always provide a classic reference for daily and intraday traders. Classic methodology prefers a defined daily trend for swing trading, but moving averages also provide excellent support to manage risk for intraday traders.

Let us take a look at the crude oil daily chart (06/09/2020) to see what we are talking about.

Crude Oil Daily Chart provided by NinjaTrader, Visual Alerts provided by TradingTotal

Marked rectangles are highlighting congestive areas where daily bars show overlapping areas with several inside bars.

The proposed analysis consists in identifying areas where short moving averages such as 5 EMA, for example, are in a horizontal or flat position to determine days where there is no daily trend. From the fundamental point of view, this flat short-term EMA technical situation means that swing traders, and possibly some core traders, are not taking new daily positions.

So, day traders will not have the important support from larger time frame traders.

At the same time, risk could be increased if we face longer-term moving averages, such as the 100 EMA (green line) during the current second week of June, on the  Crude Oil daily time frame.

Note the last shown crude oil prices going into the referred 100 EMA as resistance to limit the current strong up-trending move. This technical situation is clearly responsible for the current crude oil intraday sideways situation, which means more volatility, and obviously, more risk to be stopped during our intraday trading activity.

“Using super long-term moving averages as support & resistance key reference”

1 Introduction

Trading moving averages have been one of the preferred classic strategies in any time frame and with any instrument. It doesn’t matter if you are willing to trade stocks, futures, or any other instrument either intraday or in a daily or weekly time frame. The simplicity of trading a clearly defined event, such as a moving average cross, for example, is an invitation to trade long/or short the considered instrument.

TradingTotal advocates the intense use of moving averages in many different ways, and now, ……. 

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The Alter Ego

In psychology, “ALTER EGO” is the name we give to our other I, our other personality, often unknown even for ourselves, until, at some point, as a consequence of new or unusual circumstances and sometimes, extreme circumstances or exceptional, there is the emergence and sometimes the birth of that other personality, completely different and contrasting with our everyday “I”, with the rational, balanced and predictable I that allows us to successfully face the challenges that the life poses us daily.

At the end of the day, as the poet Mario Benedetti said, in “everyday life lies happiness.”

And we are happy, so much so that we have decided to become traders as a way of life. We have educated ourselves for a reasonable period, we have studied and practiced strategies in simulation mode for the necessary time, we have carefully designed and drafted our trading plan, we have achieved the consistency necessary to be profitable, and then, we have made the decision to start live trading, risking real money.

We place our trading account in operational condition so that we can carry out our first real negotiation and this is how we arrive at the long-awaited day when we select the appropriate trading pattern for our trading plan.

On that important day, we find ourselves holding the mouse about to click at 10:00 AM, about to buy a lot of the stock XYZ, when we notice that the market is ending its sixth consecutive green bar of 5 min, in perfectly fluid formation. Also, we notice that TRIN has just formed a perfect buying pattern at a value of 1.20 and rising.

It’s 10 in the morning, half an hour has passed since our first day as a trader and we still haven’t made any entries, we are a little anxious for that reason and so, we made the important decision that we are going to skip, for this unique time, the fact that we are facing the most important reversal time of the day and that the market is extended, because we have so much faith and hope in this XYZ swing pattern!

Also, since it is the first trade of our short life as a trader, we are going to take a larger lot than what our risk control and capital preservation rules provide, because the pattern is very good and we are surely going to make money, so, why not earn twice as much as expected?

Furthermore, as a complement to this unforgettable day, we are not going to place the stop loss because maybe, there is a small retracement, the stop is activated and in a blink of an eye we are left out of this first negotiation, which will undoubtedly be successful!

Convinced that the risk we are taking is worth it, we click and breathe deeply, feeling fully satisfied.

Gentlemen, we are pleased to introduce you to our Alter Ego, who has taken control of our trading.

There is no need to tell you what the result of that first negotiation as a professional trader was.

The psychological aspect of trading is more important than the essential acquisition of technical analysis knowledge and other skills, without which there is not the slightest possibility of being successful in trading.

The first thing that is acquired is technical knowledge, which properly applied and based on sustained experience, allows us to achieve the degree of confidence that will make it possible for us to achieve the necessary consistency to be viable.

Mental control is the only way to maintain the necessary emotional asepsis, to avoid deviation from our mandatory systematic routine of applying our technical knowledge (this is called adherence to the trading plan, discipline).

Trading is a mental “sport”, in which our rational and balanced “I” must always be in control of the situation.

If we let the Alter Ego place even a single finger, even for just a second, in our physical and/or psychological trading “environment”, we will pay the consequences, exactly like the first day we bought XYZ shares at 10 :00 AM sharp.

Don’t ever forget it.

The importance of retesting the HOD/LOD

When a high probability pattern shows up during the premarket session, the average trader has the impulse to take the position as soon as the market opens.

