Fallen Angels Lesson 8: Graduation Lesson Agenda • Putting all the rules together • Key Indicators • Q&A on Fallen Angels Series Putting all the rules together (1:19 – 57:27) 1. MOMENTUM TRADE REVIEW (2:02 – 2:40) • Moving Averages now become the system of movement • Rather than buying the bottom we wait for confirmation • Utilize momentum indicators rather than oscillating indicators 2. MOMENTUM TRADES (2:41 – 4:37) • Levels are not just based on fixed lines • Support and Resistance are MOVING – ‘Moving Averages’ • Exponential Moving Averages used for smaller time frames as they hug the most recent data. Referred to as EMA’s • Simple Moving Averages are used for longer term trends. Referred to as SMA’s • Small time frame Moving Averages represent more aggressive/short term Traders • The larger time frame the more institutional the support/resistance represents 3. KEY MOVING AVERAGES (4:38 – 7:06) • 5 Day Exponential Moving Average (EMA) • 9 Day EMA • 20 Day Simple Moving Average (SMA) • 50 Day SMA • 100 Day SMA • 150 Day SMA • 200 Day SMA 4. ENTRY RULES (7:07 – 21:50) • As a Momentum Trade, Moving Averages become the key trigger for entry and exit targets • Enter when the stock crosses into the LEAF by trading above the Moving Averages • Closing above the Moving Average provides confirmation • Look for a minimum of a 5%+ move between entry and the top of the Leaf • Assess threat of any significant Horizontal/Oscillating levels • If first entry point is missed, one can also enter on break into the next Leaf • Still ensuring enough risk/reward in the Leaf 1 5. STOP LOSS RULES (21:51 – 32:31) • As a general rule for short term trades, stop loss can be placed approximately 1% below previous candles low or most recent Turning Point • For longer term trades with strong Smart Money indicators, stop loss is SAFEST underneath the infliction point (Turning Point) 6. SETTING TARGETS (32:32 – 52:28) • When setting the Target, we look for the next level where significant Oscillating resistance exists • Look at the next overhead Moving Average • After identifying these levels, apply the Fibonacci Retracement • Look for areas where several resistance points are aligning 7. MOMENTUM TRADES BEGIN WHEN OSCILLATION ENDS (52:29 – 53:05) 8. EACH CROSS ABOVE AN MOVING AVERAGE ADDS STRENGTH (53:06 – 53:32) 9. AVANCED TRAINING AND FALLEN ANGELS (53:33 – 57:27) Key Indicators (57:56 – 1:14:54) 1. MACD (MOVING AVERAGE CONVERGENCE DIVERGENCE) (58:10 – 1:01:49) • MACD is a powerful indicator used by Traders to look for entry and exit points on a trending security. It’s buy/sell signals are based on the correspondence, a line created by two Moving Averages and a signal line • When a potentially powerful launching of a Fallen Angel is being created, we may also see signs of divergence as an added extra edge • This is when price creates a lower low, but the MACD creates a higher low • This, much like any divergence, gives us the secret edge! 2 2. ROC (RATE OF CHANGE) (1:01:50 – 1:03:16) • Looking for the Traction Point of where negative movement turns to positive movement • ‘Breaking the Back’ of the downtrend • Looking for when the trend begins to develop, we break upward through the sweet spot of -5% to -15% 3. DIRECTIONAL MOVEMENT SYSTEM DI+ DI- (1:03:17 – 1:07:02) • The problem with most indicators is that they often are not effective in both momentum or oscillating cycles of the markets • The Directional Movement System is especially powerful as it is a system which first identifies which cycle we are likely in and then provides signals as to which direction we are likely headed • The positive Directional Movement Indicator (DI+) indicates the upward trend movement • The negative Directional Movement Indicator (DI-) indicates the downward trend movement • The upward or downward trend is calculated by a complex calculation that takes into account if the stock is making higher highs or higher lows over a given period • It then combines this with taking into account the ‘True Range’ of the stock, or in other words, how much the stock is moving 4. ADX (1:04:42 – 1:06:00) • ADX is added to the Directional Movement Indicators to gauge market activity • It is NOT a directional indicator • Declining ADX shows a market is losing direction and beginning to fade • When the ADX drops BELOW both the DI+ and the DI- it signals the market may now be lifeless and untradeable from a direction standpoint 5. WHERE DO WE ENTER? (1:06:01 – 1:07:02) Many different trading systems have been developed around Directional Movement. The following rules are based on the system presented by Dr. Alexander Elder in Trading for a Living Go Long when DI+ is above DI- and either: • ADX rises while DI+ and ADX are above DI- or; • ADX turns up from below DI+ and DI – • Exit when DI+ crosses below DI- Go Short when DI- is above DI+ and either: • ADX rises while DI- and ADX are above DI+ or: • ADX turns up from below DI+ and DI- 3 6. EASE OF MOVEMENT (EOM) (1:07:03 – 1:11:04) • Measuring how much volume it takes to move the price • When there is significant resistance a stock may take a lot of time and volume to break through that selling pressure • When price just easily pushes further and further up without these volumes blocks the price moves ‘Easily’ • We go Long when the 10 day exponential Ease of Movement crossed above 0 • While this average stays above 0 the trend is strongly intact • Warning signs of a potential exit is when Ease of Movement drops below 0 7. STOCHASTIC (STO) (1:11:05 – 1:14:54) • Tells us the relationship of where the stock is closing over a given period in relation to its range • The higher in the range the stock continues to close the higher the Stochastic level. Inverse applies for low closes • The longer it continues to do this, the wider the Trough at the top or bottom of the indicators chart • Go Long after a sharp Trough has developed • The closer to 30 or above the better • Look for divergent Troughs where the stock is going lower but higher lows in the Stochastic are developing • Go Short after a sharp Trough has developed • The closer to 70 or below the better • Look for divergent Troughs where the stock is going higher but lower highs in the Stochastic are developing Q&A on Fallen Angels Series (1:18:52 – 1:52:10) 4 .