How To Buy And Sell Cryptocurrencies in Kenya

Kenya is well-known in Africa as one of the countries where the cryptocurrency (crypto) Bitcoin has been traded in large amounts. Crypto, specifically Bitcoin, was the talk of the town during the 2017 crypto hyper surge.

In reality, according to recent figures, Bitcoin accounts for 2.3 percent of Kenya’s GDP!

We won’t go into detail on what cryptocurrencies are, but there is something you should be aware of in light of recent events.

Cryptocurrencies are digital currencies with the following characteristics:

• Cryptocurrencies are decentralized, meaning they don’t have a single point of control. They are community-owned and operated.
• Cryptocurrencies can be easily transferred from one individual to another in any part of the world.
• Fast transactions: Unlike bank transfers, which can take days, crypto transactions are completed in a matter of seconds or minutes. Different cryptocurrencies have different transaction speeds.
• Cheap: Believe it or not, you can now send your millions of dollars to every part of the world for pennies on the dollar.

These characteristics, not to mention blockchain, are some of the reasons why cryptocurrencies have grown in popularity in recent years. Since cryptos are difficult to control, banks, including central banks around the world, are wary of them.

With this in mind, you’re probably wondering:-

How Do I Buy Cryptocurrencies in Kenya?

Start trading bitcoin for as little as $10 today. To get started, create a Paxful Bitcoin Trading Account.

And if you’ve heard of the terms “cryptocurrencies” and “bitcoin,” few people seem to grasp what they mean. Not once, but twice, I’ve been asked,

“How do I become a member?” This isn’t anything like Public Likes or Bold Cashers that you enter.

No way! So here’s what you’ll need.

 

Capital/Funds

Investing in cryptocurrencies does not necessitate large sums of money. The good news is that you can buy as little as $1 in cryptocurrency.

Cryptocurrencies are, as previously mentioned, digital currencies with monetary value.

So you’ll need to buy or exchange your money for cryptocurrencies in order to get started.

For example, at the time of writing, an ADA Cardano coin costs $0.043046 per coin, which means that 100 ADA Cardano coins would cost $4.3046, or around Kshs. 450 in Kenyan currency.

See our crypto tracker in the sidebar above this page for the most up-to-date cryptocurrency rates, or go to CoinMarketCap for a full view of all mentioned cryptocurrencies worldwide.

NB: Never spend money that you can’t afford to lose. This is an investment that, like any other, comes with risks.

However, if you lack capital, you should not be prevented from purchasing cryptocurrencies. Also, take a look at How to Earn Free Cryptocurrencies.

Wallet

You’ll need a digital purse to store your digital currencies in. Send, receive, and backup choices are included in the purse/wallet.

To receive funds on your ADA wallet, for example, you must provide the sender with your wallet address, which functions similarly to your bank account number or as a mobile number for your MPESA or mobile money account.

You’ll also find a backup option in your wallet. Backing up your wallet’s private and public keys in a safe offline location, such as on paper or a flash disk, is recommended. You don’t want to be the person in 2025 who loses access to his or her crypto wallet, which contains a million dollars in savings. All is possible with crypto; I’ve seen it happen. So be cautious and protect your investment.

One of the most popular wallet bitcoin is bitpay. You can research more about it in case you really want to know about wallets.

Exchanges

Exchanges are a type of online marketplace where buyers and sellers of digital currencies can transact without having to meet in person. A Kenyan who wants to invest in cryptocurrencies can choose from a variety of exchanges.

Exchanges  Merchants

The following are the six most common points for purchasing cryptocurrencies directly with MPESA:

Paxful: One of Kenya’s most famous exchanges for buying Bitcoin is Paxful. Anyone can sign up, buy, sell, and exchange Bitcoin, including via MPESA. The registration process is simple and takes just a few seconds to complete. Because of the customer service and community already present in Kenya and across Africa, this is the best-recommended exchange for purchasing crypto in Kenya.

 

(We highly recommend paxful if for sure you are interested in buying cryptocurrencies via Mpesa in Kenya)

Localbitcoins: This is a Bitcoin-only exchange. To get started, sign up here, unlock your account using the link provided in your sign-up email, sign in, and keep your paper wallet secure. After that, go to buy or sell bitcoin and look for a merchant that fits your needs. Before trading, make sure to check out the merchant’s profile.
Localethereum: This is an Ethereum-only exchange. Sign up here to get started. There are buyers and sellers of Ether, a popular cryptocurrency, who are always willing to exchange cryptos for cash and vice versa on this platform. With the aid of escrow, a third-party service, one can send money to the seller without fear of him or her disappearing with it. To be on the safe side, it’s a good idea to check out a merchant’s success and trading background on the platform.
Binance is the world’s largest cryptocurrency exchange by amount. Sign up here to get started. The platform allows you to buy bitcoin and a variety of other cryptocurrencies in Kenya using MPESA mobile money and bank account transfers.
Yellow Card is a bitcoin trading app that lets you buy and sell bitcoins using your MPESA card. Sign up here to get started.
Bitzlato: Similar to Paxful and LocalBitcoins, this P2P platform allows you to buy and sell Bitcoin, Ethereum, and other cryptos using MPESA. Sign up here to get started.
Merchants prefer to sell cryptocurrencies at a higher rate than the market price on the two sites mentioned above, and they often tend to buy at the market price or at a lower rate than the market price.

However, there is another alternative that allows you to buy cryptocurrencies at market value.

Trading Exchanges

Exchanges are online marketplaces that link buyers and sellers by matching their trading orders to complete transactions. Cryptocurrency is exchanged between buyers and sellers.

A buyer submits a buying price order, and a seller submits a sell price order. When the orders are in sync, the exchange takes place automatically. It’s best to start on an exchange with a high volume of trades. The Binance Exchange, which recently opened operations in Uganda, is one of these exchanges that is also available to Kenyans.

The exchange of one cryptocurrency for another becomes quite easy. You can exchange one crypto for another as long as you have one that is exchanged on exchanges.

On the Bitcoin market, for example, you can easily place a buy order to purchase Bitcoin with ADA or ADA with Bitcoin.

Wallets are built into Trading exchanges, making it extremely simple to deposit and withdraw cryptocurrencies. Since these wallets lack private and public keys, it is risky to hold (store) your cryptocurrencies in them. Hackers are known to target Exchanges on a regular basis.

Binance, as previously mentioned, is one of the most common cryptocurrency exchanges with high trading volumes. This is one of the crypto exchanges I highlly recommend. You may sign Binance by clicking Register Binance Account 

Other exchanges where a Kenyan can easily register and begin trading include:

KuBitX (now defunct) – The first African cryptocurrency exchange operated entirely by Africans.

PesaMill (now defunct) – An African exchange that aims to list African coins in the future.

Different types of Forex orders

Order management is an important part of not just the trading style, but also better risk management. Although forex trading may appear to be as easy as pressing the ‘Buy’ or ‘Sell’ order button and closing the trades on benefit (or loss), there are several other ways a trader may approach the markets. In this post, you’ll learn about the various methods for placing forex orders, as well as what they all mean.

Orders in the forex market can be divided into two categories:

• Market orders
• Limit Orders

What exactly are market orders?

If you’ve been trading forex for a while, you’re probably familiar with the term “market order.” The order to buy or sell a security at the current market price is known as a market order. It’s as simple as pressing the buy or sell button. For eg, if EURUSD was currently trading at 1.31051 (bid) and you wanted to buy, you would simply click the ‘Buy’ button to place a market order. When you put an order, it is merely a market order that is executed. Similarly, when you click ‘Close’ to close your trade, you place a market order to ‘Sell’ to close the previous buy position.

When do you use a market order?

Market orders are best used in fast-moving markets and where you only need a few pips to make a profit. Scalpers and traders who want to trade a news event to take advantage of a demand that is set in a specific direction prefer market orders. Market orders allow you to enter and exit trades quickly and easily. Market orders are the best form of orders to use if your trading style is focused on scalping or making a few pips in income.

What exactly are Limit orders?

Limit orders are a form of order that is only used by professional traders. A limit order is a buy or sell order for a security at a particular price. There is no guarantee that your limit order will be filled when you position it (executed). This is because a limit order is only enabled when the price you specified is reached.

When is a limit order useful?

Limit orders are useful when trading for the long term or on higher time frames, and they can also be used in conjunction with your trading strategy and approach. Limit orders normally have an expiration date. When placing limit orders, you have the option of selecting GTC (good until cancelled) or EOD (end of day expiry) (where the order expires by end of the day). You may also set a time period in which the limit order will automatically expire if it is not met.

Limit orders are used by most swing traders, but some intra-day traders use them as well, and it all depends on their trading style and strategy.

Another advantage of limit orders is that you don’t have to sit in front of your charts waiting for the price to hit your desired amount. You may simply place a limit order, which will be executed once the price exceeds your limit order stage.

Stop Orders – What are these?

