What timeframe works best for the EMA Cloud?

There is no universal best timeframe. Many traders use a higher timeframe for trend bias and a lower timeframe for entries.

Stock Chart Learning - Learn Technical Analysis for Free

Q: Is the EMA Cloud good for day trading?

It can be, especially in trending sessions. In choppy markets it may whipsaw, so many traders add confirmation or higher-timeframe filters.

Q: What are the best EMA Cloud settings?

Common settings include 5–12, 8–9, 20–22, and 34–50. The best settings depend on the market, timeframe, and volatility.

Q: Is the EMA Cloud the same as Ichimoku?

No. Ichimoku uses multiple components and different logic. EMA Cloud is simply two EMAs with shading between them.

Elder Impulse System Explained: Strategy, Settings & Trading Rules

2026-08-29T10:32:46.749-07:00

What Is the Elder Impulse System?

The Elder Impulse System, developed by Alexander Elder, is a trend-and-momentum trading system that combines a 13-period exponential moving average (EMA) with the MACD Histogram.

It converts the relationship between those two indicators into three easy-to-read price-bar colors:

Green: trend rising + momentum rising
Red: trend falling + momentum falling
Blue: trend and momentum disagree

Default settings: 13-period EMA combined with the standard MACD Histogram.

Important: Elder's system is much more useful as a trade filter than as a rule to automatically buy every green bar or sell every red bar.

Jump to: Rules · Settings · Timeframes · Strategy · Exits · Mistakes · FAQ

Many technical indicators answer only one question.

A moving average can help identify trend direction. A momentum indicator can help determine whether that trend is strengthening or weakening.

Alexander Elder's Impulse System attempts to combine both ideas.

Instead of asking only whether price is trending higher, the system asks:

Is the trend moving higher AND is momentum improving at the same time?

When the answer is yes, the bar becomes green. When trend and momentum are both deteriorating, it becomes red. When they disagree, it becomes blue.

That simple idea is what makes the Elder Impulse System useful.

Elder discusses the framework in Come Into My Trading Room .

How the Elder Impulse System Works

The Elder Impulse System combines two measurements:

13-period EMA: determines whether the short-term trend is rising or falling.
MACD Histogram: determines whether momentum is increasing or decreasing.

The system then compares today's readings with the previous period.

This distinction is important. Elder isn't simply asking whether the EMA is above price or whether MACD is above zero.

He is examining the direction of change.

Bullish impulse:
EMA rising + MACD Histogram rising

Bearish impulse:
EMA falling + MACD Histogram falling

Neutral:
The two indicators disagree

If you aren't familiar with these indicators individually, read:

Elder Impulse System Rules: Green, Red and Blue Bars

Green Bar — Bullish Impulse

A price bar becomes green when:

The 13 EMA is higher than it was during the previous period.
The MACD Histogram is higher than it was during the previous period.

In other words:

Trend is rising AND momentum is improving.

This creates a bullish environment, but it should not automatically be interpreted as "green = buy."

A green bar occurring directly underneath major resistance can be much less attractive than a green bar appearing during a pullback within an established uptrend.

Red Bar — Bearish Impulse

A bar becomes red when:

The 13 EMA is lower than during the previous period.
The MACD Histogram is lower than during the previous period.

That means:

Trend is falling AND bearish momentum is increasing.

For traders already holding a long position, red can also act as a warning that the bullish impulse has deteriorated.

Blue Bar — Neutral Impulse

Blue occurs whenever the EMA and MACD Histogram disagree.

For example:

EMA rising but MACD Histogram falling
EMA falling but MACD Histogram rising

This is actually one of the smartest features of the system.

Rather than forcing the trader into a bullish or bearish opinion at all times, Elder effectively creates a third state:

"The evidence is mixed."

Many traders would be better off trading less frequently when the evidence is contradictory.

Best Elder Impulse System Settings

The traditional Elder Impulse System uses:

Trend: 13-period EMA

Momentum: MACD Histogram using standard MACD settings

For the traditional MACD, those settings are:

12 EMA / 26 EMA / 9-period signal line

You can change the settings, but doing so changes the behavior of the system.

Adjustment	Effect	Tradeoff
Faster EMA/MACD	Responds sooner	More false signals
Traditional settings	Balanced response	Good starting point
Slower EMA/MACD	Filters noise	Signals arrive later

Rather than searching for a magical setting, I would start with Elder's original configuration and then backtest any changes.

Best Timeframe for the Elder Impulse System

One of the most important ideas in Elder's methodology is multi-timeframe analysis.

Instead of looking at only one chart, the trader first identifies the larger trend and then uses a smaller timeframe to locate an entry.

A useful approximation is:

Higher timeframe ≈ approximately 5× the trading timeframe

Examples:

Trading daily → examine weekly trend
Trading 60-minute → examine approximately 4-hour trend
Trading 15-minute → examine approximately hourly trend

The exact ratio does not have to be mathematically perfect.

The important idea is to avoid making a short-term trade without understanding the larger market direction.

Elder Impulse Trading Strategy

I would use Elder Impulse primarily as a filter.

Example Bullish Setup

The weekly chart is in an established uptrend.
Move to the daily chart.
Price pulls back rather than becoming extremely extended.
The Elder Impulse turns from blue to green.
Price remains above important support.
Volume or another independent indicator supports the move.

The green bar isn't creating the trade by itself.

It is confirming that trend and momentum have realigned with the larger bullish direction.

Example Bearish Setup

The larger timeframe is trending down.
A temporary rally occurs.
The smaller timeframe turns red again.
Price fails near resistance.

