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Pro traders use many strategies to gain an edge in the stock market. These strategies help them make informed decisions and increase their chances of success. Today, we are going to share five of these advanced trading strategies.
Trading can be complicated, but understanding and applying the right strategies can make a big difference. The strategies we will discuss are used by experienced traders to analyze the market, identify opportunities, and manage risks. Whether you are a beginner or an experienced trader, learning these strategies can help you improve your trading skills.
By the end of this post, you will have a better understanding of these advanced trading strategies and how to apply them to your own trading. Let’s dive in and explore each strategy in detail.
Fibonacci retracement is a popular tool used by pro traders to identify potential levels where the market might reverse or continue its trend. This tool is based on a series of numbers called the Fibonacci sequence. In trading, the most commonly used Fibonacci levels are 23.6%, 38.2%, 50%, 61.8%, and 100%.
Fibonacci Levels and Their Significance
The Fibonacci sequence is a set of numbers where each number is the sum of the two preceding ones. In trading, these numbers are turned into percentages. These percentages represent how much of a previous move the price has retraced.
For example, if a stock moves from $100 to $200, a 50% retracement level would be at $150. Traders believe that these levels often act as support or resistance, where the price might bounce back or continue its trend.
How to Apply Fibonacci Retracement in Trading
Identify the High and Low Points: First, you need to find a significant high and a significant low on your chart. Let’s say we are looking at the stock of Apple Inc. (AAPL). Suppose the stock moved from $120 to $180.
Draw the Fibonacci Retracement: Using your trading platform’s Fibonacci retracement tool, draw a line from the $120 low to the $180 high. The tool will then plot the Fibonacci levels on the chart.
Analyze the Levels: The key Fibonacci levels (23.6%, 38.2%, 50%, and 61.8%) will appear between $120 and $180. These levels are potential areas where the stock might find support or resistance. For instance, if AAPL retraces to the 50% level, it would be at $150. This level could act as a support where the stock might bounce back up.
Example with Real Stock: Apple Inc. (AAPL)
Let’s consider an example with Apple Inc. (AAPL). Assume AAPL stock moved from $120 to $180:
If the stock retraces to $150 (50% level) and starts to bounce back, this could be an indication that the level is acting as strong support. Traders might then look for additional signals to enter a trade, like bullish candlestick patterns or increased volume.
Using Fibonacci retracement helps traders identify possible points where the price might change direction, allowing them to make more informed trading decisions. By watching how the price reacts at these levels, traders can better understand the market and improve their trading strategies.
Stop loss hunting is a tactic where the price moves to trigger stop loss orders, leading to significant market moves. Traders use this strategy to identify areas where stop losses are likely to be placed, often around obvious support and resistance levels.
Example with Real Stock: Tesla Inc. (TSLA)
For example, suppose Tesla Inc. (TSLA) has support around $600. Many traders place their stop loss orders just below this level. If the price briefly drops to $590, triggering these stop losses, it can cause a sharp move down. Savvy traders can use this knowledge to anticipate such moves and position themselves to take advantage of the price action once the stop loss hunting is complete.
Order flow analysis is a powerful technique that helps traders understand the buying and selling activity in the market. By looking at the flow of orders, traders can see where the big players are making their moves, which gives clues about future price directions.
Order flow analysis involves studying market orders, limit orders, and stop orders. Market orders are executed immediately at the current price, showing strong buying or selling interest. Limit orders are placed at specific prices, indicating areas where traders are willing to buy or sell. Stop orders turn into market orders once a certain price is reached, often leading to significant price movements.
Take Amazon.com Inc. (AMZN) as an example. Suppose AMZN has been trading between $3,000 and $3,200. By analyzing the order flow, you notice a lot of buy market orders coming in as the price nears $3,000. This suggests strong buying interest and that $3,000 is a solid support level. Similarly, you see many sell limit orders around $3,200, indicating that traders expect resistance at this price. If the price breaks above $3,200, it could trigger stop buy orders just above this level, causing a sharp rise.
Order flow analysis gives a real-time view of market dynamics, helping traders make better decisions by understanding the intentions behind the orders placed in the market.
Smart money refers to institutional investors, hedge funds, and other large, experienced traders who have significant capital to invest. These market participants often have access to more information and resources than individual traders, allowing them to make more informed and strategic trading decisions. Understanding smart money concepts can help traders identify potential market trends and trade alongside these influential players.
Smart money plays a significant role in the market due to the sheer size of their trades. When smart money enters or exits a position, it can cause significant price movements. This is because their trades are large enough to impact supply and demand, leading to shifts in market sentiment.
Smart money traders are also known for their ability to anticipate market moves. They often have access to proprietary research, advanced trading algorithms, and expert analysis, giving them an edge in the market. By following the actions of smart money, traders can gain insights into potential market trends and adjust their strategies accordingly.
For example, consider Apple Inc. (AAPL). If you notice a large institutional investor buying a significant number of AAPL shares, it could be a signal that smart money is bullish on AAPL’s future prospects. This could prompt you to consider entering a long position in AAPL, following the smart money’s lead.
Monitoring institutional activity, following price and volume trends, using options data, and tracking insider trading are some techniques traders can use to follow and trade with smart money. So by understanding smart money concepts and following their actions, traders can gain valuable insights into market trends and potentially improve their trading performance.
Many pro traders rely on their own backtested trading plans to navigate the market. These plans are personalized to their goals, risk tolerance, and style, providing a structured approach to trading decisions. By backtesting, traders can assess their plan’s viability and make adjustments for better performance.
A personalized trading plan is crucial for disciplined and non-emotional trading. It outlines specific entry and exit rules, risk management strategies, and trade selection criteria. Backtesting involves testing the plan against historical data to see how it would have performed. This helps identify flaws and make improvements.
To create a back tested trading plan, traders define their goals and risk tolerance. They develop a strategy based on these factors, incorporating analysis techniques. The plan is then back tested using historical data to evaluate performance.
After backtesting, traders can optimise the plan by refining rules, adjusting risk management, or modifying criteria. Implementing a well-thought-out and back tested trading plan can improve a trader’s success in the market.
Pro traders who use their own back tested trading plans can make more informed decisions and increase profitability.
If you’re looking to master trading, consider joining the ETTFOS Trading Masterclass. With over 20 years of experience, we have developed backtested systems that give you an edge in the market. Learn from seasoned traders and gain valuable insights to enhance your trading skills.
In conclusion, we have explored five advanced trading strategies used by pro traders. These strategies include Fibonacci retracement, liquidity analysis, order flow analysis, smart money concepts, and personalized, backtested trading plans. Implementing these strategies can help traders make more informed decisions and improve their trading performance. We encourage you to consider incorporating these strategies into your trading approach to enhance your success in the market.
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