Stop orders are also used in conjunction with limit orders. A stop order, as the name suggests, is an order to buy or sell (i.e., to close the trade) when the price exceeds the required stop order level. Stop orders are also referred to as stop-loss orders and take profit orders. Consider the following scenario to better understand stop orders:

GTC: Buy 1 lot of EURUSD with a Limit order at 1.32 and stop orders at 1.325 and 1.31.

So, what exactly does this imply?

With a limit order at 1.32, you buy 1 lot of EURUSD. Since it is a Good-till-cancelled form of expiry, the order is only activated when EURUSD exceeds 1.32. At the same time, you set a profit and loss limit of 1.325 and 1.31 respectively. So, if EURUSD exceeds 1.32 and then drops to 1.31 (indicating a losing trade), the stop order (in this case, a stop-loss order) is activated. When the price drop to 1.31, your trade is closed.

Similarly, when the price hits 1.325, your stop order is activated, and you exit the market with a profit of 1000 pips.

Trading Strategies and Order Types

The types of orders you use are normally determined by the trading technique you employ. For example, some trading strategies require you to place a limit order on a recent swing high or the open or close of the previous candle. Scalping strategies, on the other hand, enable you to trade based on price action and thus position market orders.

If you’re wondering which of the two forms of orders is better, the response is that they’re both excellent. It all depends on your trading goals and preferences. Stop orders, on the other hand, are necessary and must be used regardless of the form of order. Stop orders, especially stop loss orders, protect your money from depreciation due to unanticipated price movements, giving you enough cash to face the next trading day.

 

Forex trading is one of the most lucrative ventures out there. At the moment, traders complete trades valued at over $5 Trillion daily. This mind-boggling amount generally points to the market’s potential to give you decent returns on your investment.

Typically, you can enjoy a piece of the FX trading scene by trading Over-the-counter (OTC). On the other hand, the rise of computer technology has made it easy for just about anyone to get into FX trading.

Computers have given rise to portable devices with which you can still carry out market analyses and further execute your trades. The growth of handheld devices advanced the need to trade on-the-go and hence the introduction of trading apps.

The Best Apps To Trade Forex

Nowadays, you don’t have to visit your local bank to buy or sell currencies. If you have an internet-enabled device, then you can quickly get yourself a bunch of trading apps and get started dealing in forex. Check out this list for seven of the best apps you can use to trade FX.

1.      MetaTrader 4

For newbies, you have certainly come across the term MT4 while seeking out trading information online. MetaTrader 4 is a well-known trading platform around the world and its app is also in-demand across the globe.

In a broad sense, MetaTrader 4 has all the tools you need to trade currencies plus a wealth of other trade worthy instruments. Besides currencies, you can deal with CFDs, futures, indices, crypto, and commodities.

MT4 is arguably the benchmark when it comes to trading platforms and with good reason. Besides the wealth of options available for trading, the platform is also available for use by hundreds of brokers and banks, indicating its popularity across the trading world.

As a beginner, MetaTrader 4 is the best place to start your trading journey. It has a pretty straightforward design and quite easy to use. Additionally, since many brokers use it, you will get access to a ton of educational material that gives you a decent head start into trading.

Besides beginners, veteran traders routinely use the platform because of its superior charting capabilities. There are several inbuilt tools as well as indicators that will aid your trading.

Additionally, MT4 is a versatile platform that can be used on your PC and even smartphone. You can opt to use the web app, desktop, and even mobile platform to trade on MT4. Moreover, the MT4 platform supports over 30 international languages including English, French, Russian, and Chinese.

If you opt for the MT4 mobile app, you can access your trading account from any location in the world. Moreover, there is an automated trading feature that allows you to utilize Expert Advisors (EAs) – these are ‘robots,’ which help analyze data and execute trades on your behalf. You don’t have to buy the EAs since you can easily download the EA codes from Code Base.

One of the hallmarks of the MT4 platform is that you do not have to spend a dime to obtain. Simply check out the MetaTrader website and download it at zero cost. Remember to check the version that is compatible with your computer.

The MT4 platform similarly excels at customer support. There is a web-page section dedicated to helping out traders with issues ranging across various topics. So if you have difficulty with getting the software set up, user interface, analytics, charts or the actual trading, simply head to their website and see if there is any information regarding the problem in question.

2.      Netdania

One of the earliest trading chart providers, Netdania, is one of the leading financial app services today. Founded in the late 90s, this platform has made great strides in the world of trading. In 2014, a partnership with leading mobile device maker Samsung lead to the app being termed as the ‘World’s #1 Forex & CFD Trading App’.

While the app makes a pretty bold statement about itself, it is equally equipped to back up all the hype. For starters, the app is one of the easiest to use.

Netdania boasts of numerous tools that you can use to trade currencies on the mobile platform. So traders looking to carry out thorough technical analyses for trading currencies, this app has what it takes.

Additionally, there is a wealth of currencies from all across the globe, which you can trade on. This app offers you more than 2,000 different currency pairs.

Additionally, Netdania is not solely centered around the FX scene. This platform allows you to trade other instruments and offers a wealth of different stocks and indices for you to exploit.

With close to 20,000 different trading instruments on the platform, traders are spoilt for choice. So when FX trading doesn’t cut it, you still have thousands of stocks and indices to trade on. Moreover, this app provides real-time updates on asset prices so that you are always kept in the loop.

Finally, Netdania comes in 16 languages and serves traders from all across the world. You can get the app on both Android and iOS platforms.

3.      ThinkTrader

Marketed as an intelligent trading platform, ThinkTrader boasts of a wealth of neat features that are aimed to give users not only the best trading experience but also afford them a reasonable degree of success while trading.

This is because of the abundant trading tools and indicators you can find on the platform. Traders will discover over 80 trading indicators and dozens of other drawing tools and charts which are a must-have if you want to do any meaningful market analyses.

ThinkTrader’s parent company, ThinkMarkets, is well-known in the cryptocurrency spheres. Also, the platform offers traders the chance to deal with FX and CFDs. While trading on this platform, you have access to about 40 different currency pairs which is a sizeable option’s list.

The trading app offers some much-needed convenience when it comes to trading on-the-go. Additionally, the app allows you to view several charts at the same time. Also, the app affords you several different chart types for your market analysis needs.

The app also incorporates a robust trading signaling tool known as the Trend-Risk Scanner. This checks the market for potentially profitable trades automatically, after which it will alert you of the same. Moreover, the app delivers real-time news on the market drawn from FX Wire Pro – a leading financial analysis company.

4.      Trade interceptor

The Trade Interceptor app is another decent trading app that you can download on your mobile device and use to trade on-the-go. Before 2017, it was a standalone app after which the company was taken over by ThinkTrader.

Following the takeover, Trade Interceptor received generous updates meant to make the platform compete with the best in the trading world. You can find the app on either Android and iOS app stores. Also, you can get the app on the ThinkTrader website.

5.      FOREX.com

FOREX.com is one of the best trading apps tailored for newbie traders. Not only is the platform available for use on PC, but you can also get it on your smartphone on both Android and iOS.

The platform offers an extensive list of tradeable currencies with up to 80 listed currencies. It is one of the most comprehensive forex trading apps you can get today.

Additionally, beginners are afforded a wealth of trading indicators to aid their trades. FOREX.com allows you to utilize up to 90 different indicators. We all know how crucial these trading tools can be for traders especially when providing essential trading signals.

Besides indicators, the platform also has a substantial store of educational tools that newbie traders should find quite helpful as they go through their first trading stages. On the platform, you will find a wealth of resources like trading-focused courses and live webinars to guide you through your trading journey.

FOREX.com works across different platforms, and if you prefer to trade on-the-go, there is a mobile app that allows this. The app will work on either Android and iOS devices and is absolutely free to download.

You can easily customize the mobile app to suit your trading preferences without affecting its performance. Additionally, the app is equipped with every feature found on the web app as well, so you get the best of both PC and mobile apps.

In a nutshell, the app is comprehensively equipped to suit traders who are just getting into the game. Also, seasoned forex traders will enjoy the extensive currency options available, affording them more opportunities to make money.

The platform has quite a stress-free feel about it, and creating an account is a straightforward endeavor that should only cost you a few minutes of your time.

On the flip side, however, traders are only limited to FX trading as FOREX.com doesn’t support other trading instruments such as stocks and bonds.

Their customer support is not the best across the field so you might want to consider this first. They, however, allow call-ins every day of the week save for Saturday. Also, you can contact customer support via the email provided on their website.

6.      TD Ameritrade

Another trading app popular with beginners is TD Ameritrade. Every newbie trader ought to have as much information as they can get their hands on. Doing so helps them broaden their understanding of how the market operates.

While ignorance is sometimes blissful, trading blindly will cause you to lose a sizeable portion of your capital. You might just quit the venture before you even get started. However, TD Ameritrade provides novices with a wealth of educational material that should get you started on the journey towards profit-making as you trade FX.

TD Ameritrade features a wealth of trading options. This should allow you to explore different assets and see which one suits your trading style.