That can indicate that bearish trend and momentum have reasserted themselves.

Short selling carries risks that are very different from simply buying shares. Read my guide to short selling before treating red bars as automatic short entries.

How to Exit an Elder Impulse Trade

One weakness of simplistic explanations of Elder Impulse is that they focus entirely on entries.

A trading system isn't complete unless it defines exits.

Possible exit frameworks include:

Exit when the bullish impulse disappears.
Exit when the opposite impulse appears.
Use a predefined stop based on price structure.
Use a trailing stop during strong trends.
Exit when support or resistance invalidates the trade.

Notice that these methods can produce very different results.

That is exactly why they should be tested rather than chosen based on a few successful historical examples.

Real Elder Impulse System Example

The chart below shows the Elder Impulse System applied to QQQ.

Rather than viewing every green or red bar as an isolated trade signal, pay attention to how groups of colors develop during different market environments.

Long stretches of the same color typically reflect stronger alignment between trend and momentum.

Rapid green-blue-red-blue switching often indicates exactly the opposite: choppy conditions with weak directional conviction.

When the Elder Impulse System Fails

No trading system works in every market environment.

Elder Impulse can struggle when price moves sideways because both the EMA slope and MACD Histogram can change direction frequently.

That produces rapid sequences such as:

Green → Blue → Red → Blue → Green

This is essentially whipsaw.

The same weakness occurs in many trend-following systems.

Common Elder Impulse Mistakes

Buying every green bar.
Shorting every red bar.
Ignoring the larger timeframe.
Entering directly into major resistance.
Using the system during extremely choppy markets.
Ignoring volume and price structure.
Having no predefined exit or risk-management rule.
Changing settings until historical results look perfect.

Elder Impulse vs MACD

The Elder Impulse System includes MACD, but the two are not the same thing.

MACD	Elder Impulse
Measures moving-average momentum relationships	Combines MACD momentum with EMA trend
Displays lines and histogram	Converts information into colored price bars
Primarily momentum/trend indicator	Designed as a trade-filtering framework

If you want to understand the momentum component in greater detail, read: MACD Indicator Explained .

How to Improve the Elder Impulse System

The simplest way to improve the framework is to combine it with information that isn't simply another version of the same momentum calculation.

Examples include:

Volume to examine market participation.
ADX to estimate trend strength.
Support and resistance for trade location.
Higher-timeframe structure for directional context.

The objective is not to keep adding indicators.

It is to combine different types of evidence.

Backtesting the Elder Impulse System

Because Elder Impulse uses objective rules, it is well suited to backtesting.

For example, test:

Buy when Elder Impulse turns green.
Require the higher timeframe to be bullish.
Require ADX to exceed a chosen trend-strength threshold.
Require price to remain above a longer-term moving average.
Compare different exit rules.

Then compare the results against buy-and-hold and test them on multiple securities and market environments.

Test the Strategy Instead of Guessing

TrendSpider Market Scanner & Strategy Backtesting can be used to test technical trading rules and scan for indicator conditions instead of manually searching charts.

You can also read: How to Create a Winning Stock Trading System .

Disclosure: Some links on this page are affiliate links. I may receive a commission at no additional cost to you.

Elder Impulse System FAQ

Who created the Elder Impulse System?

The system was developed by trader and author Alexander Elder.

What indicators does the Elder Impulse System use?

The traditional system combines a 13-period EMA for trend with the MACD Histogram for momentum.

What does a green Elder Impulse bar mean?

It means the 13 EMA is rising and the MACD Histogram is also rising compared with the previous period. Trend and momentum are therefore aligned bullishly.

What does a red Elder Impulse bar mean?

It means the 13 EMA is falling while the MACD Histogram is also declining. This indicates bearish alignment between trend and momentum.

What does a blue Elder Impulse bar mean?

Blue means the EMA and MACD Histogram disagree. The system therefore does not classify the period as a clear bullish or bearish impulse.

What are the best Elder Impulse settings?

The traditional starting point is a 13-period EMA combined with standard MACD settings. Different configurations can be tested, but faster settings usually increase sensitivity and false signals while slower settings react later.

Is the Elder Impulse System profitable?

No indicator configuration can be assumed to be profitable across all securities, timeframes and market environments. Its rules should be tested with realistic entries, exits, transaction costs and risk management.

Can the Elder Impulse System be used for day trading?

Yes, the same logic can be applied to intraday charts. However, shorter timeframes contain more noise, making higher-timeframe confirmation especially important.

Is Elder Impulse better than MACD?

It isn't really an either/or comparison because Elder Impulse actually uses the MACD Histogram. Elder adds EMA trend direction to the momentum information provided by MACD.

Conclusion

The strength of the Elder Impulse System is not that it magically predicts the next market move.

Its strength is that it forces traders to ask two useful questions at the same time:

What direction is the trend moving?
Is momentum supporting that trend?

When both agree, the system produces a bullish or bearish impulse. When they disagree, it tells you that conditions are mixed.

That simplicity makes Elder Impulse an excellent framework for learning how a rules-based trading system works.

I would use it primarily as a market and entry filter, combine it with higher-timeframe analysis and price structure, define risk before entering, and backtest the rules rather than assuming every green or red bar is profitable.

Continue Learning

MACD Indicator Explained: How to Use MACD for Trading

2026-08-29T10:20:46.061-07:00

What Is the MACD Indicator?

MACD (Moving Average Convergence Divergence) is a trend-following momentum indicator built from exponential moving averages. It helps traders evaluate trend direction, momentum changes, crossovers and divergence.

