In last week’s blog, "It Seems So Right – But It Goes So Wrong," I shared an idea as to why a trade that looks like the ideal trade can be derailed by a trend in a larger timeframe. This week I have another reason why trades can sometimes look really good and turn out really bad. The indices! I have mentioned previously that at
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1. Trading with the trend is the safest way to trade
Understanding that trading with the trend is the safest way to trade is a huge step towards becoming a successful trader
2. Trading Breakouts gives the greatest upside potential
Let’s concentrate on concept number one for this blog. When we say that trading with the trend can be the safest way to trade, most traders are not aware of how deep that statement goes. Every stock that is traded on the exchanges is subject to trend in all different timeframes. For day traders there can be trends in a one minute chart, a five minute chart, a thirty minute chart and so on. For the day traders it is important to use the trend from a larger timeframe as a compass for the directional movement of the stock in general, and use a shorter timeframe to navigate the ins and outs of the actual trade. When a day trader does this he will find that when he or she enters a trade in the same direction as the larger timeframes trend, the runs will be longer and stronger.
So, what if you are not a day trader? What if your trades run for days and not minutes? Actually, the same types of rules apply. Take SWK as an example. (SWK is not a recommendation – only an example for the topic of this blog.) The daily trend looks great and it is showing a nice breakout.
But if we take a look at the weekly chart to make sure our compass is heading in the right direction we see that the trend looks good, but there is a point of resistance not too far away. The resistance level on the weekly chart is just below $76.00. This would be an area where we need to be aware there could be a retracement or a reversal on the horizon. Notice on the daily chart above,
If you are wondering why the weekly chart is showing different signals than the daily chart it is because The Wizard provides signals for both, short term traders (daily signals) and long term traders (weekly signals).
Now back to the original point of this blog – the indices. SWK is part of the S&P 500. Before entering a position on this stock it is going to be important that we take a look at S&P 500 chart to make sure that we are on the same course that the overall market is tracking. Below you can see that they daily charts are very similar.
The S&P appears to be nearing a possible resistance level, just as SWK seems to be doing. This tells me that the strength of the index that SWK is trading in likely has a direct bearing on how well it performs. You may have heard the expression, "A rising tide lifts all boats." You might be surprised at how true that really is. The signals are still bullish but extra caution should be exercised if a trader was going to enter a position that looks like our example.
As a rule, it is critical that you stay focused on what the indices are doing. At The Wizard we believe this so strongly we are currently making our "Market Trends" indicator available for free to anyone who wishes to have it (the registration button is in the top right corner of the web site).
Market Trends overview -
Again, knowing the trend of the overall market can be just as critical as knowing the trend of the stock you are trading. I would encourage all of you to download this free tool. Just click here and go to the web site and register for this free tool at the top of the site.
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