This Week…

We’re zooming in on the basics of technical analysis with a visit from one of the best traders ever featured on Real Vision, the founder and CEO of Aspen Trading Group, Dave Floyd.

For many investors, learning to read the charts is pivotal to understanding market sentiment and how other market participants are positioned.

• “Depending on your preferred style of trading, that information might mean something entirely different to you than it does to me,” says Dave. “So, the first step is understanding what type of trader you are.”

In this issue, we’ll cover 3 things:

• How to identify a trend in price.
• Using momentum for entries and exits.
• Understanding support and resistance levels.

Now let’s get started.

Welcome to the Game

Welcome to The Game of Investing, a bi-weekly newsletter bringing you “aha” moments and actionable lessons from Real Vision experts. No matter your level of expertise, markets are tough — which is why we all have to put in the work. Ultimately, the game of investing is a competition with yourself. Our mission is to help you navigate the path to success. Prepare to level up.

Let’s get started.

LEVEL 1  — Identifying the Trend

For Dave, identifying the trend is a foundational pillar of his trading process — but one that too many traders overlook.

Some investors — like contrarian traders — like to trade countertrends, but Dave insists that most market participants should follow the trend for the highest probability of success.

There are 3 key trend environments that every trader should be able to recognize:

• Uptrend: Price action with a chart moving up and to the right. Traders should be buyers on pullbacks in in an uptrend.
• Downtrend: Price action moving down and to the right. Traders should be sellers of rallies in a downtrend.
• No Trend: Choppy, sideways price action is a clear signal to not trade. This is an indecisive market that offers no edge and limited opportunity.

Dave recommends using moving averages — like a 50-day simple moving average — as tools to see price trends more clearly on screen.

Intermission

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LEVEL 2 —  Momentum Markers

Every trader has grappled with mistiming an entry or exit point. Your trade analysis can be spot on, but the market still moves against you. 

“It happens to all of us,” says Dave. “But there is one indicator you can use to reduce those poorly-timed entries.”

Stochastics: a group of oscillator indicators that point to buying or selling opportunities based on momentum.

• Stochastic indicators use a range of values between 0 and 100 to reflect momentum.
• A reading above 80 indicates that the security is overbought (suggesting the likelihood of a pullback is high).
• A reading below 20 indicates that the security is oversold (suggesting a potential rally upcoming).

Stochastics are not infallible, but they can enhance your ability to find more optimal entries and exits.

Level 3 — Support, Resistance, and Footprints

Many traders focus on forecasting market direction, but Dave prefers to let support and resistance levels determine where and when he buys and sells.

• Support: Price levels where a downtrend is expected to pause, due to a concentration of demand.
• Resistance: Price levels where an uptrend is expected to pause, due to a concentration of supply.

Traders frequently use previous highs and lows to chart potential levels of interest. But, more expert traders like Dave tend to focus on the market footprints.

• Footprint: A price level where there’s been a high volume of trading activity, suggesting a pause in the trend based on support below or resistance above.

🔑  “The market leaves these footprints every day,” says Dave. “It’s our job to identify them.”

Next Time

Thanks for reading. Next time, we’ll keep the technical trading lesson going with a look at the system of DeMark trading indicators, their best applications, and use cases. 

See you then.

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