How to Day Trade Using Simple Technical Analysis. A No-Bullshit Approach.
Yes, this will be very long. You’re welcome, asshat.
Introduction: I thought all t…
Summary:
Summary: – The author discusses how to use technical analysis to day trade, while dismissing many common indicators as “bullshit.”
Key themes: 1. Many technical analysis indicators are not useful and can distract from price action itself. 2. Support, resistance, and trendlines are the most important aspects of technical analysis to focus on. 3. The Wyckoff price cycle is a useful pattern to understand and can be found in many markets. 4. A simple breakout strategy can be used to day trade based on these principles.
Similar subreddits: – r/Daytrading – r/TechnicalAnalysis – r/StockMarket – r/Trading – r/Investing
Multi link: https://www.reddit.com/r/Daytrading+TechnicalAnalysis+StockMarket+Trading+Investing/
Subreddit: r/wallstreetbetsOGs Technicals
Post Author: ContentViolation1488 👑 WSB OG’s Chess Champion 👑
Post Date: 2021-04-10 15:31:38 UTC
URL: https://www.reddit.com/comments/moell4
Full Post: How to Day Trade Using Simple Technical Analysis. A No-Bullshit Approach.
Yes, this will be very long. You’re welcome, asshat.
Introduction: I thought all technical analysis was 100% bullshit.
Market Voodoo is what I called it. And you can find plenty of books and opinions out there that will confirm this bias. “You can’t predict future movement by looking at the past,” I used to say. In retrospect, this was a stupid thing to say, because at the end of the day ALL WE HAVE is the past. Even fundamental analysis is a look at past data and an attempt to project it into the future. Even “buy and hold an index fund” is based on past data as justification. There is no “future” analysis we can rely on since the future doesn’t exist yet.
What first started to change my mind on TA was finding successful traders who traded exclusively on technical analysis. These people had no idea about fundamentals, they couldn’t derive a company valuation if their life depended on it. All they used was charts, and they managed to make money consistently enough to live off the income. That told me there was at least something to look into.
So I started reading. The first book I read on Technical Analysis is still what I consider to be the best book I’ve read on the subject. I listened to a podcast with Adam Grimes, and his extremely skeptical, no bullshit approach to technical analysis is what piqued my interest. That book is The Art and Science of Technical Analysis.
After studying the basics found in that book, I began to look at charts and price action in a whole new light. It wasn’t just random movements anymore. I could see STRUCTURE in the market. I started to watch the price action closely and make predictions. And more and more, those predictions began to come true.
Most of it is still bullshit. Let’s just get that out of the way.
I still believe 99% of technical analysis is bullshit. Drawing complex shapes on your chart or using an array of indicators is not going to help you predict price movements better than randomly guessing. But there are a few aspects of technical analysis that are undeniably real and can be used profitably. I will focus on some of those today.
First of all, let’s talk indicators. Nearly every indicator out there is simply derived from price. Moving averages, RSI, MACD, and the like are all derivatives of price. What’s even worse, they are all LAGGING indicators of price action. They contain the same exact information found in the price itself, only delayed by anywhere from seconds to days depending on the chart range.
If you want to understand price action, then study price action itself, not some lagging indicator. Everything you need is contained in those bars/candles, and in the volume. The only indicators I will use on occasion are VWAP, since it factors volume into price action in a useful way, and Keltner channels or some other kind of band, which have some interesting applications that I won’t go into here.
At the end of the day, if it sounds like market voodoo, it probably is. Elliott wave theory, fibonacci retracements, and all that fancy jazz is certainly interesting, but no serious study has indicated much practical use for those tools. There may be a few successful traders that use them, but I would venture a guess they’d be successful traders without them as well.
Looking at magical candlestick patterns or drawing complex shapes on your chart will not help you. For every “cup and handle” you find that works I can find 5 examples where it didn’t work. This is just my opinion, and you can of course disagree.
So What Does Work? Keep It Simple, Stupid.
Support works. Resistance works. Trendlines (which are really a diagonal representation of support and resistance) works. Those are the core basics, and should constitute the vast majority of the technical analysis you use when trading. Keep things simple, and you can go far.
At the end of the day, all price action is determined by simple supply and demand. There are people who want to sell, and people who want to buy, at different prices, and those shifting individuals (or algorithms) constitute the cause for price movement itself.
“Support” is another word for a supply of buyers at a given price. “Resistance” is another word for a supply of sellers at a given price. Often, but not always, these are round numbers, since people tend to place their orders at round numbers. In order to break support or resistance, the demand of buyers/sellers must be greater than the supply at those price points.
https://i.redd.it/e2xa9dev7fs61.gif
The only two chart patterns which I’ve found to show some consistency of use are “bull/bear flags,” as they are sometimes called by others, which will be discussed below, and head and shoulder patterns, which appear quite regularly in price action.
This is all well and good. But if you really want to “see” the structure in markets, you need to understand the Wyckoff price cycle.
The Wyckoff Price Cycle
Once you learn this simple pattern, you will begin to see it EVERYWHERE in the market. This pattern forms the basis for the vast majority of my daytrades.
Let’s start with the very basic structure. You have a period where price trades in a range. Let’s call this “consolidation.” At the top of the range is resistance, at the bottom of the range is support. At some point, price breaks out of this range and moves aggressively either higher or lower. Then there is another consolidation phase where this change in price gets absorbed by market participants. And once that consolidation completes there will be another breakout, either up or down.
You will see again and again markets following this jerky pattern. Big move, flat trading, big move, flat trading, and so on.
We can get a bit more complicated with this format once you recognize the basics. Often the big moves will result in a climax point and a quick reversal. You will also see something we can call a “spring,” where for example the price will drop below support temporarily only to quickly rocket back up in the opposite direction and break resistance. These represent buying or selling exhaustion points.
