Often traders take this to mean that the price must retrace or pullback from the high.  This is a big mistake, because mathematically, what is happening in the calculation of the indicator is that as each new bar is added to the price, another bar further back must be subtracted.  If the new bar is higher and the old bar is lower, you will get a classic divergence in the indicator.

Think of this phenomena of a fat man getting off a teeter totter with multiple small children on the other side.  Conversely if more and more small children get on the teeter totter, they can out weigh the fat man.

Another outcome of a Classic Divergence is that the price simply goes flat for a period of time, or you get a second or even third divergence.  Be cautious when trading divergences.  They can fool you, especially in a long up trend.

I encourage you to be observant of the strength of the divergences that occur when the trend that is changing is rapid or slow.  We have an excellent video that shows this effect  with a triple classic divergence.

We have attempted to give you a background in trading.  Overall I learned to trade from Dr. Alexander Elder’s Book and Workbook, “Trading for a Living” back in 1996.  I actually failed the tests in the workbooks several times before I got it right.  I still think that that book is a classic and in a class all by itself. 

A second principle I learned from Alex, is that trading is a triune skill of Mind, Money and Method.  It is the basis of our training program.  With the mental and money management the most important skills.  But like a three legged stool, if you cut off one leg, you can’t sit down.

In the Method area, which I will share with you one part of the method, you have three parts as well.  One of them is how to use Support and Resistance in your trading.  We use these daily Support and Resistance areas as targets.  Why do they work so well?  It is because other traders “Think They Work”.  Remember in your trading your job is not to think, but to observe what is happening right now.

Check out this short video on Support and Resistance  associated with Pivot Points and how we use it. 

The calculation for the new day are calculated from the High (H), low (L) and close (C) of the previous day.  Our recommended software calculates all of this automatically, however we use a trick to get a 24 hour Pivot and Support and Resistance Lines.  Here is the formula  used by floor traders.

Pivot point = P = (H + L + C)/3

First area of resistance = R1 = 2P – L
First area of support = S1 = 2P – H
Second area of resistance = R2 = (P -S1) + R1
Second area of support = S2 = P – (R2 – S1)  and so forth.

Now Support always becomes Resistance and Resistance becomes Support in the markets, so you have minor Support and Resistance in many places on your charts.  The trick is to know which on is the target, so as part of your money management, you should always select a level that offers at least a 3 to 1 win to loss potential..

There are many nuances to using Support and Resistance with other indicators, Fibonacci levels, Ema’s and other indicators.  However, once you master the skill of target shooting, you will be much more profitable.

For a detailed video of how our complete system work with all the indicators, please go to the Futures Trading Room

A simple moving average is the average of a series of closing prices over a set period of time. For example, to determine a 3-day moving average of a commodity, the closing prices for three consecutive days are added together and divided by 3. A 20-day moving average would add the closing prices for 20 days and divide by 20. The “moving” is created by re-adding and re-dividing each day. In recalculating, the earliest closing price is dropped and the newest closing price is added before the figures are averaged. In our example, you are always averaging 3 prices for the three most recent consecutive days; however, those days are progressing in time through the month; therefore, the average is “moving.”

Because they use information that has already taken place, moving averages are “lagging” indicators. They are also “trend following” indicators that are most useful in trending price patterns in which an uptrend or downtrend is firmly entrenched. Moving averages often serve as both support and resistance points.When graphed, horizontal, or “flatline” moving averages have no predictive value.

The most common moving averages, those touted on the financial networks are 20-, 40-, 50-, and 200-day averages. Also effective are 10-, 30- and 100-day averages. Some traders create their own moving averages at intervals that appeal to them: 12, 18, 21, etc. days. Determine the time periods you believe will be most effective and stick with them. As a rule of thumb, limit your charts to no more than 4 or 5 moving averages per chart to avoid confusion.

For more information about Bill McCready’s trading system, visit Futures Trading Secrets.

Futures traders usually calculate and chart several moving averages of various time variations (5-day, 20-day, etc.) for use as indicators. Short-term moving averages are more sensitive to price change, but early signals may proof to be false. Long-term moving averages respond more slowly, but there is the danger of missing the trend by waiting too long. By comparing short, medium and long-term moving averages, futures traders can spot probable trend changes. The challenge is to determine the combination of time variations that will create that optimum balance that results in reliable indicators.

