Bulls Continue to Hold the Steering Wheel
- $SPY remains in a huge long term range since the January 26th unadjusted all time high of $286.63.
- Price is bullishly over all key moving averages.
- Last week price formed a price range while elevated over the 10 day EMA. With $276.50 support and $280 resistance.
- The 10 day EMA has remained over the 50 day EMA after the May 9th crossover.
- RSI is at 63.52 which is not overbought and has room to trend higher.
- The MACD remains under a bullish crossover.
- The $VIX at 12.18 is very low historically.
- The Average True Range (ATR) has stayed steady at 2.41. It remains a low volatility market.
- There are 194 stocks at all time highs. 266 stocks are at 52 week highs. This is what a bull market looks like.
- The stock market continues to be led by small caps $IWM and the Nasdaq 100 $QQQ. Big cap ETFs $SPY and $DIA have lagged and they could play catch up into the second half of the year.
Swing trading inside bars is a simple trading pattern where one or many bars are contained between the high and low of another known as the “mother bar”. Often times, depending on the length of the inside bar pattern, it will appear as a triangle on your chart. Swing Trading Inside Bars This is a breakout trading strategy that you can use when price has found itself near levels of support and resistance. Using Inside Bar Candlestick Pattern At Good Areas Since the inside bar indicates a lower level of volatility, it can appear just about any place on a chart and that is why you must have some trading rules about using the pattern. A few rules you may want to use for a higher probability trade and to avoid over trading are: How many inside bars do you need to see inside the mother bar? Does the mother bar include the low and highs or will you use the real body of the candlestick? Will inside bar trading only take place at obvious levels on the chart? What technique will you use to pull the trigger on the trade? What system will you use in placing your protective stop loss? Every proper trading system has rules and this strategy is no different. Without trading rules, you will fall victim to emotional trading and that is one of the fastest ways to dwindle your trading account to zero. Developing Your Own Inside Candle Trading Strategy Let’s take the 5 points above and expand on them as you develop your trading strategy. I want to focus on swing trading inside bars in Forex because even though FX is a 24 hour market, not all of those hours are worth sitting at your desk for. 1. How many inside bars do you need to see? Since the formation of this pattern indicates lower volatility (volatility compression) and indecision, the longer it plays out the more pent up energy is contained within the pattern. You could have multiple occurrences of them which will form a triangle or you may only have one. For trading patterns, the more the merrier for me and some traders need to see weeks of consolidation before taking a trade. multiple inside candlesticks pattern 2. Mother bar body or shadows? For simplicity, you could simply use the entire candlestick but there are arguments for both. Remember that each close on a candle is an acceptance and willingness of market participants to hold their position at that price. Where the close occurs with the mother candle may have you decide which part to use. 3. Obvious levels on the chart? You may elect to only consider swing trading inside bars when they present themselves at obvious turning points on the chart. What about seeing a large momentum move and then a series of inside bars forming at the highs? Depending on where these occur, this strategy may be showing a trend reversal or continuation. You have to know how to read price action to have your order leaning one way or the other. Two examples of location 4. How will you enter the swing trade? Some traders will wait for the break of the mother bar and others will look for a price pattern on a lower time frame to indicate an entry. Just keep in mind that at every breakout point, there can be a lot of volatility which could also include slippage. One technique is to look on a lower time frame to see if there is an indication like a pin bar showing up in a range inside of the inside bar pattern. You may find an entry in that zone. 5. Stop loss when trading inside bars You could elect to use the low of the mother candle but keep in mind that you may be the victim of a bull or bear trap if you use a tight stop. You may study using the ATR as a stop measure or, depending on the strength of the break, you may use a point inside of the pattern. Swing Trading Inside Bars Conclusion Swing trading inside bars is a great non-day trading strategy since, once the mother candle has formed and the amount of inside bars have formed that your trading plan requires has formed, you can set a stop order to be taken into the market. If using that method, you may want to use the ATR value x 2 at the mother candle. This way you will have a better representation of the range prior to the inside bars.
$SPY officially entered correction territory dropping over 10% from all time highs to the lows on Friday. $SPY price is under all key moving averages even the 250 day SMA. $VIX continues to remain high at 24.16 and went higher Friday over the Thursday high. The market currently has elevated fear and uncertainty as indexes go into corrections and many growth and tech stocks drop over 20%. Price has closed under the 10 day EMA since October 4th. The 10 day EMA is currently acting as end of day resistance. The current downtrend has been on higher volume than the previous uptrend showing distribution. Many days are double the average volume of the uptrend. The MACD remains under the bearish cross under since the last price top in the $SPY. The trading range continues to expand higher to a 4.62 ATR. Giving day traders room to work but creating extreme volatility and danger of quick losses if caught on the wrong side. The RSI closed above the oversold level ending at 30.34 Friday. But this drop in the stock market has not held the 30 RSI and only resulting in short term oversold bounces of a day or two before new lower prices. The 200 day SMA and 250 day SMA are key dividing lines between bull and bear markets and backtests well as end of day buy and sell signals in $SPY. This is the type of market that is best to stay defensive, trade smaller, and wait for only the best signals before going long.
1. Never trade so big that you end up watching every price tick even though you are not a day trader 2. Don’t trade so big you dramatically increase your pulse rate or get the sweats. 3. Each trade should only be one of your next one hundred. Never risk more than 1% of your trading account on one trade based on your stop loss. 4. Don’t spend time obsessing over market hindsight. All you can focus on is following your plan in real-time. 5. Forget about your last trade and focus on your next trade. 6. Losses should be lessons that you paid to learn. Look at drawdowns in capital as tuition and not failure. 7. If you followed your trading plan, your loss is just part of the process to get to profitability. Think long term. 8. Position sizes can’t be so large that they compromise your emotions and distract you from your trading plan. 9. Don’t revenge trade to attempt to recover your losses. Stick to your trading plan no matter what. 10. Your signals have to be based on price action and not greed, fear, or your ego.