Another strong selling point for the platform is its customer support service. When it comes to client support, TD Ameritrade excels. The platform allows you to contact the experts in case of any shortcomings 24/7. Also, there is a live chat option open during business hours.

The user interface is quite easy to master and opening an account takes merely a couple of minutes to execute.

If you like trading conveniently, then TD Ameritrade operates three different mobile apps. There is an official app that is best for those who are new to the trading world and an advanced version of the app tailored to seasoned traders.

7.      ForexTime

ForexTime (FXTM) is one of the few trading apps tailored to giving traders the ultimate mobile trading experience. Founded in 2011, the app is regulated by several top-tier regulatory bodies and hence considered safe to use.

As with all trading apps, FXTM offers a better level of convenience as opposed to traditional PC-focused apps. FXTM is purely a mobile trading app. The app is easy to use and opening an account is pretty straightforward and takes between 1-2 business days to complete.

There are different types of accounts that you can open on FXTM, all of which attract different charges and commissions. Whichever account you opt for depends on the kind of trading you wish to undertake.

For instance, if you are looking to trade currencies, there is a Micro account available that will need between $5-10 as the minimum deposit. On the other hand, a Standard account commands a minimum deposit set at $100.

While FXTM is focused on mobile trading, the platform also has a web-based trading platform. However, it features an outdated design, and the lack of a two-step verification process raises security concerns.

Critical Features Found In Forex Trading Apps

In reality, there are several trading apps you can get online. Most of them characteristically feature more or less the same specs, and this can make app selection a tad difficult.

You must know exactly what to look out for so that you do not end up with a product that hardly meets your trading expectations. So when checking out trading apps, here are a couple of aspects that you need to be keen on:

·         User interface – user friendly

The primary reason people opt for mobile trading apps is the convenience they afford users. Unlike traditional platforms and Over-The-Counter trading systems, trading apps allow you to trade virtually anywhere and with great ease.

As such, any app needs to be easy to use when it comes to executing trades. Remember, a trading app gives you total control over your trades, and you are often the one making critical decisions regarding the market.

Anything overly complicated will undoubtedly distract you and routinely lead to losses. This is because such software requires users to set apart some time to study its workings to trade successfully.

·         Analysis and Charting capabilities

Trading charts make or break successful trades. Important information about potential trading moves is often displayed on a trading chart. As a trader looking to make a profit, charts are a vital part of any trading app.

A lot of traders rely on technical analysis when deciding their next move. As such, charts provide an avenue for you to monitor price changes over time, capture the prevailing trend, and further predict what will happen in the future.

Any trading chart worth its salt will also permit modifications that go a long way in aiding your analyses. You will have various lines that assist you in interpreting price action.

In addition to the charts, useful trading apps also incorporate various market analysis tools. These include multiple indicators representing volume, volatility and the predominant market trend. Moreover, oscillators, moving averages and support and resistance bands are crucial to your trading success, so keep an eye on apps that feature these tools.

·         Real-time updates and Alerts

The FX market is one of the most volatile out there, and price changes occur rapidly. For instance, day traders capitalize on this famed volatility to earn decent returns daily. As such, you would want to know when the value of one or more currencies has gone up or dropped the minute it happens.

Mobile trading platforms are usually disadvantaged because of their poor processing powered as compared to PCs. Nevertheless, you must test out your app to see how it performs in a demo before committing to an actual trade.

You want to know when price action is on the move to implement your preferred trading strategy at the right moment. Trading apps with inbuilt alerts give you an edge over others as you will be furnished with the proper market entry and exit signals in time to execute your moves.

·         Mobile trading

Some trading apps are only available for use on a desktop computer while others cut across different platforms. While some people prefer to trade on PC, apps that work on mobile phones are merely convenient since you can easily buy and sell on-the-go.

Today, technology allows us to conduct business virtually everywhere, so you don’t have to carry your entire desktop with you. If you have a smartphone or other handheld device, look out for trading apps that are compatible with these portable devices and trade freely.

·         Alerts

While alerts may seem like an unimportant feature to include in the trading app, apps that provide real-time alerts allows you to make timely decisions. You may not always be on your phone and hence the app ought to send you notifications once your trading parameters have been satisfied. This way, you will not miss a trading opportunity even when you are engaged elsewhere.

·         News and trading education resources

Technical analysis is vital when it comes to figuring out the market; studying the fundamentals is equally essential and shouldn’t be ignored. As such, look out for apps that provide real-time news about the market. This will broaden your understanding of the market behavior at the time.

·         Demo trading

Demo trading is quite essential for newbie traders. Before you dive into the market, you need to understand how it operates and find out whether your chosen strategy will work in an actual trading scenario. Furthermore, you don’t have to spend real money on the demo.

Therefore, apps that allow demo trading gives you a chance to test out your strategy and generally practice trading beforehand and gain some meaningful experience.

·         Historical data

Information is critical and when it comes to trading, and the availability of the same could lead to a profit or a loss. Any trading platform should allow you to access historical information going back several years. Such data will enable traders not just to make solid analyses, but is also beneficial when testing a trading strategy. When it comes to the amount of information available, more is always better so keep that in mind when selecting a trading app.

·         Automated trading

Trading apps offer a degree of convenience when it comes to trading stocks or currencies. Apps that allow automated trading take this a notch higher and permit traders to set triggers that complete trades once certain conditions are met.

The upside to this is that once you have set out your preferred parameters for executing trades, you won’t have to keep checking your phone to see if certain conditions have been met. Also, automated trading frees you to engage in other trades or businesses.

·         Customer support

In case of any technical hitches during an active trading session, you would want to get it resolved as fast as possible. Interruptions that delay trading cost you valuable time and the opportunity to make money. Therefore, you should be able to access customer support from your broker to handle any unforeseen circumstances.

The Takeaway

As traders advance further into the age of tech, our dependence on mobile devices grows. This is seen by how dependent we are on our phones for just about everything we do.

So when it comes to conducting our businesses, our devices play a pretty crucial role in facilitating our successes. So when trading currencies, the right trading app could mean the difference between making a profit or merely burning your account.

If you are considering diving into the FX trading scene, make sure you know what to look for in a trading app. A poorly-equipped platform will put you in a disadvantaged position in the market. For instance, an app that doesn’t provide real-time news denies you the vital information you need to make critical trading decisions.

All-in-all, the trading apps discussed in this piece offer the best features you need to trade forex. So keep an eye out for them.

Before embarking on their voyages, all seamen, including the famed Christopher Columbus, chart the course of their journey. The ocean is a vast expanse and getting lost takes no effort at all and to achieve anything during the expedition, getting lost is not an option.

The ocean is very similar to the trading world. It is a vast arena made up of thousands of players from across the globe and all of them are out to make money from their investments. However, few actually follow any sort of laid down strategy and as such, most fail.

If you want to be among the few winners, you need to operate differently. Like Christopher Columbus, develop a strategy and plot your course through the markets. Follow it to the letter and watch as your trading portfolio grows exponentially.

It takes time to study the markets and come up with a trading plan. However, hold on because it will be worth it in the end. Read on and learn why a trading plan could spell your success or failure in trading. Also, discover key steps crucial to developing your trading plan.

What Is A Trading Plan?

Like all strategies, a trading plan outlines, in general, the goals you aim to achieve while trading and how you plan to do so. Trading is no get-rich-quick-scheme, and therefore, a trading plan caters to the long-term future.

All trading plans spell out the guidelines that you will follow while trading and also defines your trading conduct in a nutshell. Some crucial details in trading plans include your money management procedures, financial goals, your modus operandi for risk management and how you open and close trading positions.

Your trading plan is also mindful of the technique you decide to employ while trading. The type of trader you choose to become significantly influences not just your goals in the business, but also how you go about trading. Day traders operate differently from swing traders, position traders, and scalpers. Therefore, different traders usually operate with diverse strategies. In a nutshell, stick with what works for you.

One important thing to note is that there isn’t a successful trading plan developed in a single day. Successful traders are persistently developing and tweaking their trading strategies. This is because world markets are dynamic and every day presents new opportunities that could mean a profit or loss. You have to be ready for any eventuality.

Why You Need A Trading Plan

Trading markets regularly operate on predictions for future prices. Usually, a lot of buying takes place when prices are on the lower end. Buyers believe that these prices shall eventually rise and when the time comes, they sell.

For traders, this is the most basic principle to follow. A trading plan further outlines all the activities you are going to undertake as you seek to generate a profit from the venture.

Any trading plan should show you the way to success. Having a plan of action is beneficial in so many ways.

For starters, a plan directs your success in trading as you work toward achieving your goals. If you wish to succeed in trading, then planning for the future ought to take up a large chunk of your time as well as developing a trading plan.

Other reasons why you need a trading plan are outlined below:

Train your focus on meaningful trades

Without a trading plan, you are bound to make several trades, most of which won’t amount to anything. However, if you were to consider the trades that you follow through carefully, then the chances of such failures tend to reduce.

Once you decide to regulate the number of trades you make for your preferred timeframe, you will be able to dedicate more of your time analyzing the select few actions.

