If you want consistent success as a trader, you need to be consistent with how you execute your trades.
Start by developing a trading plan.
A trading plan is a framework that should detail every step you need to take before you push the “buy” or “sell” button.
My trading plan has only four simple steps, and I apply them to every single trade I take. This has led to consistent trading results.
And right now, I’ve spotted an opportunity in the market that meets the criteria found in my plan.
So, let’s walk through it using my four steps to success…
Careful Planning for a Real-Time Opportunity
There’s a trade setting up in DICK’S Sporting Goods (DKS).
And my analysis tells me to prepare for what could be a dramatic sell-off. So, it seems like a prime opportunity to short DKS.
Let’s check out a price chart of DKS so I can show you what I mean…
Here’s how I’ve filtered my analysis through my trading plan…
Step 1: Trend Analysis
DKS has been in an uptrend since November 17, but now it looks primed for a sharp move lower.
Although DKS has rallied over 40% since its November 17 low at $98.92, there are signs that the move higher is getting weaker.
Therefore, this trade plan is targeting a reversal setup in DKS.
Step 2: Chart Pattern
The rising wedge pattern (blue lines) is a clear sign of the weakening trend.
Rising wedges are reversal patterns. The overlapping nature of the price action contained between the lines hints at underlying bearish strength building up.
Step 3: Momentum Analysis
The momentum signature of the Moving Average Convergence Divergence (MACD) indicator (in the bottom half of the chart) is further proof of underlying bearish strength.
Take another look…
Notice how the MACD peaked on January 10 and has been steadily trending lower ever since. Price action, however, continued to make new highs.
This is known as bearish divergence. It’s called divergence because the MACD is trending lower while the stock’s price continued to trend higher.
Eventually, price action should follow the MACD.
Step 4: T.E.S.T.
Timeframe: DKS rallied from its November 17 low of $98.92 to a high of $136.85 on February 6. Therefore, we can reasonably expect a decline of similar force to take up to three months.
Entry: I like to trade the rising wedge by entering the market on a break of the pattern’s most recent low. In the case of DKS, that means a price of $119.50.
Stop Loss: A very reasonable stop loss would be a price of $138, just slightly above the February 6 high. (Remember, we’re going short DKS. So if it starts trading higher, our losses would increase.)
If the market were to trade back above this level after breaking below $119.50, then the trade idea is simply wrong.
In such an instance, it makes sense to exit the trade for a controlled and minor loss and wait for the next opportunity.
Target: A great minimum target when trading a rising wedge is the origin of the chart pattern. In the case of DKS, the wedge pattern originated from a price of $98.92.
Whether I’m trading a stock like DKS, or a currency like the Japanese yen, my method for executing trades stays the same.
In fact, this consistency is what has enabled me to recommend my subscribers 23 winning trades out of 24 in my forex trading advisory, Currency Trader.
Ultimately, how and what you trade is entirely up to you. But I encourage everyone to use this trading plan to model their own.
In the coming days, I’ll be keeping an eye on DKS. Once the price action has developed further, I’ll be sure to update you here.
Happy trading,
Imre Gams
Analyst, Market Minute
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Source: Jeff Clark Trader