MACD Cheat Sheet:

MACD above signal line: bullish momentum is strengthening
MACD below signal line: bearish momentum is strengthening
MACD above zero: short-term EMA is above the longer-term EMA
MACD below zero: short-term EMA is below the longer-term EMA
Growing histogram: distance between MACD and signal line is expanding
Shrinking histogram: momentum difference is contracting
Default settings: 12, 26, 9

Most important: A MACD crossover is not automatically a buy or sell signal. MACD performs much better when you first determine whether the market is trending or sideways.

Jump to: Formula · Components · Zero line · Crossovers · Histogram · Divergence · Settings · Strategy · FAQ

The MACD is one of the most popular technical indicators because it attempts to combine two ideas traders care about enormously: trend and momentum.

That makes it more informative than simply looking at whether price is above or below a single moving average.

But there is a catch.

MACD is built entirely from historical price data. It therefore lags price, and blindly buying every bullish crossover or selling every bearish crossover can generate a huge number of bad trades—particularly when the market moves sideways.

The real value of MACD comes from understanding what its individual components are telling you and then combining them with price structure, trend strength, volume and risk management.

Who Invented MACD?

The Moving Average Convergence Divergence indicator was developed by Gerald Appel in the 1970s.

Its purpose was to compare a faster moving average against a slower moving average so traders could visualize changes in trend and momentum.

Because MACD incorporates several measurements into one indicator, it can provide more context than looking at a single moving average by itself.

If moving averages are new to you, start with my guide: EMA vs SMA: Which Moving Average Is Better?

The MACD Formula

The standard MACD uses a 12-period EMA and a 26-period EMA.

MACD Line = 12-period EMA − 26-period EMA

Signal Line = 9-period EMA of the MACD Line

Histogram = MACD Line − Signal Line

When the faster 12-period EMA moves above the slower 26-period EMA, the MACD line becomes positive.

When the 12-period EMA falls below the 26-period EMA, MACD becomes negative.

That means MACD can be thought of as a visualization of the distance between two moving averages.

When that distance expands, momentum is increasing. When it contracts, momentum between the two averages is weakening.

The 3 Parts of the MACD Indicator

MACD contains three primary components:

MACD Line
Signal Line
MACD Histogram

1. MACD Line

This is the difference between the fast EMA and slow EMA.

The farther the MACD line moves away from zero, the larger the separation between those moving averages.

2. Signal Line

The signal line is a 9-period EMA of the MACD line itself.

Because it smooths the MACD line, traders can use the interaction between the two lines to identify changes in momentum.

3. MACD Histogram

The histogram measures the distance between the MACD line and signal line.

This makes the histogram particularly useful because traders can visually see momentum accelerating or decelerating.

How to Read the MACD Zero Line

The zero line is one of the simplest but most useful MACD signals.

MACD above zero: 12 EMA is above the 26 EMA.
MACD below zero: 12 EMA is below the 26 EMA.

In plain English, MACD above zero generally indicates the shorter-term trend is stronger than the longer-term trend.

MACD below zero indicates the opposite.

This is why I view the zero line primarily as a trend context signal rather than an automatic trading trigger.

Why Repeated Zero-Line Crosses Matter

If MACD repeatedly moves above and below zero over a short period, the market may be moving sideways.

That is important because MACD is a trend-following indicator.

MACD's biggest weakness is sideways markets. Repeated crossovers can create a series of false entries when no meaningful trend exists.

This is one reason I like combining MACD with an independent trend-strength measurement such as the ADX indicator .

MACD Crossovers: Bullish and Bearish Signals

Signal-line crossovers are probably the most commonly used MACD signal.

Bullish MACD Crossover

A bullish crossover occurs when the MACD line crosses above the signal line.

This indicates that short-term momentum is strengthening relative to its recent average.

Bearish MACD Crossover

A bearish crossover occurs when the MACD line crosses below the signal line.

This indicates weakening short-term momentum.

But this is where traders often make a mistake:

A crossover is not inherently a buy or sell command.

A bullish crossover occurring within an established uptrend has very different implications from a bullish crossover occurring in the middle of a directionless sideways range.

Why MACD Crossovers Fail

Suppose a stock trades sideways between $95 and $105 for several months.

The 12 EMA and 26 EMA repeatedly cross each other as price moves back and forth inside the range.

MACD might therefore produce:

Bullish crossover
Bearish crossover
Bullish crossover
Bearish crossover

None represents a durable trend.

A trader mechanically following every signal can slowly get chopped to pieces.

This behavior is known as whipsaw.

It is not necessarily a failure of MACD. It means you're using a trend-following indicator in a market that isn't trending.

That's why identifying the market environment first is often more important than identifying the crossover.

How to Read the MACD Histogram

The MACD histogram is one of my favorite components because it makes momentum changes extremely easy to visualize.

Remember:

Histogram = MACD Line − Signal Line

When the histogram gets larger, the distance between MACD and the signal line is increasing.

That indicates momentum is accelerating.

When the histogram begins shrinking, the two lines are converging.

Momentum is decelerating.

Shrinking Histogram ≠ Immediate Reversal

This distinction matters.

If a positive histogram becomes smaller, it does not necessarily mean price must fall.

It means bullish momentum is slowing.

Price can continue higher at a slower rate, consolidate sideways or eventually reverse.

Similarly, a shrinking negative histogram means bearish momentum is losing strength—not that a rally is guaranteed.

I generally find this interpretation more useful than treating every histogram change as a mechanical trade.