Analyzing your potential moves helps draw a better picture and provide likely scenarios set to occur. You will be in a better position to decide then which path to follow. Generally, if the prospects of reaping from a trade are low, you abandon the move altogether.

While you focus on only those trades worth your time, you potentially abandon losing moves. These would have otherwise cost you not just your money, but also time and resources that could have been essential while following through a possible winning trade.

Reduce the chances of emotional trading

Having a plan means that every move you make is calculated. Emotions have proved numerous times to be the downfall of men. Even in trading, once you allow your feelings to take over decision making, you are bound to fail.

Emotional trading is rampant among beginners as they seek to recover amounts lost through prior trades. Re-entering a market without a strategy is unwise, as the likelihood of you analyzing the previous losing trade is improbable to begin with.

Avoid as much as possible trading with your instincts, but consider the facts and data available. Failure to which, you will probably make the same mistake without gaining as much as a lesson in trading.

Always have a plan so that you reduce the chances of you losing money chasing losses. You must plan for failure as well and your course of action in the event you lose out on a trade.

A trading plan lessens the chances of burning your account

The primary reason for planning your trades is to generate a profit while keeping your capital intact. Every trader aims to make decent earnings at the end of the day and hence the main reason for drawing a trading plan.

A well-thought-out plan has the potential to generate decent returns. Everyone who gets into the trading business does so with the ultimate goal of growing their portfolio.

Operating without a plan increases the chances of sinking your account’s funds in pointless moves. Just like shooting from your hip, the chances of you hitting the bullseye are slim with such a strategy. Sooner or later, you will run out of bullets and you might as well give up the fight.

Gambling and trading are worlds apart. Without a reliable MO, there won’t be much to differentiate you from a gambler who relies on their gut feeling. You need to enter the game with a solid plan of action. If you don’t have one, then prepare to waste precious time, energy and resources towards a fruitless venture.

Trading without a plan is like sailing without a map. You won’t get anywhere anytime. Instead, you are bound to expend precious resources chasing the wind that you shall eventually run out of steam.

Aimlessly sailing wastes your time and resources. Likewise, trading is unforgiving to those who operate without laid-down rules. You might as well give away your money if you are entering the market without a strategy.

A good plan outlines your market entry and exit strategy. Ideally, you should enter a trading position when the prices offer value for your money and exit when the conditions are still favorable.

Developing A Trading Plan

When you are armed with an all-inclusive trading plan, there is little that can stand in the way of you making a profit. Before then, you first need to come up with a foolproof strategy that will guide you along the way to successful trading.

While developing a trading plan, there are several items that you need to account for. We shall consider these factors in a series of questions that you, as a trader, can ask yourself in the course of coming up with a trading strategy.

·         Why are you trading?

Are you looking to invest your extra cash? Is trading going to be your primary income source? Or are you simply in it to make tons of money? Carefully consider your answer as this will ultimately decide the trading route to follow.

There are a ton of ads online that promise quick riches while trading. If these guys got to you, you need to re-evaluate your trading plan. Trading, like any business, takes time and patience to grow in. You are going to need incredible luck to generate the kind of wealth you see in those ads, more so in record time.

One of the first lessons you need to understand about trading is that a lot of people lose money because of these ads.

Once you know why you want to get into trading, you can then move on to setting your financial goals. These should be realistic and line up with your intended trading timeframe. There is no way you are going to become a millionaire overnight, so forget about overnight riches.

·         What are your strengths & weaknesses?

To come up with a dependable trading approach, you have to put into account your strengths and weaknesses. As always, capitalize on your strengths and try to work on your weaknesses.

One shortcoming that hinders not just traders, but humans the world over is greed. We always want things the easy way but are reluctant to get down and dirty. That is why a lot of people get scammed out of their money with the promise of making quick bucks trading.

Take control of your greed and learn from the mistakes of others. Trading can be a zero-sum game if you do not capitalize on your strengths while limiting your flaws.

·         Do you have enough money to trade?

To trade, you first have to raise the minimum capital as stipulated by your broker.  This is just the first step to the trading world. You will also need the resources and tools to monitor market trends. Trading charts help you examine the prevailing market conditions. Some are free as others need to be paid for. The latter typically contains verifiable data in real-time so go for one that aligns with your trading goals at the time.

How To Make A Trading Plan

The best way to make and follow through with your plan is to write it all down. Have a journal beside you during the planning process. This way, you can record probable moves and references as you construct your trading strategy.

These items should guide you as you construct a thorough trading plan:

1.      Pinpoint your Trading goals and objectives

Write down what you want to achieve by trading. You will hardly find a fellow trader who trades with similar motives as yours. In this step, do not follow the crowd as you will ultimately be trading for the wrong reasons.

2.      Identify your preferred market and narrow in on a trading timeframe

Trading offers access to several markets in which you can trade in. Go with what is convenient for you and suits your level of knowledge and expertise on the same. Do not work on assumptions but always try to learn the facts surrounding different markets before settling on one.

3.      Identify entry and exit signals

As a beginner, you need to understand the essence of order while trading. Seasoned traders tend to monitor market trends for quite some time. Doing so will help you get a feel of how the market moves, and when the conditions are right, solidify your conviction as to the trade you are about to undertake.

Additionally, specify your entry and exit signals. You need t now precisely when to enter and exit a position to realize the best returns. Clearly describe your entry signals and adhere to them.

Indicators come in handy when describing market conditions, and you are encouraged to use them. Whatever trading indicators you decide to utilize, make sure that you include them when describing your entry points.

The same applies to exit points. Once you get through to entering a trade, you need to know when exiting the same will realize the best reward for your effort. Patience is critical while trading as you would not want to close a winning trade because of mere impatience.

4.      Recognize your risks and weigh them against the reward

Trading bears risk just like other businesses. Understand this and figure out how much you are willing to lose in the process. While trading, losses are inevitable and anyone who tells you otherwise is probably pulling your leg. Nevertheless, the secret to success in this field is managing these shortcomings.

Before entering a position, set your limit and only spend what you are willing to lose. Emotions often tend to get in the way of many trades and these could go end up as a profit or loss. However, there are a pair of tools that help traders with managing trading risks.

Stop-loss and take-profit are essential to every trade initiated. Stop-loss is, however critical and will define how much you are willing to lose in the deal so be sure to include it in your trades.

Weaknesses Arising From Trading Plans

This article has exhaustively indicated why you need to have a trading plan. However, creating one is only the first step in your trading journey. You need to actualize your projected trading approach to realize its benefits.

A trading plan is mainly a theoretical document that guides you as you trade. The actual work lies in following up the design with actions.

While they look good on paper, most traders falter when it comes to actualizing their trading strategies. This is mainly attributed to the pressure that comes with high-frequency trading decisions. As markets are increasingly dynamic, traders are often required to make fast decisions in the face of price movements.

If you trade on lean timeframes, you will often have to decide as fast as you can whether to hold a position or sell before prices change. The likelihood that you make impulsive decisions is quite high, especially for newbies. Granted, this is a recipe for disaster as you deviate from your laid-out path.

That is why traders need to evaluate their trading style regarding not just their financial goals, but also their experience level at the time. Any successful trader went through a gradual learning curve and you won’t be any different.

Your trading plan is the only way you can learn the art of trading and become a guru while at it. Therefore, create a practical step-by-step guide that will be straightforward when the rubber hits the road.

Remember, different traders follow varying strategies, and what works for you probably isn’t compatible with other traders. Remember, if you aren’t losing money, you are on the right path so stick to what works for you.

The Takeaway

If you want to succeed in trading, plan your actions to the letter. Such a plan should be extensively documented in your PC or even on paper. You can also hang the strategy somewhere visible to continually remind yourself of your goals and the path to achieve them.

When creating any trading plan, you need to consider a wealth of information. This should help you create a clear picture of what to expect in the markets. Also, you will understand all the risk involved in the venture and ultimately create realistic goals.

A comprehensive trading plan is a valuable asset that could determine the success of your trades altogether. Besides creating one, you also need to adhere to the strategy to realize your projected achievements in the operation.

As you have seen, coming up with a trading plan is no mean feat. However, do not skip the process because it will be far much easier to trade with a plan as opposed to having none at all.

Like Columbus, having a sense of direction is a sure way of guiding you towards your goal. So therefore, get started plotting your trading strategy. As you adhere to the steps discussed in this article, watch as your confidence swells while trading. Moreover, get a much-needed confidence boost through it all.

There is a lot of information that one must process before getting into trading. For starters, you should have a thorough understanding of the trading world, beware of how to actually trade, when to do it and when to abstain from trading. All this is generally done to ensure that you are making meaningful gains in the trading arena.

Backtesting trading strategies is a means of ensuring that whenever you trade, you won’t just be making blind moves in the market. Once you have understood all the facets that pertain to trading, then you can apply software applications to help you trade.

Trading strategies take a lot of time to complete. Such an approach defines how you enter a trade as well as your expectations from the venture. Before launching the strategy, you need to test it out so that you can protect yourself from potential lossmaking and eventual failure in the trading scene.

