When it comes to trading, precision is the utmost important. You need to be very sharp and precise to get the best entry points. Trading is very different from investing. When you invest, you do not need to be so precise in your entry and exits. You can afford it because you hold stocks for months and years. But in trading, you hold stocks for a few hours to a few days. Therefore, precision is the key to success. In this page, you will learn how to use the 5 min charts to get the best and conducive environment to enter a day trade or even swing trades.
What you will learn here is to find a "conducive environment" to enter or exit stocks. We do not learn about the exact entry points here because that will be the function of your trading strategy's setup.
Why do we need to have a conducive environment? The argument can be used with a student who needs to study for his finals. Does he or she studies at the basketball court with dozens of kids pushing each other and shouting and teasing each other? It would be better for the student to study in a quieter environment such as in the Library.
The best environment for long or short is:
For example, if you are looking to day trade stocks and you wanted to buy Disney but you saw the SPY below its 5 min 20 MA and 50 MA, you will stay away from buying this stock. This is because 75% of stocks in the market follow the direction of the major indexes. The major indexes are the S&P 500, the Dow Jones industrial Average and the Nasdaq Composite Index.
In the chart above, you can see how the SPY pointed to traders when is a conducive environment to buy or sell stocks. When the SPY is above its 5 min 20 MA and 50 MA, it was a good time to long stocks for day trades. I have colored the chart with green and red. Green is the area where SPY is above its 20 and 50 MA while red which stands for bearish is when the SPY is below its 5 min 20 MA and 50 MA.
Swing traders can really benefit from this green and red signal. For example, if you plan to buy Disney for a swing trade and hold it for 5 days but you see that the SPY is below its 5 min 20 and 50 MA, you might want to wait until tomorrow when the SPY goes above the 20 and 50 MA before purchasing it.
Besides the SPY, you can also use the QQQ which is an ETF that mimics the performance of the Nasdaq Composite Index to time your entries. The same principle that applies to SPY applies to the QQQ.
QQQ works better for tech related stocks.
In the chart above, you can see how the QQQ gave traders a signal that the environment is conducive to long stocks. The QQQ was above its 5 min 20 MA and 50 MA most of the time.
Now that you know that the best environments to long a stock is when the major indexes are above its 5 min 20 MA and 50 MA, you can overlay the chart of SPY or QQQ below the stock. It helps you to see things clearer. But as you progress and get more experience, you can check SPY or QQQ daily and see whether it is above or below the 5 min 20 MA and 50 MA and make a mental note to be bullish or bearish for that day without needing to refer to that chart that often.
The chart above shows the 5 min chart of Apple and QQQ. You can see that both of them are above their 5 min 20 MA and 50 MA. This tells us that first of all, the market environment is conducive to long tech stocks. Secondly it was conducive for us to long Apple stock as well. Day traders could have jumped into Apple for a nice day trade. Swing traders can also enter at that time and immediately have some profits.
Bullish and bearish crosses can be very useful to help us spot a trend change in the 5 min charts. While they may sometime be lagging, the 20 MA cross 50 MA can be useful to confirm a change in trend. All trend changes will have a MA cross.
In the chart above, you can see how the 5 min chart help traders to go in and out of NFLX. The first hint of a rise is when the stock went above its 5 min 20 MA and 50 MA. Then there was a bullish cross that signal a change in trend to bullish. The stock rose rapidly and day traders enjoyed a rapid rise.
When the stock dropped below its 5 min 20 MA, it gave traders a first red flag. Then it dropped below the 5 min 50 MA and gave traders another red flag. Finally, the bearish cross happened and the stock quickly moved lower. There might be some more selling the next day unless the market sentiment is bullish and propels the stock higher.
While the 5 min 20 MA and 50 MA may not be perfect, it is very helpful to traders and gives them confidence to enter or exit a position.
Let me just introduce you to the yellow line which is the 5 min 200 MA. While traders may or may not want to use it for short term timing, the 5 min 200 MA can be useful to spot longer trends in the 5 min chart. By longer trend I mean a trend that last from 2 to 5 days or a bit longer.
When you see a stock that is below its declining 5 min 200 MA, you should think carefully before touching the stock. The odds of it moving lower is very big.
The chart above shows AN below its declining 5 min 200 MA. The stock is also below its 5 min 20 MA and 50 MA most of the time. During this time, the stock was clearly telling us to stay away from it. If you had bought it, you would most probably have experienced some shock as the stock continued to drift lower.
When a stock move sideways and hug its 5 min 20 MA and 50 MA, it is considered to be in neutral territory. During this period, it is best to stay away and not initiate a long or short position. On May 1 2017, the stock traded above its 5 min 20 MA, 50 MA and 200 MA. The stock transitioned from a neutral environment to a bullish environment. It told traders who wanted to long the stock that it is now a good time to buy the stock.
I think by following the 5 min 20 MA and 50 MA, traders can be on the right side of the trade more and more. You will also reduce your losing positions by at least 50%. That is because you will be following the trend and not going against it. Remember the saying "The Trend Is Your Friend"?
In the chart above, while MAR was below its 5 min 20 MA and 50 MA, the stock was in a downtrend and therefore not suitable for buying. The next day, the stock moved above the 5 min 20 MA and 50 MA and entered into a 5 min uptrend. It was now in a conducive environment to initiate long positions.
Now that you get a bit more familiar with the 5 min charts and the MAs, take a look at the chart above and see what you would do in the circumstances. The obvious answer is when MDLZ was hugging its 5 min 20 MA and 50 MA, we stay away from initiating long or short positions. The declining 5 min 200 MA told us this stock is in a longer term downtrend. When MDLZ went below its 5 min 20 MA and 50 MA, it entered into a conducive environment for shorting the stock. Look how the stock fell.
Lets look at another example. The chart above is OKE which was in a bearish environment and then it entered into a bullish environment. See how quickly the stock change from bearish to bullish. Those who shorted the stock can cover it and then immediately long the stock.
While this system of determining a bullish or bearish environment may not be perfect, it still beats many other ways to determine when you should enter or exit a stock. Try this out and I think you would increase your trading accuracy. You will also avoid many trades that would have given you a big loss.
Jul 30, 21 09:54 AM
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Mar 23, 21 08:25 AM
This week let us take a look at the SPX and TSLA. See what we can learn from their charts.
Mar 19, 21 05:24 AM
In this week we will have a look at Bitcoin, ETN and MAT, SPX and QQQ and see what we can learn from its chart.
Mar 09, 21 08:33 AM
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Mar 03, 21 09:48 AM
In this week we will take a look at BRX and KIM and see what we can learn from the charts.