Very often the high odds pattern makes a strong reversal as the market is going into the first reversal time at 9:35 AM breaking the LOD/HOD, depending if it is a long or short trade.

One of the possible reasons for this reversal is that a lot of people already inside the trade are closing their position, taking the money off the table practically at the same time.

This profits-taken action, makes the “high probability” pattern look like failing the original direction and as time goes by, the pattern retakes the original high odds direction, creating a very frustrating sensation for the average trader.

The early entry must be considered a very aggressive action, leaving the trader with few alternative strategies in order to take the trade.

One of the alternative strategies is called “retest’ and consists in waiting until the reversal move is generated as a consequence of profits taken, trying to get the LOD(HOD) for a long(short) position.

Once this retest fails, the trade can be taken as the first buy (sell) setup happens.

If the retest overcame the HOD (LOD), the possible trade should be re-evaluated in order to decide if the new pattern and stop point are both acceptable.

Let’s analyze a retest example to understand better this very important and conservative strategy.

 Monday 13^Th of October, 2008, NFG did a bull gap showing itself as a high odds technical pattern.

Let´s take a look at NFG daily chart:

Now let´s analyze the NFG 1 min chart.

NFG did a bull gap over the Friday 1 min base right into the next resistance area, so an early entry above the two 1 min bars is an aggressive entry without retesting the LOD even having those first BT bars.

The entry was made above 30.55 which was the maximum of the 9:32 1 min bar.

The stop was 29.97 with 1/3 of the regular lot due to the aggressive entry point.

The LOD was retested but with 100% of retracement.

The second entry above 9:38 AM was not possible because we have to see the retest and fail situation, which, obviously we couldn´t see with a 100% retracement.

So we had to wait until a safer entry point was created at 10:12 AM with a buy set up over a minor support mS area at 31.04 value.

At this level we add another 2/3 lot and trail our stop for the whole 3/3 lot at 30.81 so, the total stop loss is now 0.23¢ against the 0.59 ¢ original stop loss, allowing us to increase 3 times our size without risking more money, but once the trade is well going into the right direction.

This strategy implies adding shares to the original size and trailing the stop not risking more money than the amount allowed per trading plan.

 Therefore, another possibility, taking into consideration both sides of the classic “dilemma” of the average trader, neither being exposed to a complete Risk Unit losing trade nor letting pass a high odds trade, is to allocate a smaller amount of money for the first aggressive entry point.

You can even, if the trade goes in the expected direction, add shares to complete the risk unit as it is defined in your trading plan (add a second part with a different stop or add and trail to the second point stop, etc.)

That way lets you not lose any high-probability pattern without risking the

complete regular risk unit “R” while performing an aggressive entry strategy.

Do you have your Trading Plan ready before starting negotiation, right?

In a previous educational letter, we planned the necessity of setting the three negotiation points that are recognized as: entrance, stop and objective. Obviously, before activating the mouse on a trade, the trader’s best choice, the one with the most probability at that moment, the trader must have used some criteria for this choice.

By now, you should probably know that this must be one of your main points in your trading plan, otherwise, the trader would float without a fixed path along the sea of patterns and time frames.

The good sense indicates that further from the education that a trader needs, which will allow him/her to know the different types of TECHNICAL TRADING KNOWLEDGE, it is not possible to face negotiations with multiple strategies simultaneously, neither during the early stages nor during advanced stages along the trader’s life.

What we are trying to say, is that after a first stage of basic study of the different types of trading styles and the main types of corresponding strategies, the trader will have to focus on few strategies and styles in order to specialize in its negotiation, as a way of describing and making a systematic of trading that will result reproducible, in order to obtain consistent results that allow your viability as an independent trader.

Making a trading plan and sticking to it is the only way to achieve this consistency.

The acquisition of the skills related to technical analysis is necessary and indispensable, but not enough if we want to reach the consistency that transforms us into profitable traders.

And definitively, the knowledge of technical analysis is not something very difficult to achieve. It is just a matter of dedication and some time.

But in order to achieve this consistency, we must know and define with accuracy and precision, what type of price pattern we are looking for, what strategy we will apply, under which market conditions we will take that negotiation, how much money we are willing to risk and eventually lose in each trade, each day, each week, and mostly, once the cardinal points are defined (entrance, stop, objective), we must determine what or which will be our position  management  criteria, like taking of profits,  trailing stops rules, exiting positions, etc-

All these parameters must be perfectly defined and specified, in such a way to prevent those two powerful feelings (fear and greed) from taking control of us as traders and obviously from that negotiation that we are taking.

Every time you think about taking a position, ask yourself if all the criteria that determine the entrance and possible exits is determined and defined; so that you do not face any kind of ambiguity that shows a possible dilemma during the negotiation in matter.

Your trading plan is your best friend, do not avoid it and always keep it next to you.

TradingTotal can help you build your trading plan to achieve your goals!