What is Backtesting, and why traders require it?

Backtesting is a means to test out your trading strategy and see how it performs when subjected to real trading data. Typically, backtesting makes use of historical data from previous years and puts to work your trading strategy. You will then have a general idea of how it would’ve performed in the selected timeframe.

Once you complete backtesting, you can then engage the trading strategy in a forward test. The latter uses real-time data as opposed to historical data. However, you will have to get by the backtesting step to consider forward testing.

Back in the day, when computers were still unheard of in global markets, backtesting was quite easy. However, the workload involved was daunting going by today’s standards.

Traders would draw up their diligent trades on charts and effect a buy or sell action. Once this was done, they would then comprehensively note the trade results into a log for recording.

All this was done manually as there were no computers back then. If you could display the results on a computer screen, you would be ages ahead of the rest.

Today, on the other hand, computers are the basic tools used in trading. Therefore, backtesting is a lot easier than in previous years. They have improved the efficiency and potency of trading strategies the world over.

Why traders need to backtest their strategies

Before you enter a trade, you need to backtest your strategy. Failure to do so could spell significant consequences, not to mention burning your account. However, this is basic knowledge. Backtesting could prove useful to your trading future especially if you got into trading as a long-term investor.

·         Strategy

Needless to say, backtesting evaluates your trading strategy. From a successful backtest, you will know whether whatever you developed would have returned a profit, or would it have performed contrary to your expectations.

Afterward, you can then evaluate the entire approach where need be or refine it all together. Either way, backtesting serves as a means of improving any trading approach for the better.

·         Experience

During backtesting, you get your strategy working on real data, albeit from the past. Either way, you are sort of going to be involved in trading, or historical trading if you may. Manual backtesting is a particularly reliable way of gaining meaningful experience in the trading business.

·         Confidence

With every successful strategy backtest, your confidence as a budding trader receives some much-needed boost. Since you will be trading with actual figures drawn from the past, every successful strategy means a potentially successful trade. Even though you aren’t using real-time data, the next time you trade with live figures, you will have some experience and this is key to trading.

Ways to backtest your trading strategy

Once you have developed a potential strategy that you believe to be the real deal, it is time to test it out. There are several ways to backtesting trading strategies. They are mainly divided into two methods; manual and automated backtesting.

·         Manual backtesting

Manually backtesting a trading strategy, however, you view it, is pretty exhausting. However, this method provides traders, especially beginners with a real feel of how the market works. If you are looking for some practical experience in trading, manual backtesting is the way to go.

Follow these steps to backtest your trading strategy manually:

o   Step 1

Obtain a trading chart that is easy to read and feed in the desired currency pair you wish to backtest on. If you have any indicators or tools that make up your strategy, include them on the chart. Roll the chart back several periods.

o   Step 2

Shift the chart bar after bar and seek out possible trading setups. This is the grueling part, as you will have to sift through hundreds of them at a time to find the perfect setup.

o   Step 3

Once you spot a possibly profitable setup, log all the information as pertains to your ‘virtual’ trade. An Excel spreadsheet is the best way to record the data. Note down starting date, entry point, reward-risk ratio, stop-loss, take-profit plus any other information you deem noteworthy. This will be used to analyze the strategy and gauge the success or failure of the same.

o   Step 4

Step 4 isn’t necessary if you have found a working strategy. If not, however, get back on the chart and sift, once more, through the bars as you fine-tune your approach until you find a worthy setup. Then you can proceed to Step 3.

Manual backtesting is, from the onset, time-consuming. This is especially true since you will have to sift through piles of data unaided by any computer. Moreover, any proper backtest needs to go through as much data as possible.

Ten years’ worth of trading information is the go-to standard if you are looking to day trade your strategy. If you decide to go through such data, you ought to be mentally prepared for the workload. However, it is the most definitive way traders get to learn actual trading.

·         Automated backtesting

Granted, manual backtesting takes time. Automated backtesting, on the other hand, uses computer programs to test out trading strategies. It is fast and traders can then evaluate a trading strategy faster than it would have taken using the manual method. Moreover, traders might have several approaches on tap and backtesting all of them manually just wouldn’t cut it.

Usually, to conduct an automated backtest, you first have to get a backtesting software. First, there are free versions that we shall consider in this article. Paid versions are also available and even demo accounts count as backtesting software.

Before getting on the testing platform, get some data from valid sources. Incorrect data invalidates your backtest, and you wouldn’t know exactly why. So go the extra mile with this one.

Backtesting on TradingView

TradingView is a web-based platform that allows you to not only create trading charts but conduct a backtest on your trading strategy. TradingView is an excellent back-tester because it comes at no cost to users. Moreover, the platform includes tens of tools and indicators you can include in your trading approach.

So how do you go about backtesting on TradingView?

o   Step 1 – create an account on TradingView

Before you can begin testing strategies on the TradingView platform, you need to be logged in. It is a pretty straightforward procedure.

o   Step 2 – Bar Replay

Once inside, head on to the Bar Replay option. This button is the main item when it comes to backtesting on TradingView. It allows you to access information for as far back as the server holds.  The TradingView databank should quickly provide ten years’ worth of trading data.

o   Step 3 – Adjust bar replay settings

Before running the replay command, make sure you have implemented all the indicators and tools you need on your strategy. TradingView is comprehensively equipped with indicators and other trading tools you would require to perform any trading approach. Add them and then roll back the date to when you would wish to commence backtesting.

o   Step 4 – Start the bar replay

Simply engage the button with your cursor. Once it begins, you will be able to view each price across the years. You can, therefore, analyze the information and predict the price’s next move, after which you can engage the bar replay to see what is happening next.

Backtesting with TradingView Pros

1. Free to use for TradingView users
2. Easily accessible anywhere via a web-based platform
3. You can conduct a manual backtest
4. Accurate financial data
5. Plenty of trading indicators are available
6. A wealth of trading instruments, i.e., stocks, forex, crypto, ETFs etc.

Cons

1. Lacks fundamental analysis
2. Limited data for some assets
3. Indicators with a security function in playback cannot be used

As mentioned before, backtesting plays an essential role in determining the success or failure of any trading strategy. If you are ready to put your plan to work, get it tested first and weed out any flaws in the approach.

Putting your strategy to work through a simulated trade allows you to optimize it and fine-tune your approach towards profitability. Also, when you see your plan successfully survive a backtest, expect a significant boost in your confidence before applying it onto real-time markets.

For newbie traders, backtesting provides an in-depth method through which they can gain much-needed experience in the trading scene.

In the case of manual backtesting, you will be required to sift through substantial data. Doing so exposes you to trades that occurred in the past. Through them, you can understand the world of trading to a greater degree, pick out patterns and price action throughout the timeframe selected.

So do not skip this essential part of trading, but rather embrace it. Remember, a well-thought-out and tested strategy is the key to earning a decent profit from the venture.

One of the hallmarks of trading is the ability to avoid loss-making trades. The basics of investment entail that once you place your money, the result follows a pre-determined gain trajectory. Any other consequence would result in a loss-making venture.

To succeed at trading, one would need to monitor previous volume patterns of the trading market. Usually, trading needs volume to keep going. To move from one price point to the next, trading markets require volume to make the shift.

Mastering trading volumes will give you a newfound conviction on the strength or weakness of an asset and further help decide where to place your money. Trading is a lucrative venture, and in the case of forex, trillions of dollars’ worth of trades are carried out daily. If you want a piece of this cake, then mastering forex is how you get into profitability.

So how do you master volumes while trading? You will need to understand the fundamentals surrounding trading volumes, volume indicators, and how you can capitalize on the signals these indicators send out to use in your trading strategy.

Read on to gain insight into how you can make the most of this trading parameter and achieve profitability in trading.

What is a volume in trading

Volume quantifies how much trading has taken place. More specifically, trading volume denotes the scale of trades that a given financial asset has been subjected to.

If you are dealing with stocks, then their volume would be given in terms of the number of shares traded. In the case of options traders, this would then be how many contracts changed hands over some time.

Trading markets often experience periods of increased activity. This points out that many traders are involved in active trading. The result is an increase in volume and a volatile market.

The volatility leads to significant shifts in price points and provides an opportunity to make good money in the process. This doesn’t only apply to the FX arena, but you can as well make money trading crypto, stocks, bonds et cetera.

Well, you don’t need large volumes to succeed at trading since even slimmer ranges will give you returns. However, trading tight ranges can sometimes be a risky affair owing to how little price movement occurs. In this case, therefore, the volume is pretty significant.

How can you measure trading volume?

Trading is affected by several factors that traders are hardly in control over. To be ahead of the game, you would need to identify when to trade more so when the value of trading instruments decline and sell when the opposite manifests itself.

Volume is an excellent place to start when deciding when to trade. In this case, you ought to quantify trading volume. Volume indicators are essential measures of trading volume, and they go on to give you precious signals when the market is favorable for entry or exit.