MACD Bullish and Bearish Divergence

Divergence occurs when the behavior of price and MACD stop confirming one another.

This can warn that momentum underneath a trend is changing.

Bullish MACD Divergence

Bullish divergence occurs when:

Price makes a lower low, while
MACD or its histogram makes a higher low.

Price continues weakening, but downside momentum is no longer becoming more extreme.

That can indicate selling pressure is losing strength.

Bearish MACD Divergence

Bearish divergence occurs when:

Price makes a higher high, while
MACD makes a lower high.

Price continues rising, but momentum is failing to confirm that strength.

This can warn that the trend is becoming vulnerable.

Divergence is a warning—not a reversal guarantee. Strong trends can continue for considerable periods even after divergence appears.

That is particularly important with bearish divergence. I would not short a strong stock simply because MACD has made a lower high.

Short selling introduces substantially different risk than owning shares. Read How to Short Stocks before interpreting bearish MACD divergence as an automatic short signal.

Real Example: Bullish MACD Divergence

The chart below demonstrates bullish divergence.

Price made a lower low, but momentum represented by the MACD histogram failed to make a corresponding lower low.

In other words, price looked weaker while the momentum underneath the decline was actually improving.

The eventual reversal demonstrates why divergence can be useful.

But the correct takeaway is not that divergence always predicts a bottom. Instead, divergence gives you another independent clue that the existing trend may be losing momentum.

Best MACD Settings: Is 12, 26, 9 Always Best?

The standard MACD configuration is:

12, 26, 9

That is an excellent starting point, but it is not mathematically ordained to be the best setting for every market and timeframe.

Settings	Behavior	Tradeoff
Faster MACD	Responds quickly to price	More signals and more whipsaws
12 / 26 / 9	Standard balanced configuration	Good baseline for testing
Slower MACD	Filters more short-term noise	Signals arrive later

The same speed-versus-noise tradeoff appears with almost every moving-average indicator.

Faster settings catch changes sooner but generate more false signals. Slower settings produce cleaner signals but react later.

That is why the correct answer to "What is the best MACD setting?" is: test it.

MACD for Day Trading vs Swing Trading

Day Trading

On intraday charts, MACD responds to much shorter price cycles.

That can create a large number of crossovers, particularly during low-volatility or sideways periods.

If using MACD intraday, filtering signals with trend strength and price structure becomes particularly important.

Swing Trading

MACD tends to be easier to interpret on larger timeframes because much of the intraday noise disappears.

A daily-chart bullish crossover occurring within an established uptrend can be much more meaningful than a random crossover on a 1-minute chart.

That does not mean daily MACD is automatically profitable. It means the signal contains less microstructure noise.

How I Would Build a MACD Trading Strategy

Rather than using:

"MACD crosses up → buy"

I would build a multi-stage process.

Determine the trend. Is price making higher highs/higher lows or lower highs/lower lows?
Check moving-average structure. Is the faster trend aligned with the longer-term trend?
Measure trend strength. Use an independent indicator such as ADX.
Evaluate MACD. Is it above zero? Is there a bullish crossover? Is the histogram expanding?
Check price structure. Is price breaking resistance, bouncing from support or moving randomly?
Check participation. Does trading volume support the move?
Define risk. Know where the setup becomes invalid before entering.

This creates a cluster of independent signals rather than relying entirely on MACD.

That's much closer to how I believe technical analysis should actually be used.

MACD + RSI

MACD and RSI can work well together because the two indicators present momentum differently.

For example, suppose:

MACD makes a bullish crossover.
MACD is above zero.
RSI moves above 50.
Price breaks resistance.

Those signals collectively provide more information than the MACD crossover alone.

However, be careful not to stack multiple momentum indicators and assume that five versions of the same information constitute five independent confirmations.

MACD + ADX

I particularly like the conceptual combination of MACD and ADX because they answer different questions.

MACD: What direction is trend/momentum shifting?
ADX: Is there actually a strong trend?

This directly addresses MACD's biggest weakness: whipsaws in sideways markets.

A bullish MACD crossover in a genuinely strong trend is much more interesting than one occurring while trend strength is extremely weak.

Read: ADX Indicator Explained .

MACD + EMA Cloud

Another useful combination is MACD with the EMA Cloud .

The EMA Cloud provides an easy visual representation of the underlying trend, while MACD helps show whether momentum within that trend is strengthening or weakening.

For example, a bullish MACD crossover occurring while price remains firmly above a bullish EMA Cloud can be substantially more interesting than the same crossover occurring below a bearish cloud.

MACD vs RSI: Which Is Better?

Neither is universally better.

MACD	RSI
Trend + momentum	Momentum oscillator
Uses moving averages	Compares recent gains vs losses
No fixed upper/lower range	Ranges from 0 to 100
Useful for crossovers and trend context	Useful for momentum regimes and extremes
Can show divergence	Can show divergence

Instead of asking which indicator wins, ask which one answers the question your trading system needs answered.

The Biggest MACD Trading Mistakes

Buying every bullish crossover. Sideways markets generate constant whipsaws.
Selling every bearish crossover. A brief momentum slowdown does not necessarily end the larger trend.
Ignoring the zero line. The same crossover has different context above and below zero.
Confusing histogram contraction with reversal. Momentum slowing is not the same as price reversing.
Treating divergence as guaranteed. Divergence can persist much longer than expected.
Using MACD alone. It is still based entirely on historical price.
Over-optimizing settings. A MACD configuration that perfectly fits one historical chart may fail on future data.

