Putting Online Trading Academy Tools to Work for You
In an Online Trading Academy Class, we teach many tools all week long. These tools are anything from support and resistance to moving averages, oscillators to level II and much more. During the live trading period of the class, we put those tools to work. The key to making these tools work for us is to put objective rules around them as this helps ensure we are taking the proper trade. Over the past few weeks, I have written about using CCI and a moving average and have received good feedback from people who are trying that. This week, let's discuss a simple little strategy using Bollinger Bands and CCI. This strategy is one of Steve Misic's favorites, and one of a few we go over in class as a way to use the tools we are learning. For those who don't know him, he is an Online Trading Academy instructor.
Above is a 5 minute chart of the SPY, the ETF (Exchange Traded Fund) for the S&P. On the chart we have the Bollinger Bands and the CCI. In this piece, I will go over the basic principles of the strategy. In class however, we spend plenty of time going over the exact rules and practice them. You can always email if you want more information. Either Steve or I will get back to you.
The Setup:
1) For Shorts: When the candle closes above the upper Bollinger Band and then closes below the upper band, your next step is to wait for CCI to trigger your entry. This means letting CCI cross back below the overbought +100 reading. I have drawn a vertical line on the two short entry candles on this chart. These are not confirmation candles, these are entry candles. Your stop can be just above the pivot high. Make sure you adjust your position size with each trade to ensure you are never losing more than your maximum dollar loss as the distance from entry to stop will always be a bit different.
2) For Longs: When the candle closes below the lower Bollinger Band and then closes above the lower band, your next step is to wait for CCI to trigger your entry. This means letting CCI cross back above the oversold -100 reading. Again, I have drawn a vertical line on the one long entry candle on this chart. This is not a confirmation candle, this is an entry candle. Your stop can be just below the pivot low.
The Logic:
When taking the short setups shown on this chart, we are selling short to someone who is buying AFTER a move higher in price and at a price level where the oscillator suggests price is overbought. This is not the action of a consistently profitable trader, it's more the behavior of a novice trader who trades based on emotion and losses. This is the pedigree of the trader we want on the other side of our trades.
When buying on the one long setup on the chart above, who are we buying from? We are buying from a seller who is selling AFTER a decline in price and at a price level where the oscillator suggests price is oversold. We want to buy from this type of seller, it gives us a very good chance with the trade.
Exits:
There are a number of exits available, too many to list in this piece but here is an idea that we see some people using with success. You can use the opposite band as a target for part of your position and then add a trail stop for the rest of your position.
The Trading Reality:
Every trade will not work; you will have losers but that's ok. Never forget, one of the least important sets of numbers in your performance is your number of wins to losses (batting average). The most important statistic to watch is your average gain to average loss. This is very difficult for most people as people in general desire to be right all the time. In the books, "Market Wizards", 1 and 2, the author interviews some of the biggest and greatest traders of all time. This book is not theory, these are interviews with the big hitters in the markets. The recurring theme is that most of these guys were not even right 50% of the time yet they are regarded as some of the greatest traders of all time. This is because they got out of their losers quickly and held on to their winners for large profits. Most of them however did not have the benefit of charting the way we do today so a higher than 50% batting average can and should be a goal.
While we teach Bollinger Bands, CCI, Moving Averages, and many more tools in class, it is very important to understand how to use them, not just what they are. The question you must always ask yourself is this: Who is on the other side of my trade? Is it someone making a logical decision or an emotional one? Emotion provides steady income for logic. The key to any strategy like this or others I have covered is to take the simple concept and turn it into a ruled based strategy for YOU with YOUR rules that make sense to YOU. There are many ways to trade; stay in your comfort zone with strategies so you are not challenged with too much emotion. I have taken the things I have learned over the years and created a simple strategy that I employ year after year. I am comfortable with it and it works for me. Instead of trying to trade how someone else does, take the fine tools and information we teach and build a simple trading plan around what is comfortable to you.
Lastly, if you are attending the Professional Trader Course at Online Trading Academy London next week, I look forward to seeing you there. For Online Trading Academy graduates, we have a very informative free event for you on Friday, May 16th, a day before the Professional Trader course begins. I will be introducing students to all the major global markets including the global stocks, futures, forex, and options markets. We will cover the important aspects and benefits of getting involved in these markets and also spend time on quantifying supply and demand to uncover low risk/high reward trading opportunities in any and all of these markets. This free event is filling up fast. If you are interested, contact Online Trading Academy London today and reserve a seat.
Have a great day.
- Sam Seiden, sseiden@tradingacademy.com
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Sam brings over 15 years experience of equities, forex, options, and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.