Volume indicators

Like all trading tools, volume indicators use mathematic formulas when quantifying trading volume. These indicators then portray the result on a trading chart, such as what you can find on TradingView. The display is easy to understand as compared to their seemingly complex formulas.

Check out some popular volume indicators you need on your trading chart.

1.       Chaikin Money Flow

Developed by Marc Chaikin, the Chaikin Money Flow indicator is considered the best in the game. It measures both institutional and accumulation-distribution.

In trading markets, an increase in the price of commodities follow a rise in trading volume. As such, the Chaikin Money Flow concentrates on the growing volume as prices close at either high or low ranges daily. It then provides a figure to correspond with the outcome.

The Chaikin indicator signals an expanding volume when the price finishes at a higher level of its daily range. The Chaikin value will then be in the highs. The vice versa holds when this price lies lower in the daily range.

Because it considers daily ranges, the Chaikin indicator is a popular short-term indicator due to the oscillation it displays.

2.       Klinger Oscillator

The Klinger Oscillator considers buying and selling volumes for a specific timeframe. Developed by Stephen Klinger, the indicator follows money flow trends for extended periods, all the while considering short-term shifts.

By comparing the scale of securities’ volume and their price movement, the Klinger oscillator comes up with a description of how different two moving averages are. This figure is not solely based on price.

Traders are keen on divergence that is shown on the oscillator to detect possible price reversal points.

3.       On Balance Volume (OBV)

OBV is a powerful yet straightforward volume indicator. When markets close at highs, the volume is added ad subtracted when closing at a low. This shows you which stocks are accumulating through the running total.

Analyzing volume; what you should know

To get a proper feel of how the market moves in a particular direction, volume analysis is essential. As a trader, the last thing you want is to invest your money in a declining stock that would ultimately spell disaster for your trade.

As such, preference is afforded to strong moves. In the case of a declining movement, you can plot when to enter the market. Analyzing trading volume generally helps you decide when to trade and boosts your effectiveness at it.

The next time you analyze trade volumes, watch out for the following guiding principles.

·         Confirming a trend

Typically, rising prices are indicative of an upsurge in trading volumes. When many people are buying a commodity, the market volume goes up. More importantly, their enthusiasm follows a similarly rising trajectory.

Prices for the commodity then increase because the product is ‘hot-cake.’ However, an increase in price coupled with declining interest among traders indicates a possible price reversal.

Now when the price drops on a minor volume doesn’t warrant any drastic moves. On the other hand, when the price drops while the volume is topping out, it shows that something is wrong with the item. Buyers at this point are onto something about the trading instrument and are unlikely to keep up trading in it.

·         Bullish signals

When the price increase is accompanied by declining volume, we know that something in the stock has changed. On the other hand, when it is the volume that is surging against a price drop, it is a good sign that the market is adjusting down, and you ought to get ready to buy into the market.

When the price drop fails to drop below its previous lower point, and the volume diminishes, then a bullish sign is revealed.

·         Price reversals and volume

no matter how high a price for a stock will go, it will eventually fall. The market follows an up-down movement in the prices of commodities. The time taken for a rising value to fall is what traders are on the lookout for.

Prices will, at first, fluctuate with slight ranges at first despite a substantial prevailing volume in the market. This is the initial sign that the market is about to reverse. The price direction is expected to shift.

·         Exhaustion moves and volume

Exhaustion often indicates the end of a trend in the market and, consequently, how far you can ride on a trade. Exhaustion moves are shown by drastic price moves coupled with equally sharp volume shifts upward.

As prices climb, more buyers are roped in riding the trend. When the price drops, many traders are forced out of the trend, and we can then witness volatility in the market and amplified volume as well.

·         Breakouts and false breakouts vis a vis volume

Once a breakout in a range is spotted, it could indicate a strong move. If the volume drops, then the strength of the movement is in doubt.

Also, if the volume doesn’t see any change, you cannot count on the move. Generally, there is a lack of interest in the said stock or trading option to warrant a rise in trading volumes, and as such, there is a higher chance of the breakout being false.

The increasing volume shows that traders are actively involved in taking up the commodity, and hence you can ride on the progressing trend.

·         Volume history

Trading history provides a perfect starting point when you are gauging the viability of investing in the market. However, the farther back trading history goes, the less significant it is to the present trading scene.

Volume, as such, should be analyzed with recent data. This is because markets 10-20 years back are similar to that which we trade in today, and hence their information is relevant to your trades.  If you were to go back 50 years, you would find a completely different environment.

Takeaway

Volume trading is one way you can guarantee your profits, all the while protecting yourself from losses. Volume traders are keen on price trends as well as how the market volume appears.

In a nutshell, when there is a significant trading volume, you are better placed to open a position in the market. On the flip side, decreased trading volume points to bearish divergence, and you should sell.

With the basic guidelines discussed, you should be able to make headway when analyzing the strength of the market or weakness, if present. While volume indicators are not an encompassing indicator, they add much-needed insight into the market dynamics and should be part of your decision-making process.

Momentum is a crucial part of trading, and participants in the market are always taking into account how fast price changes occur. Technical traders are especially keen on momentum. This is because momentum complements their trading strategy and further increases their trading confidence.

As a trader, knowledge on price momentum in the market should support your trading strategy, just as it does professional traders.

So how does it all go down? Read on and find out more about momentum, momentum indicators, and the potential benefits that are up for grabs with a thorough understanding of this concept.

What are momentum indicators

Momentum indicators form a section of the broader array of technical trading tools available for use by traders. These indicators are used on trading charts to display various facets surrounding momentum.

Most of the time, they are combined with other indicators as a way of refining trading signals sent out. This is mainly because momentum indicators, unlike trend indicators, do not show the direction of price movement.

Momentum indicators can reveal the strength or weaknesses of price changes. By doing so, they allow traders to go about investing with confidence as they are assured of an upward or downward trend as gathered from momentum indicators.

To better understand how momentum indicators work, you first need to have a basic understanding of momentum.

Momentum?

Momentum indicators, from their name, work around momentum. Momentum quantifies the rate of change that a price undergoes. This gives you an idea of how fast or slow the quantity of trading instrument shifts.

Since momentum is given by a rate of change in a parameter, the indicators then consider a timeframe during which such a change occurred. It then uses the information collected to plot a single line on a trading chart.

Momentum indicators are classified as oscillator type indicators because momentum indicators often work by sending out signals that assist traders in picking out the forces behind price movement. Such signals identify whether the market will continue moving in a certain direction or retract and diverge from the prevailing trend.

Even if a price is seemingly following an upward trajectory, you need to have a rock-solid conviction that it won’t give in and with it take away your investment. This way, if the price is expected to experience a reversal, you will then be prepared for what is to come.

There are three critical signals you need to be on the lookout for when using momentum indicators. They are outlined below.

·         Moving average cross

The average closing price over a select number of days is the moving average. To be able to identify the moving average cross, first, add a moving average line onto your trading chart alongside the indicator. With it, you should be able to tell when the price crosses the moving average line.

The moving average cross is, therefore a signal telling you when to buy or sell. Typically, you can buy when the indicator crosses above the moving average and sell when it comes from above heading down past the moving average line.

The moving average cross, however, is not a foolproof indicator of when to buy and sell. One should follow the predominant trend in the market. Furthermore, you should first test out the signal before putting it to use on a live trade.

·         Divergence

Momentum divergence comes in two forms. They may either bear bearish or bullish inclinations. In the case of a bullish divergence, the price drops, but the momentum indicator’s low points are appreciating in contrast to the former.

O the other hand, a bearish divergence will occur when the price is moving upward, but the momentum’s top-level is in decline. This indication shows that even though there is an increasing price for a stock, the number of people interested in buying is slowly falling and you are inclined to sell.

The two-sidedness characteristic of momentum divergence gives traders indications early on of a market that is about change direction. By following divergence signals, you will be able to tell how strong a price momentum is and whether it can keep up the pace and further add or reduce the value of a stock or other option.

Both scenarios offer critical insight into market behavior and further signal when you can enter into a trade. However, divergence should not be used as the sole sale indicator but rather in combination with other indicators to be able to build up a conviction for your trade signals.

·         100-line cross

Another signal provided by momentum indicators is the 100-line cross. Momentum indicators give this signal when the price action curve crosses the 100-line either moving above or below it.

Both scenarios point to bullish or bearish indications depending on where the direction the price is moving past the 100-line.

When the price moves down past the 100-line, commodity prices are in decline, and you may want to trade from a bearish position. The opposite holds when the price climbs past the 100-line.

Types of momentum indicators

There are plenty of momentum indicators out there. However, there are three key indicators popular among pro-traders and which, as a beginner, you ought to familiarize with.

1.      Moving Average Convergence Divergence (MACD)

Pronounced mak-dee, MACD is one indicator popular with traders. The indicator follows a trend and shows the connection between the moving averages of a pair of prices for a stock or other trading instrument.

MACD can indicate price momentum oscillating between the two moving averages. During the process, the pair of moving averages will converge, overlap, and diverge from each other.