Backtest MACD Instead of Guessing

This is where MACD becomes particularly interesting.

Because its signals are mathematically defined, they can be systematically tested.

For example, instead of saying:

"MACD crossovers look profitable."

Test specific rules:

Buy when MACD crosses above signal line.
Only buy when MACD is above zero.
Only buy when price is above the 200-day moving average.
Add an ADX trend-strength filter.
Add volume confirmation.
Compare results against simply buying and holding.

Then test the rules across multiple stocks and different market environments.

That is far more meaningful than finding three historical charts where MACD worked perfectly.

Backtest MACD Strategies

TrendSpider — Market Research, Scanning & Backtesting allows you to test technical-analysis rules rather than manually scrolling through charts looking for successful examples.

You can also read my complete tutorial: How to Create a Winning Stock Trading System .

For those interested in building trading systems programmatically: Hands-On Trading With Python covers quantitative strategy development and backtesting.

Disclosure: Some links above are affiliate links. I may receive a commission at no additional cost to you.

MACD Frequently Asked Questions

What does MACD stand for?

MACD stands for Moving Average Convergence Divergence. It measures the relationship between a faster exponential moving average and a slower exponential moving average.

What is the standard MACD setting?

The traditional setting is 12, 26, 9: a 12-period EMA, 26-period EMA and 9-period signal line.

What is a bullish MACD signal?

A MACD line crossing above its signal line indicates strengthening bullish momentum. The signal generally has more useful context when it agrees with the broader price trend.

What does MACD crossing above zero mean?

It means the 12-period EMA has moved above the 26-period EMA, indicating shorter-term price momentum is stronger than the longer-term average.

What does a shrinking MACD histogram mean?

It means the distance between the MACD line and signal line is decreasing. Momentum is decelerating, but that does not necessarily mean price will reverse.

Is MACD a leading or lagging indicator?

MACD is primarily a lagging trend-following indicator because it is calculated from moving averages of historical prices. Divergence and histogram changes can sometimes warn of changing momentum earlier, but MACD should not be treated as a reliable predictor of future price.

Is MACD better than RSI?

Neither is inherently better. MACD is useful for trend and momentum relationships, while RSI is particularly useful for measuring momentum regimes, extremes and divergence. They answer somewhat different questions.

Does MACD work for day trading?

It can be used intraday, but shorter timeframes contain considerably more noise. MACD crossovers can therefore generate frequent false signals when price is moving sideways.

Can MACD predict stock reversals?

No indicator reliably predicts reversals. MACD divergence, histogram contraction and crossovers can warn that momentum is changing, but price confirmation and risk management remain essential.

Conclusion: MACD Is Best Used as a Trend and Momentum Tool

MACD is popular for good reason.

It condenses several useful pieces of information into one indicator:

Short-term versus long-term trend
Momentum direction
Momentum acceleration and deceleration
Signal-line crossovers
Zero-line positioning
Bullish and bearish divergence

But MACD does not eliminate the fundamental limitation of technical indicators: it is derived from price that has already occurred.

I therefore view MACD primarily as a tool for identifying and riding an existing trend, not as a magical mechanism for forecasting exactly where price will go next.

Its weakest environment is a directionless market where the moving averages repeatedly cross and generate false signals.

Its strongest use is within a defined trading framework where price structure, trend strength, volume and risk management all agree with what MACD is showing.

Most importantly, don't assume that MACD works because a few historical charts look impressive. Turn the rules into a system and test them.

Continue Learning Technical Analysis

RSI Indicator Explained: How to Use RSI for Trading

2026-08-22T18:35:15.797-07:00

What Is the RSI Indicator?

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price movements on a scale from 0 to 100. Traders commonly use RSI to identify momentum, overbought and oversold conditions, divergences, and possible changes in trend.

RSI Cheat Sheet:

Above 70: traditionally considered overbought
Below 30: traditionally considered oversold
Above 50: generally indicates stronger bullish momentum
Below 50: generally indicates stronger bearish momentum
Default setting: 14 periods
Divergence: price and RSI moving differently can warn that momentum is changing

Important: Overbought does not automatically mean "sell," and oversold does not automatically mean "buy." RSI works best when interpreted in the context of the prevailing trend.

Jump to: How RSI works · Formula · 70/30 levels · 50 level · Divergence · Settings · Strategy · FAQ

Technical analysis becomes much more useful when you stop asking an indicator to predict the future and instead ask it to describe what the market is doing right now.

That distinction is especially important with the Relative Strength Index. RSI is one of the most popular technical indicators in trading, but it is also one of the easiest to misuse.

A trader sees RSI hit 70 and immediately thinks, "the stock is overbought — sell." Another sees RSI below 30 and assumes the stock has to bounce.

Neither conclusion is necessarily true.

RSI becomes much more powerful when you understand what it actually measures: momentum. From there, RSI can help you evaluate trend strength, identify momentum shifts, spot divergences and improve the timing of entries and exits.

How Does the RSI Indicator Work?

The Relative Strength Index was developed by technical analyst J. Welles Wilder Jr. and introduced in 1978.

RSI compares the magnitude of recent gains with the magnitude of recent losses. The result is converted into an oscillator that moves between 0 and 100.

Think of RSI as a momentum gauge.

A rising RSI indicates that recent upward price movements are becoming stronger relative to downward movements.
A falling RSI indicates that recent downward movements are becoming stronger relative to upward movements.

The standard RSI uses 14 periods. On a daily chart, that normally means 14 trading days. On an hourly chart, it means 14 hourly candles. On a 5-minute chart, it means 14 five-minute candles.