Watch your moving averages for these signals:

• When a faster average crosses above a slower average, buy.
• When a faster average crosses below a slower average, sell.
• When the daily close is below either moving average, offset long positions.
• When the daily closes is above either moving average, offset short positions.

One important caveat about using published moving averages for information or comparison: You cannot assume that the market will behave today the way it did yesterday!

Visit Futures Trading Secrets for more information on Bill McCready’s trading system.

A simple moving average is the average of a series of closing prices over a set period of time. For example, to determine a 3-day moving average of a commodity, the closing prices for three consecutive days are added together and divided by 3. A 20-day moving average would add the closing prices for 20 days and divide by 20. The “moving” is created by re-adding and re-dividing each day. In recalculating, the earliest closing price is dropped and the newest closing price is added before the figures are averaged. In our example, you are always averaging 3 prices for the three most recent consecutive days; however, those days are progressing in time through the month; therefore, the average is “moving.”

Because they use information that has already taken place, moving averages are “lagging” indicators. They are also “trend following” indicators that are most useful in trending price patterns in which an uptrend or downtrend is firmly entrenched. Moving averages often serve as both support and resistance points.When graphed, horizontal, or “flatline” moving averages have no predictive value.

The most common moving averages, those touted on the financial networks are 20-, 40-, 50-, and 200-day averages. Also effective are 10-, 30- and 100-day averages. Some traders create their own moving averages at intervals that appeal to them: 12, 18, 21, etc. days. Determine the time periods you believe will be most effective and stick with them. As a rule of thumb, limit your charts to no more than 4 or 5 moving averages per chart to avoid confusion.

Day traders often use shorter moving averages based on Fibonacci numbers, such as 5, 8, 13, 21 or 34.  These moving averages, especially if they are exponential moving averages (EMAs) can be very effective on short time frames.

For more information go to Futures Trading Secrets

• In an uptrend, as prices rise, the closing price rises to the top of the recent price range.
• In a downtrend, as prices fall, the closing price drops to the bottom of the recent price range.

In charting, the stochastic oscillator uses two lines to give a single signal. The major line (%K) is usually depicted as a solid line. The second line (%D) is often depicted as a dotted line and represents a 3-day moving average of %K. Futures traders watch the %D line closely for major trading signals. When %D crosses %K, the intersection of the two lines indicate buy/sell points. Use the following rule of thumb to read stochastics signals:

• When both the %K and %D lines are below 20 and the faster %K line crosses above the slower %D line, BUY.
• When both lines are above 80 and the %K line crosses under the %D line, SELL.

The two lines rise and fall in tandem between 0 and 100. Readings above 80 are overbought; those below 20 are oversold. Savvy futures traders will watch for divergences which can indicate coming price trends over the next few time periods.

Futures traders value stochastics for its accurate findings. Easily understood, even by novice traders, stochastics provide valuable indicators for making good entry and exit decisions.

Scalpers. Scalpers seek immediate gratification. They look for short-term market movements seeking to shave money off the bid/ask price spread. Holding each position for only a  very short period of time (often only minutes) to minimize risk, scalpers make small gains through rapid trading.

• Money-making  strategy: To realize a large gain by the end of the day from the accumulation of many small gains.
• Most productive market environment: Wide-channel, heavy-volume, trending or oscillating markets.
• In their trading tool box: 1- and 3-minute moving averages and stochastics charts.

Swing traders. Swing traders are more dispassionate. Fundamentalists at heart, swing traders track price trends and patterns and other quantitative data looking for short-term price momentum. They act quickly to exploit such short-term price movements, looking for gains that can be made in one to four days. Swing traders sometimes mitigate risk by trading in smaller quantities.

• Money-making strategy: To gain from short-term changes in price movements that occur over one to four days.
• Most productive market environment: Tight-channel, light-volume and trending markets.
• In their trading tool box: 13- and 60-minute moving averages and stochastics charts.

Combination traders. Quick reflexes and flexibility characterize combination traders. They are able to gauge the market and respond quickly to the existing environment.

To become a successful futures trader, you have to figure out which trading style suits your personality and talents. If you’re quick on your feet, have the ability to look at the indicators and make snap decisions, and can be satisfied with small wins, you could thrive as a scalper. If you prefer a more measured approach to trading, like to back your decisions up with data, and have the patience to wait for the right moment, swing trading could be your milieu. If you can live in both worlds, you’re a combination trader. Each trading style has its advantages and can be quite profitable. The trick is to figure out in which environment YOU can be most profitable.

