Day Trading Stocks – 3 Steps To Trade Trend Reversals
Today’s article on video on day trading stocks will focus on trading against the trend. You’ve probably heard that you should trade with the trend and not against it.
You may have even heard the famous saying “The trend is your friend.”
That saying is true, but it’s not the complete saying. The full quote is “The trend is your friend until the end.”
This implies that the trend is actually a fair-weather friend! It’s best to trade early in a new trend, but the longer the trend goes on, the less likely it is to continue. That’s the first clue on how to trade a high probability trend reversal.
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Alright welcome to this lesson on day trading stocks. How to trade trend reversals in 3 simple steps. This actually applies also for Forex and for futures, E-minies and commodities. So really if youâ€™re trading anything that can be charted, this will pretty much work and here we go.
STEP 1 FOR DAY TRADING STOCKS – TREND REVERSALS
The first thing that we are looking for is a trend. Because we are trading a trend reversal. So we have got, here we have got them market moving up. We are looking at Disney 2 minute stock here. A very fast chart, this is for, you know just doing quick little day trading with pretty large size in order to make some money.
Alright, and then here are the keys. So we get a high, then we get another high, notice our cycle highs here. By the way, if youâ€™re interested in my cycle indicator, Iâ€™ve got a free webinar, Iâ€™ll give that away for you, just send me an email at Barry@TopDogTrading.com. Iâ€™ll be happy to invite you to the next live webinar, since this is a recorded video, cant really tell you when it is on the recording, depending upon when you respond to me, Iâ€™ll tell you when the next one is going to be.
STEP 2: MOMENTUM SHIFT
Now here is the key. Alright, we are looking for a momentum shift. So what we want to look for at the end of trends is the trend getting weaker, and we use a momentum indicator for that. So here you see that price has still gone up a little bit, making a little bit of a higher high. But on the momentum indicator, it’s making a lower high. Now this is a 14 period momentum indicator. This is actually the indicator called momentum on your charts.
Thatâ€™s the thing right there and that means that strength is coming out of the market. Yes, price is still going up and even during this little period here, the price is still going up, but the momentum has come down. As we see from that high to that high.
Momentum will often lead price. Not always. Nothing always leads the market. There is no such thing as an indicator that always leads. And by the way, trends donâ€™t always end this way, sometimes they end with very high velocity moving up, and then they turn right around, and come down. So donâ€™t expect this to happen with every trend.
But we wait for those where it does occur and then we trade those. So you get V bottoms, V tops where this doesnâ€™t occur and of course then this apply. But we aren’t trying to catch every change in the market, we are just trying to catch some. Enough that we can make some money. Now let me show you an example from the other side.
STEP 3: SUPPORT/RESISTANCE
That was a short, now here is a long trade. So weâ€™ve got the market moving down. It comes down to, by the way the other thing you want to look for is support resistance. I forgot to mention that. Here we have yesterdayâ€™s close, yesterdayâ€™s low. Weâ€™ve got, those are just the horizontal lows from those two. Really this is the zone that we are looking at. Then the market comes into that support resistance zone. In this case it’s support.
And alright, so we put in a cycle low, and where is momentum? Momentum goes all the way down to here. Alright. Oops try to, yup canâ€™t get it quite down there, because it goes off the bottom of the video.
Now where is the next low? The next low comes back in into the same zone between yesterdayâ€™s close and yesterdayâ€™s low, but look where momentum is this time. Again as you can see, thereâ€™s a momentum shift, and momentum is not as strong, coming down the second time into the second low as it was at the first one. And again this is how trends will often end, with less strength coming down into that support.
One of the rules of support resistance is that in order to break through them, we need a hell lot of energy, lot of momentum, lot of acceleration, lot of volume, all these kind of things to play into, to play into it.
But here we have a higher low and momentum meaning that the move down here is not as strong as it was down there. Therefore, and then we look for, again we got to have, thatâ€™s not quite enough. We got to have a momentum shift.
CYCLE HIGHS AND LOWS
There is our cycle low, and thatâ€™s a very good cycle low pattern, on the indicator I teach you how to read these, the patterns that will be reliable, cycle high is a reliable cycle lows because otherwise the indicator can stay down here for quite a while. Then really doesnâ€™t mean anything. So I show you which ones are reliable signals in that webinar that I do periodically.
The key is then reaching a resistance level. Again we have a resistance level up here and that is a pivot level R1. Resistance level 1, floor trader pivot. And then less strength going into it. So strength coming out of the market, meaning that it’s no longer a strong move.
I often ask people in my seminars, what are 2 types of trends? And the answer inevitably always, uptrend and downtrend. And thatâ€™s a correct answer, but another correct answer would be strong trend and weak trend. And very few people even have that in their mind. Even on their radar, very few people even consider that. Well if you are not even thinking whether trend is strong or weak, you got a problem. Youâ€™re going to have a hard time making money.
HOW TO TRADE WITH THE TREND RELIABLY
When we trade with the trend, we only want to trade strong trends. When weâ€™re looking for trend reversals, in other words going short after a trend has already been established. Then we are looking for weak trends, remember the trend is your friend until the end. Weâ€™re waiting for the end to fade the trend. And our best indication of whether that trend is going to end is right there, momentum. Momentum has come out, it’s no longer strong. It’s now weak, and down she goes.
So thatâ€™s it for today, if you liked the video and you are watching this on YouTube, please click the thumbs up icon below. And leave a comment, telling me what youâ€™d like me to cover in future videos. Or what you liked about this one.
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