That makes RSI usable across stocks, ETFs, indexes, forex and cryptocurrencies, as well as across many different trading timeframes.

How Is RSI Calculated?

You do not need to calculate RSI manually because virtually every modern charting platform does it automatically. However, understanding the formula helps explain what the indicator is actually measuring.

RSI = 100 - [100 / (1 + RS)]

RS = Average Gain / Average Loss

Suppose a stock has experienced much larger average gains than average losses over the measurement period. RS rises, causing RSI to move toward 100.

If recent losses dominate recent gains, RSI moves toward 0.

The important takeaway is that RSI isn't comparing a stock with another stock or with the S&P 500. Despite the name Relative Strength Index, it is measuring the strength of the security's own recent gains versus its recent losses.

What Do RSI 70 and 30 Mean?

The traditional RSI interpretation uses two major levels:

RSI above 70 = overbought
RSI below 30 = oversold

These levels tell you that price momentum has reached an extreme relative to its recent history.

But there is a major mistake traders make here:

Overbought does not mean a stock must fall, and oversold does not mean a stock must rise.

A stock experiencing exceptionally strong buying pressure can become overbought because its trend is extremely strong. Selling simply because RSI reaches 70 can therefore cause you to exit one of the strongest stocks in the market.

The opposite can happen during a major decline. A stock can reach RSI 30, continue falling, hit RSI 25 and remain oversold while price falls much further.

Why RSI Overbought Does NOT Automatically Mean Sell

This is arguably the single most important concept to understand about RSI.

Imagine a stock breaks out of a six-month consolidation after unexpectedly strong earnings. Buyers flood into the stock and RSI jumps from 55 to 74.

A simplistic interpretation says:

"RSI is above 70. Sell."

But RSI may be above 70 precisely because a powerful new trend has started. If price continues higher, RSI could remain between 65 and 85 for days or even weeks.

Instead of treating 70 as an automatic sell signal, ask:

Is the stock in a strong uptrend?
Did price just break resistance?
Is trading volume confirming the move?
Is trend strength increasing?
Is RSI diverging from price?

RSI should provide context, not dictate a trade by itself.

Real RSI Example: Tesla Overbought and Oversold

The Tesla chart below demonstrates why RSI extremes need context. The stock bounced after RSI reached an oversold condition and later experienced a pullback after RSI became severely overbought.

But notice something important: the larger price trend did not automatically reverse every time RSI reached an extreme. Price eventually returned to its broader direction.

This is why I prefer using RSI extremes as an alert to investigate the setup rather than as an automatic buy or sell command.

The RSI 50 Level: An Underrated Signal

Traders spend so much time watching 70 and 30 that they often ignore the middle of the indicator.

The 50 level can be extremely useful for understanding momentum.

RSI above 50: recent gains are dominating recent losses.
RSI below 50: recent losses are dominating recent gains.

That doesn't mean crossing 50 predicts the next candle. Instead, it provides a quick way to evaluate which side currently has greater momentum.

For example, suppose a stock is above its moving averages, price structure is making higher highs and higher lows, and RSI repeatedly pulls back toward 45-50 before moving higher again.

That behavior can be more useful than waiting for RSI to become oversold at 30. The stock may never reach 30 because the underlying uptrend is too strong.

RSI Bull and Bear Market Ranges

Another more advanced way to use RSI is to stop assuming that every market should oscillate evenly between 30 and 70.

Strong trends can shift the entire RSI range.

During a healthy uptrend, RSI may repeatedly find support around the 40-50 area and spend much of its time above 50.

During a persistent downtrend, RSI may repeatedly struggle around the 50-60 area and spend much of its time below 50.

This gives traders another way of thinking about RSI: the range itself can tell you something about the underlying trend.

If you want to measure the strength of that trend independently, RSI pairs particularly well with the ADX trend-strength indicator.

RSI Divergence: One of the Most Useful RSI Signals

One of my favorite uses of RSI is divergence.

Divergence occurs when price and RSI stop confirming each other.

Bullish RSI Divergence

Bullish divergence occurs when:

Price makes a lower low, but
RSI makes a higher low.

Price is technically weaker, but downside momentum is no longer confirming that weakness.

That can be an early warning that selling pressure is exhausting itself. This is personally one of the RSI setups I find most interesting because it can identify potential bounces before they become obvious on the price chart.

Bearish RSI Divergence

Bearish divergence is the opposite:

Price makes a higher high, but
RSI makes a lower high.

Price is still rising, but momentum is failing to confirm the new high. That can warn that the move is losing strength.

However, divergence is a warning, not a reversal guarantee. Price can continue trending for a surprisingly long time while divergence develops.

I am particularly cautious about using bearish RSI divergence as a standalone reason to short a stock. Shorting introduces its own risks, and strong stocks can continue climbing despite weakening momentum.

If you're considering short trades, read How to Short Stocks before treating an RSI divergence as a trade by itself.

Real Example: Bearish RSI Divergence

The chart below shows an example where price and RSI stopped confirming each other. Price continued pushing higher while RSI momentum weakened.

RSI Failure Swings

A less commonly discussed RSI technique is the failure swing. Unlike ordinary divergence, this setup focuses primarily on RSI itself.

Bullish Failure Swing

A simplified bullish failure swing occurs when RSI:

Falls into oversold territory.
Rebounds.
Pulls back but remains above its previous RSI low.
Breaks above the previous RSI swing high.

That sequence suggests momentum has transitioned from extreme weakness toward increasing strength.