Futures traders are players and the game they play is fast paced. To succeed as a futures trader you must have self confidence, discipline, patience and quick reflexes. You need those quick reflexes to keep track of the many variables that affect the futures markets and, therefore, influence your buy/sell decisions. Among the more important variables you must track are:

• Underlying asset. A futures contract is based on an underlying asset. Most often assets are physical commodities. As we’ve discussed in recent posts, commodities are natural resources, so the underlying asset could be crude oil, soy beans, gold, sugar, etc. However, futures contract can be used to trade all sorts of assets, such as interest rates, indexes, currencies, equities, even the weather! Different commodities are traded on different exchanges. For example, the Intercontinental Exchange (ICE) trades crude oil, electricity and natural gas while the Chicago Board of Trade (CBOT) trades corn, ethanol, gold, oats, rice, silver, soybeans and wheat. Before you trade, be clear about the asset you want to trade and, particularly, about the exchange you want to trade on. Some assets are traded on more than one exchange. For example, wheat is traded on CBOT, the Kansas City Board of Trade (KCBT) and the Minneapolis Grain Exchange (MGE).
• Underlying quantity. The contract size, or trading unit, specifies the amount of the underlying asset covered by the contract. Futures contracts are highly standardized and specific to each exchange.  For ease of trading, the size of one futures contract is predetermined and fixed by each exchange. For example, one futures contract of frozen pork bellies traded on the CME equals 40,000 pounds of pork. One futures contract of light sweet crude oil on the NYMEX equals 1000 US barrels, or 42,000 gallons. Before you purchase a futures contract, make sure you know the exact amount of the underlying asset represented by the contract. Due to the influx of individual investors into the futures markets, many exchanges offer smaller sized contracts — minis. For example, one futures contract for light sweet crude oil traded on the NYMEX miNY is 500 barrels, half the quantity and, therefore, half the price of a traditional contract. For this very reason, I recommend trading the e-minis.

Next time, we’ll talk about more of the variables futures traders have to juggle as they make trading decisions.

Every schoolboy is familiar with the physics concept: “for every action there is an equal and opposite reaction.” For unknown reasons, financial markets appear to follow the same basic laws that affect our physical world. Therefore, in the market any price move up or down must be followed by a similar move in the opposite direction. In futures trading, this is called a retracement. Retracements provide futures traders with a valuable reference point that can be used to predict the occurrence of price turns. They can also help a trader measure the strength of a preceding move.

For futures traders, the most important retracement strength levels are 40%, 50%, 60% and 100%. For example: If the market moves upward 6 price points, then pulls back 3 points, it has experienced a 50% retracement. The same holds true if the market declines 6 points, then rallies 3 points. This is also a 50% retracement. Should the market reverse by the full 6 points, returning to its original starting point, a 100% retracement has occurred. Traders call this a double bottom.

Futures traders can use the strength of a retracement to gauge the strength of market movement and predict potential trends. Futures traders use retracement levels as a general guide in making trading decisions and choosing low-risk entry points. If a retracement is shallow, 40% or less, the prior move is considered strong and a counter move should be equally strong. A deep retracement, above 60%, indicates a weak prior move and should garner a correspondingly weak counter move. Futures traders look for buying and selling opportunities at key retracement levels. Learning to identify and trade on retracements correctly is a valuable asset in the futures trader’s toolbox.

Many traders will tell you that knowing when to sell is the key to successful trading. While the importance of knowing when to sell is not disputed, entering a trade correctly often clarifies the selling point decision. The best trades yield near instant profits. When this happens you know you have entered at the optimum time. There is considerably less pressure about when to sell when you are already winning.

Every sound trading strategy has one entry and two exits. The exit below your entry price is called the initial stop loss. The exit above your entry price is the price objective. The success of a trade depends on your ability to correctly gauge when, where and how to enter. Get your entry wrong and the whole trade goes down the tubes.

There are three basic entry strategies: the key buy, the 30-minute buy and the late-day breakout.

• Key buy. In the key buy, the futures trader enters the market as a buyer just at the point when aggressive buyers start to fear that a rising stock will fall.
• 30-minute buy. By watching for gaps and stalls in the first 30 minutes of trading after the market opens, the futures trader can determine which stocks will truly trend upward.
• Late-day breakout. Futures traders know trading can be maximized late in the day, between 2:15 p.m. and 4 p.m., after the mid-day doldrums.