The indicator typically uses 12-day and 26-day exponential moving averages (EMAs). The difference between the two EMAs gives the MACD line plotted on the price chart. Combining this MACD with a 9-period EMA helps forecast price movement turns as the EMA acts as a signal line.

MACD is positive when the 12-day EMA value is above the 26-day EMA. It is negative when the conditions are rotated. When the two EMAs move away from each other, the MACD, in a similar fashion, moves away from its baseline.

A histogram usually accompanies the MACD indicator to disclose the difference between MACD and the 9-day EMA line. The histogram is essential for traders in that they can identify bearish or bullish conditions in the market.

For example, when the histogram is positive (lies above the 0-midpoint), but then begins to fall towards the midpoint. Such a situation alludes to a declining uptrend.

2.      Relative strength indicator (RSI)

The RSI is another popular trading indicator in constant use today, more so in the day trading arena. As a part of the New Systems in Trading book by J. Welles Wilder, RSI indicates the momentum a trading instrument bears.

To do so, RSI takes into account the price of a commodity or stock and follows its upward and downward trend. How fast this rate fluctuates is indicative of the strength of its price action and, as such, may give you a bearing as to the direction the market follows.

While using an RSI, stocks are given a value between 0-100 and then compared against other parameters such as under bought or overbought values.

RSI often uses the values 70 and 30 as caution points. They indicate both overbought and oversold assets, respectively, and can even be reconfigured to suit the trader’s preference. For instance, you can set them to 80 and 20 to ascertain the trading decision and avoid hasty moves.

Its use by day traders is well-known and hence is charted following daily trading intervals. Nevertheless, shorter time frames are used to chart RSI when you are scalping.

3.      Average directional index (ADX)

The ADX was designed as part of the Directional Movement System in conjunction with Minus Directional Indicator (DMI-) and the Plus Directional Indicator (DMI+).

Directional Movement Systems are meant to assist in measuring momentum as well as the direction a price is moving to. ADX is, however, derived from the aforementioned –DMI and +DMI. The pair are obtained after comparing two consecutive bottoms and high points.

When the ADX value goes above 25, it indicates a strong trend and none when it drops to below 20. If the ADX is falling from a high position, then the prevailing trend is coming to an end or weakening when the decline is sustained.

A rising ADX signifies an improving trend. When it increases by 4-5 units, then you can ride on the pattern to some meaningful gains. As the ADX line is related to the accelerating price movement, it tends to flatten when this trend indicator follows a constant slope.

Advantages of using momentum indicators

Momentum indicators are used to show the strength of price movements. Basically, if a robust upward trend up should hold out for even longer than another with weak tendencies. The former holds better investment opportunities for traders.

Additionally, these indicators pick out market reversal points. Through either bearish or bullish divergences, you will get a pretty good feel as to the interest that drives the price of a stock. The points between momentum and price movement are especially critical to recognizing market reversal points.

Nevertheless, momentum indicators are rarely used in isolation, and most times, do not serve as primary indicators. They indicate the strength of a trend but not where this trend is headed.

You will not get the direction of price movement from momentum indicators alone hence the need to combine other technical indicators to your trading strategy. Momentum indicators serve best as confirmatory tools complementing other indicators that signal the direction of price/ action.

Day-traders are generally involved in making rapid trades throughout the day, and rarely will they hold a position throughout the night.

Moreover, these guys train their focus on the varying price trends throughout the day. As such, a keen emphasis is placed on technical information about the price of trading items and commodities. This technical information, in a broad sense, refers to the numbers that explain price movement.

To better get a picture of price movements, day traders often employ technical indicators to guide them in tracking buy and sell points. Consequently, day traders are reliant on technical indicators for them to trade.

What is a technical indicator?

In a broad sense, a technical indicator will show you when the time is right to trade. These trading tools provide valuable signals which traders use to make trading decisions.

Any technical indicator is the result of technical analysis of available data. To properly appreciate indicators in trading, you must understand the significance of conducting technical reviews and the role it plays in coming up with technical analysis tools.

Technical analysis

Developed by Charles Dow in the Dow Theory, technical analysis assumes that information on previous trading activity and price movements are indicative of future behavior of the same parameters. Over the years, trading charts have shown how various market patterns are periodically recurrent over time. History repeats itself, following how little human trading psychology has changed.

Trading is affected by the forces of demand and supply. These are further affected by a broader range of factors such as commodity price, politics, volume, substitute items, and so on.

Of great importance in this instance are the commodity price and volume. This is what traders are interested in when analyzing the market conditions. For day traders, the actual commodity price combines all the factors that affect supply and demand and hence forms a vital part of trading.

Price action is what determines whether day traders will buy or sell. If the price of an instrument falls, you buy and later sell when the same appreciates. Doing this will ensure you earn a profit.

For day traders, the primary factor affecting their readiness to trade is the prevailing price of any commodity or trading option and volume traded.

To conduct a technical analysis, traders consider available data and trends in the market. Price movement and trade volume are essential items usually indicative of the general market environment. These often give pointers on the general direction traders should follow derived from the projected variation in price and volume.

When conducting a technical analysis, the main goal is to obtain trading signals for short-term trading periods, hence why it is crucial among day traders. Moreover, this scrutiny helps traders examine how strong an instrument performs on the market or its weakness. This information then goes a long way in improving a trader’s conviction in a trade.

So once you have sorted the analysis bit, technical indicators are much easier to work with.

Classes Of Technical Indicators

1.      Trend Indicators

As the name implies, trend-following indicators attempt to figure out the general trend in a market. While traders are often capable of identifying a pattern just by looking at the price chart, recognizing a trend during its formative period is often harder.

2.      Momentum Indicators

Momentum measures how fast the price of trading instruments change. In John J. Murphy’s book, ‘Technical Analysis of the Financial Markets,’ he explains, ‘Market momentum is measured by continually taking price differences for a fixed time interval. To construct a 10-day momentum line, simply subtract the closing price ten days ago from the last closing price. The positive or negative value is then plotted around a zero line.”

By measuring the strength of rising prices, momentum indicators point to the sustainability of price action and, consequently, the viability of investing in the same. This way, the indicators signal when conditions for buying or selling are ripe. This may happen when either overbought or oversold situations are witnessed in the market.

3.      Volatility Indicators

Volatility measures how commodity prices adjust throughout a trading period. To do this, traders consider the shifting values of trading options during the period to conclude how volatile a stock is.

A significant price range means a highly volatile commodity. The opposite holds for a smaller price range. To get the price range, simply get the difference between the highest and lowest price for that day.

Volatility indicators, therefore, point out the volatile behavior of an instrument’s price and assist traders in evaluating trading decisions.

Best Indicators For Day Trading

Day traders combine a wide range of indicators while studying trading charts. The most common ones used are:

a.       RSI

RSI indicates a stock’s momentum following the rate at which the price appreciates or depreciates. Naturally, the value assigned to any trading instrument experiences periodic rise and fall. Keen interest is placed on how fast the trend appears and disappears and hence draw attention to the strength of the commodity price. Knowing how the market behaves often gives you a leg-up when it comes to predicting market behavior. RSI enables day traders to monitor market dynamics via price momentum. As such, you will be able to distinguish bullish or bearish market signals and know precisely when to trade.

b.       Bollinger Bands

These bands are a popular feature on different price charts. While based on a rather simple moving average, Bollinger bands identify market volatility in the present. The bands are made of three lines, a middle moving average and two standard deviations on either side.

The bands deviate from one another by increasing the space between each band. This is known as expansion and it increases when the market volatility is on the rise. On the contrary, the bands will contract when the market volatility diminishes.

c.       Commodity Channel Index – CCI

Established in the eighties, CCI compares the current option price to the average running for a specific period. Additionally, this indicator oscillates above and below the zero – line.

This index, unlike its name, is not designated for the commodities market but cuts across various financial sectors. Day traders mainly apply the indicator on short period charts. When the CCI increases, traders receive more trading signals as opposed to a longer-term application of the tool. For day traders, they don’t make indicators as good as this one.

A large number (75%) of CCI values fall between -100 and +100. Other values that lie above this range are indicative of a very strong price-change concerning the average price.

d.       Average Directional Movement Index – ADX

ADX is a trend-following indicator made up of three lines, namely ADX line, +DI line and –D line. The ADX line is used to determine how strong a trend is. The remaining lines thus assess the direction of the same pattern and will indicate an upward trend or the reverse of it.

Once the –D line crosses the +D line, the market is experiencing a downward trend. When the positions of the D lines are interchanged, then the market is experiencing an upward trend.

e.        Stochastics

As is the case with the RSI indicator, the Stochastics indicator is also an oscillator. It compares the actual price if a trading instrument to a range of prices. This comparison spans a specific time.

The similarity with RSI doesn’t stop at their makeup, but also the interpretation employed with Stochastics. Traders are typically on the lookout for oversold or overbought levels in the market and these points determine whether they will trade.