Bearish Failure Swing

The bearish version occurs when RSI reaches an elevated level, pulls back, fails to make a stronger momentum high, and then breaks its previous RSI low.

Failure swings can help traders avoid the simplistic approach of buying merely because RSI touched 30 or selling merely because it touched 70.

Best RSI Settings: 7, 14 or 21?

The traditional setting developed by Wilder is 14 periods, and it remains the standard starting point.

But there is nothing magical about 14.

RSI Setting	Behavior	Potential Use
7 RSI	Fast, sensitive, more extreme readings	Short-term trading
14 RSI	Balanced/default	General-purpose analysis
21 RSI	Slower and smoother	Swing/longer-term analysis

Shorter RSI settings respond more rapidly but create more noise. Longer settings smooth the oscillator but react more slowly.

The best setting is therefore the one that works with your market, timeframe and trading system, not the setting somebody on social media claims is universally optimal.

How I Would Build an RSI Trading Strategy

RSI becomes far more useful when combined with independent information rather than stacking several indicators that all measure essentially the same thing.

A basic framework might look like this:

Determine the trend. Is price structurally trending up, down or sideways?
Measure trend strength. Use something such as ADX.
Evaluate momentum. Is RSI above or below 50? Is momentum strengthening?
Look for an RSI setup. Extreme reading, divergence, range support or failure swing.
Check price structure. Support, resistance, breakouts and previous highs/lows matter.
Confirm participation. Check whether volume supports the move.
Define risk before entering. Know where the setup becomes invalid.

The important part is that RSI becomes one component of a system rather than the entire system.

If you have never formally built one, read my guide on how to create a stock trading system.

RSI + ADX: Momentum Meets Trend Strength

RSI and ADX make a logical combination because they answer different questions.

RSI: What is happening to momentum?
ADX: How strong is the trend?

For example, an RSI reading above 70 while ADX is rising strongly can be very different from an RSI reading above 70 while the trend is deteriorating.

The first may represent strong trend momentum. The second may deserve more caution.

Read my complete ADX Indicator Guide to understand how trend strength can complement RSI.

RSI + Moving Averages

Another useful combination is RSI with moving averages.

A moving average can establish the broader trend while RSI measures the momentum occurring inside that trend.

For example, instead of automatically buying every RSI reading below 30, a trader might focus on RSI pullbacks occurring while price remains within an established bullish trend.

You can learn the differences between moving-average types in EMA vs SMA: Which Moving Average Is Better?.

For a more advanced trend visualization, see my EMA Cloud trading strategy.

RSI vs Stochastic Oscillator

RSI and the Stochastic Oscillator are both momentum oscillators, but they are not identical.

RSI focuses on the magnitude of recent gains relative to recent losses. The Stochastic Oscillator instead looks at where the current closing price sits relative to the recent high-low range.

Both can identify momentum extremes, but because they are calculated differently, they can behave differently under the same market conditions.

See my guide to the Stochastic Oscillator for a deeper comparison.

The Biggest RSI Mistakes

Most problems with RSI come from interpretation rather than the indicator itself.

Automatically selling at RSI 70. Strong trends can remain overbought.
Automatically buying at RSI 30. Weak stocks can remain oversold while continuing to collapse.
Ignoring the larger trend. RSI behaves differently in trending and ranging markets.
Treating divergence as guaranteed. Divergence can persist before price reverses.
Optimizing settings without backtesting. A setting that looks perfect on one chart may fail elsewhere.
Using RSI alone. Momentum without price structure, volume and risk management gives you an incomplete picture.

This is part of a larger problem traders have with technical analysis: indicators are tools, not crystal balls.

I've discussed that problem in more detail in What's Wrong With Technical Indicators?

Backtest RSI Instead of Guessing

If you want to know whether RSI actually provides an edge, don't rely on a few beautiful historical examples. Turn your idea into objective rules and test it.

For example:

What happens when RSI crosses back above 30?
Does requiring price above the 200-day moving average improve the result?
Does ADX improve the signal?
Do RSI divergences work better on daily charts than intraday charts?
Does RSI 20 produce better entries than RSI 30 for a particular stock?

TrendSpider can be used to automate technical analysis and test rule-based trading ideas rather than manually scrolling through hundreds of charts.

If you're interested in taking systematic trading further, Hands-On Trading With Python covers building and testing quantitative strategies programmatically.

RSI Frequently Asked Questions

What does RSI mean?

RSI stands for Relative Strength Index. It is a momentum oscillator that compares the magnitude of recent price gains with recent price losses and expresses the result on a scale from 0 to 100.

What is a good RSI to buy?

There is no universal RSI value that means "buy." RSI below 30 is traditionally considered oversold, but a stock can remain below 30 while continuing to fall. Trend, price structure, volume and other confirmation should be considered.

What does RSI above 70 mean?

RSI above 70 traditionally indicates an overbought condition. It means upward momentum has been unusually strong relative to recent history. It does not necessarily mean the stock is about to fall.

What does RSI below 30 mean?

RSI below 30 traditionally indicates an oversold condition. Downward momentum has reached an extreme, but that alone does not guarantee a rebound.

What does RSI 50 mean?

The 50 level acts as a useful momentum midpoint. Sustained readings above 50 generally indicate stronger positive momentum, while sustained readings below 50 indicate stronger negative momentum.

What is the best RSI setting?

The standard RSI setting is 14 periods. Shorter settings such as 7 react faster but create more noise, while longer settings such as 21 are smoother but slower. The appropriate setting depends on the market, timeframe and strategy.

Is RSI a leading indicator?