The following picture I found shows some of what I’m talking about, though it is a bit noisy with garbage.
Don’t pay too much attention to all the terminology and such, but this is a more clear example of actual Wyckoff price movement in the real world. Note that volume will typically rise during the big movement phases and then drop off during consolidation periods. This is in part because overcoming support or resistance requires demand volume to be in excess of supply, and also because price movements themselves instigate new buying and selling.
Keep in mind these charts are just showing both the up and down patterns. They of course don’t have to follow back to back. In the real world you can get multiple cases of price breakouts going up or down in a row.
A Simple Breakout Day Trading Setup
So here is a simple trading setup based on what we’ve learned so far. It is a simple breakout trading strategy. The pattern we are expecting is for a stock to rise, consolidate, and then rise again. As I said before, some technical traders refer to this pattern as a “bull flag.”
Preferably look for a fairly volatile stock that has been trending up for the past few days. Then look at the intraday price action closely.
Look for a period where the stock is trending or breaking upward in price, and then entering a consolidation period. Give the consolidation a bit of time to play out. Identify the point of support for that consolidation. Finally, place a buy order just above that line of support, and a stop loss order below that line of support. Keep the stop loss low enough that a small “spring” break of support won’t stop you out.
The logic here is simple. We want to place a trade with open-ended upside potential, and small, capped downside risk. The stop loss accomplishes the goal of a small, capped downside risk. By placing the stop loss below a support level, we decrease our odds of getting stopped out.
You will still probably get stopped out more often than not, if you are using a tight stop, which you probably should. But we are counting on the open-ended profit potential on the upside to make up for these small stop losses. By capping our losses using tight stops, we can also scale up and make much larger bets on the upside than we might normally make. I will sometimes bet up to a quarter of my account on these trades, since the maximum downside risk from my stop is usually less than 1% of the account. (Note: It is best to use a platform that allows you to enter your buy and stop order simultaneously in tandem, such as ToS. This avoids any delay between the time your trade gets filled and the time your stop is set.)
Assuming the price breaks out and you have a profit, you want to identify new potential areas of support, and raise your stop loss below those levels to “lock in” your profits. Do this as many times as possible to continue locking in gains.
Real World Example Trades
Let’s take a look at a recent trade I made. I “livestreamed” the trade by commenting about it in the daily thread. This is rare for me, but I enjoy giving noobies a glimpse into trading techniques now and then.
Trade entry: https://www.reddit.com/r/wallstreetbetsOGs/comments/mlzju2/daily_discussion_thread_april_07_2021/gtpcg71/?context=3
270 shares CAN @ 18.38
Stop loss @ 18.29
Stopped out at 18.69
Total profit: $82
Max risk: ~$25
Risk/Return: 1:3.81
Time in trade: ~50 minutes
Let’s take a look at this chart in detail and what made me enter the trade. You can see nearly every point I mentioned in the trade set up above shown on the chart.
We don’t know how long the price action will continue to consolidate and rise, which is the reason for raising the stop below a new support zone. We want to lock in existing profits at a safe point, but also leave more room for the stock to run higher again.
In the real world, price action is always messier than it is in theory. This is especially true for highly volatile stocks. But you can always see some of the theory behind the noise. To prove the point, I will be focusing on one of the most volatile stocks trading today: Gamestop.
Here is a full chart of the price action on GME March 30th. Before you scroll down to see my analysis, take a couple minutes and study the price action. See if you can spot any structure or the patterns discussed above. When you are ready, scroll down and take a look at my own analysis.
I’ve highlighted some of the possible periods of consolidation and price breakouts. I’ve also highlighted the resistance and support on a trending range, which is a bit more complex than what we’ve covered so far. As I said before, in the real world, and especially on highly volatile stocks, the price structure will be quite muddled and confusing. You will only rarely get crystal clear examples of the Wyckoff model in action. But you can still see some points where the model obviously applies.
Again, I will admit… This is quite messy. Some of the patterns are just faint outlines that don’t hold completely. But there are still clear areas that are very promising for trading the breakout pattern described above. Any of the points where the price hit the Trend Support line would have been a solid buy point. If you can see structure like this in something as complex as GME, you are already on your way to successfully daytrading the market.
Keep in mind I’m not telling you my analysis is the “correct” way to view this chart, either. Any analysis which helps you make profitable trades is correct in my book.
Good luck out there. If you liked this content be sure to check out my past submissions.
Past Educational Threads:
How to CONSISTENTLY Outperform the S&P500 using Theta Gang Strategy. A Comprehensive Guide to Wheeling ETFs.
Top 5 Tips Every Noobie Trader MUST Know.
Using Options Strategically: Flattening the Curve on PLTR.
1 Year, 100% ROI Challenge! (Closed)
The Greatest Market Bubble in History. A Full Bear Counter-Thesis.
How to Time the Markets (lol)
Selected Comments:
User: LazyProspector
**Score: 95
There’s a slight element to this I disagree with.
Yes, TA is bullshit however it’s somewhat of a self fulfilling prophecy in part.
If traders collectively trade based on those same “assumed principles” and algo’s are coded to recognise those patterns, further exasperating the effect, it begins to become true.
For sure there are some stocks that you can time very well using really basic TA tools – MACD, Bollinger Bands, RSI – and hit right consistently >50% of the time. So long as you acknowledge your own biases too.
It doesn’t make it right or wrong. At the end of the day it’s another tool, a tool that I think most would agree at the very least holds some truth. Others just place more value in it
Quite frankly I do use TA quite extensively in my trades. Not entirely but in timing peaks & troughs to squeeze out that extra margin it can be very useful
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