While the RSI scale is set at 70 to indicate overbought levels, the Stochastics position reaches 80 and falls to 20 for oversold conditions.

Typically, oscillators operate poorly when markets start to trend. As such, you are advised to ignore signals that these indicators provide, as some of them may be misleading.

f.       Fibonacci

Unlike most of these indicators, Fibonacci is not as popular. However, it is still a standout indicator used for day trading. The Fibonacci indicator makes use of the Fibonacci sequence of numbers. In this sequence, every digit is the total sum of the previous two numbers. Also, every consecutive pair gives a ratio that is constant across the series.

The Golden ratio is not just a marvel of arithmetic but is functional in the Fibonacci tool. Here, it aids in finding possible retracement levels in a trending market.

g.       Average True Range Indicator

ATR measures volatility in the financial market. Volatility stems from the range of a stock price after considering the highest and lowest prices. With this range, we can, therefore, understand how volatile the commodity price is from the volatility. A highly volatile market means that prices fluctuate to a more considerable extent as compared to one with low volatility.

In trading, history tends to repeat itself even on the market floor. A period of low volatility is usually followed by a highly volatile one and vice versa. In between the different periods is a breakpoint. It is at this position that traders choose to trade as a result of changes in the price trend.

For day traders, the ATR serves an essential role in mitigating losses from a trade that isn’t performing. The indicator helps traders identify where to position their trailing stop loss.

For newbie traders, using these indicators may sound complicated in the initial stages. However, once you get started creating trading charts, everything falls into place.

For instance, chart makers like TradingView offer a pretty simple way to incorporate indicators into your chart. What’s more, you have a wide selection of indicators and their strategies to choose from.

While trading, price changes are the key points that determine the profit or loss any trade is posited to achieve. Therefore, traders are keen on the factors that affect price changes and, where possible, predict these situations.

One such tool that traders employ when figuring out changes in price is the Relative Strength Index or RSI. J. Welles Wilder developed the Relative Strength Index  indicator in his classic hit, ‘New Concepts in Trading Systems.’

Today, the index serves traders who leverage it when analyzing a stock chart and can add great value to any trading strategy. Read on to find out how you can employ this tried and tested tool and succeed in your trades.

What Is RSI And The Role It Plays In Technical Analysis

RSI is a tool used in technical analysis to indicate a stock’s momentum. A stock price usually follows a particular trend where it will experience periodic rise and fall. The momentum, therefore, is how fast the price appreciates or depreciates over time.

Throughout the history of trading, great importance is heaped on technical analysis. Through it, traders have been able to study previously recorded data, compare and contrast with the present, and make a prediction on what will happen in the future. Trading is all about foretelling what might happen so that as you invest your money, you will be confident of the returns.

Historically, markets across the globe witness more instances of growth more frequently as opposed to a downward movement. This trend has proved the importance of monitoring price momentum, more so when focusing on rising markets.

The speed at which the value of a stock goes up is a critical indicator of the strength of its price. As a trader, you need to gauge the prospects of an upward trend in the price of a stock. The RSI indicator provides suitable signals on bullish or bearish momentum in the price. The momentum, therefore, provides an appropriate reference point when analyzing data on the price of a stock or commodity.

While trading, frequent market assessment is crucial. Things move fast across global markets, and to be in business, you ought to be in the know every day. Relative Strength Index indicator is often employed in technical analysis to give you vital information on how the market behaves.

Armed with this data, you will then have a better understanding of the general market environment. Furthermore, knowledge of the market’s behavior should assist you in identifying the best possible investment opportunity to invest.

Unique Features Found In RSI

The RSI formula is capable of assessing price momentum and, as such, is a favorite among technical analysis traders. It has a couple of unique features that allow it to work so well to identify overbought or oversold conditions in the market.

1.      Oscillation

Traditionally, the RSI indicator is classified as an oscillator indicator. We draw this depiction from oscillators which follow a band but deviate periodically within the band. This deviation may usually occur between pre-defined points or above and below a centerline.

RSI is typically set to move within 0-100 as it indicates overbought or oversold market conditions. Above 70, an overbought market is happening or occurred, and the opposite holds when the figure falls to 30 or below.

2.      Centerline crossover

There are two types of centerline crossover; a rising centerline crossover and a falling centerline crossover. Centerline crossovers are necessary market signals indicative of either bullish or bearish market development.

In the case of a rising centerline, the RSI value crosses the 50 line as it nears the 70 line on the scale. Beyond this, market conditions are point to an overbought scenario. On the other hand, a falling centerline crossover lies below the 50 line but only until it reaches the 30 mark. As it moves beyond the 30 line, an oversold condition is the main takeaway.

3.      Relative Strength Index Divergence

This occurs between the Relative Strength Index and the price of the trading option. Such a movement indicates that a reversal of market conditions is about to take place.

The two primary types of divergence are Bearish and Bullish divergence. In the former, the price attains a new high as RSI stands at a much more diminished high point. As such, traders use it as a sell sign. The reverse happens when the price falls to a new lower level but RSI maintains a slightly higher low level. As such, the latter urges traders to buy.

4.      Positive-negative reversals

Positive-negative reversals differ completely with Relative Strength Index divergence and, as you will see, are the exact opposite of the latter.

A positive reversal points to a sustained increase in the price of a commodity. This will appear where the trading item attains a higher low, so to speak, and RSI realizes a much ‘lower low.’ This lower figure lies between 30-50.

The negative reversal on the other hand, operates in defiance of positive reversals. An instrument will attain a weakened high level as the RSI climbs to a much more significant position. This ‘higher high’ falls between 50-70 lines. Notice that the negative reversal doesn’t crossover to overbought territory. Contrary to a positive reversal, negative reversal indicates a continued decrease in the price of an option.

Generally, price reversals exhibit, once the price performs better than momentum and this feature is seen in specific trends. Traders can then utilize them to confirm a trend.

Why Traders Opt To Use RSI

RSI indicator is a trade favorite among traders, more so technical analysis traders. Most do not use it as a standalone indicator but rather combine it to form part of a greater trading strategy, and here is why:

1.      RSI recognizes overbought and oversold market conditions

Like the Stochastic indicator, Relative Strength Index can be used to point out highs and lows depending on whether the market is overbought or oversold. Such parameters are essential when you want to know when the price will likely go up or fall.

The Relative Strength Index scale runs from 0-100. An overbought market is indicated by readings of 70 and above, while an oversold one will entail readings at 30 or lower. When the market is oversold, traders interpret this to point to a likelihood of the price strengthening. With oversold conditions, you are presented with an opportunity to buy into the market as the declining trend is likely to reverse.

During overbought situations, the probability of currency prices to fall is high, and hence the inclination to sell on this signal.

2.      Traders use it to locate centerline crossovers

Locating the centerlines is a crucial step to figure out the general trend. Any movement originating from below the centerline (50) upwards shows that the trend is on an upward trajectory, and its strength is similarly on the rise. This is often considered a bullish signal only until it reaches the 70 line. On the other hand, a falling trend follows a movement from beyond the 50-line heading down until 30.

3.      Verifies the formation of trends

One of the reasons RSI is popular is because it confirms trend formations in trading prices. For starters, one needs first to ascertain the position of Relative Strength Index. Does it lie above or below the 50 mark?

Typically, there may be an early indication of a downward trend forming. However, you should first wait until the index crosses the halfway point to confirm the trend. The reverse holds for the formation of an upward moving trend.

Limitations Of RSI

 Relative Strength Index primarily indicates momentum and can stay in overbought or oversold conditions for extended periods. This may occur when the asset in question has a significant movement in a specific direction. As such, RSI would need a market that fluctuates periodically between bullish and bearish situations. When such a market indicates a strengthening trend, the RSI then loses its usefulness.

Technical analysis tools like Relative Strength Indexrely greatly on available data to give trading signals more so when considering long-term moves. These signals are therefore relied upon when they match a long-term trend in the market. Moreover, the RSI formula uses 14 periods as standard so it would not favor day traders.

False reversal signals come as frequently and can sometimes be difficult to distinguish from accurate signals. For instance, a bullish crossover resulting in a declining stock is a false positive.

The Takeaway

The Relative Strength Index indicator is a powerful technical analysis tool that traders can utilize to aid their trades. While it is not the single best indicator you can find, the mechanisms surrounding RSI are potent and feature prominently among technical analysis traders.

For newbie traders, it seems instinctive to quickly jump onto the Relative Strength Index trading bandwagon before adequately understanding how to interpret an indicator correctly. Remember, the RSI might throw a false positive and mislead your trade. Therefore, patience is essential as you should first have a thorough understanding of such technical analysis tools.

 Relative Strength Index, once understood, has the potential to provide you with signals for when the market is ripe for trade. By signaling overbought or oversold conditions, traders will be able to gauge the general market environment allowing them to understand the strength of the price movement to consider trading for the long-term.

Nevertheless, Relative Strength Index should not be your sole indicator but rather complement your existing trading strategy. Traders, more so beginners should first run RSI strategies on a demo account before getting the real experience on a live account.   

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