RSI can sometimes warn that momentum is changing before the change becomes obvious in price, particularly through divergence. However, RSI does not reliably predict future prices and should not be treated as a standalone forecasting tool.

Conclusion: RSI Is More Than Overbought and Oversold

The Relative Strength Index is far more useful than the basic "70 = sell, 30 = buy" interpretation suggests.

RSI can help you evaluate:

Momentum direction
Momentum strength
Overbought and oversold conditions
Bullish and bearish divergence
Failure swings
Bullish and bearish RSI ranges
Changes in the character of a trend

Of these, I particularly like watching for situations where price makes a lower low while RSI makes a higher low. That loss of downside momentum can produce some very interesting reversal setups.

But no RSI signal should be considered guaranteed. The better approach is to combine momentum with trend, price structure, volume and a defined risk-management system.

Learn the behavior of the indicator, test it against actual market data and then decide where RSI belongs within your own trading system.

Continue Learning Technical Analysis

Market Indicators Explained: 12 Indicators Every Trader Should Know

2026-08-22T18:30:00.000-07:00

Market Indicators: Quick Answer

Market indicators are economic, technical, sentiment, and market-based measurements traders use to understand the current market environment and estimate what may happen next.

Some of the most important indicators include inflation (CPI/PCE), employment, GDP, interest rates, Treasury yields, volume, moving averages, RSI, ADX, and market breadth.

The most important lesson is that no single indicator reliably predicts the stock market. Indicators become much more useful when several independent pieces of evidence point toward the same conclusion.

Jump to: Types · Economic Indicators · Technical Indicators · Sentiment · Examples · Trading Framework · Mistakes · FAQ

If you have ever wondered why the stock market sometimes falls after apparently good economic news—or rallies after seemingly bad news—you have discovered one of the most important principles of market analysis:

The market does not simply trade the number. It trades the number relative to expectations.

A strong employment report can be bullish because the economy is healthy. The same report can be bearish if traders believe it will keep inflation elevated and prevent the Federal Reserve from cutting interest rates.

That is why understanding market indicators requires more than memorizing that "higher GDP is good" or "lower inflation is good."

You need to understand what the indicator measures, what the market expected, how the number is changing, and how other indicators confirm or contradict it.

The 4 Types of Market Indicators

I find it more useful to divide market indicators into four broad categories:

Category	Examples	What It Tells You
Economic	GDP, CPI, PCE, employment	Health and direction of the economy
Monetary	Interest rates, Treasury yields, yield curve	Cost of money and financial conditions
Technical	Moving averages, RSI, ADX, volume	Price trend, momentum and participation
Sentiment	VIX, put/call activity, investor surveys	Fear, greed and positioning

There is another useful classification: leading, coincident and lagging indicators.

Leading indicators attempt to signal changes before the broader economy changes.
Coincident indicators tend to move with current economic conditions.
Lagging indicators confirm developments after they have already occurred.

Do not assume a leading indicator can perfectly predict the future. "Leading" describes its relationship with the economic cycle—not supernatural forecasting ability.

The Most Important Economic Indicators for Traders

1. Inflation: CPI and PCE

Inflation is one of the most market-sensitive economic variables because inflation can influence monetary policy, interest rates, bond yields, corporate costs and consumer purchasing power.

Two important measures are:

CPI (Consumer Price Index) — tracks changes in consumer prices.
PCE Price Index — another broad inflation measure closely watched by the Federal Reserve.

Traders also distinguish between headline inflation and core inflation, which excludes particularly volatile categories such as food and energy.

Example: Suppose economists expect inflation of 2.8%, but the report comes in at 3.2%. Even if 3.2% is lower than last year's inflation rate, markets may initially react negatively because inflation was hotter than expected.

This illustrates a recurring theme throughout this article:

Actual number vs. expected number often matters more to the immediate market reaction than the number by itself.

2. Employment and Nonfarm Payrolls

The U.S. employment report contains several important pieces of information:

Nonfarm payroll growth
Unemployment rate
Average hourly earnings
Labor-force participation

A healthy labor market generally supports consumer spending and economic growth.

But extremely strong employment can occasionally be interpreted negatively by markets if traders believe wage pressure and demand will keep inflation elevated.

Likewise, a mildly weaker employment report can sometimes trigger a rally if it increases expectations for easier monetary policy.

Good economic news and good stock-market news are not always the same thing.

3. Gross Domestic Product (GDP)

GDP measures the value of goods and services produced by an economy and provides one of the broadest measures of economic activity.

Accelerating real GDP growth can support corporate earnings, employment and consumer spending. Weak or contracting GDP can indicate economic deterioration.

GDP does have an important limitation for traders: it is relatively backward-looking. By the time GDP confirms a major change, financial markets may already have reacted.

This is why GDP is more useful for understanding the economic regime than as a stand-alone trading trigger.

4. Retail Sales

Consumer spending represents a major part of the U.S. economy. Retail-sales reports therefore provide clues about consumer demand.

Strong retail spending can support economic growth and corporate revenue. Persistent weakness can indicate that consumers are becoming more cautious.

5. Consumer Confidence

Consumer-confidence surveys attempt to measure how households feel about current and future economic conditions.

Confidence is useful, but it should not be interpreted in isolation. What consumers say and what consumers actually spend are not always identical.

Interest Rates: The Indicator That Touches Almost Everything

Interest rates deserve special attention because they influence the valuation of almost every financial asset.

Higher rates can:

Increase borrowing costs for companies
Increase mortgage and consumer-financing costs
Make bonds and cash more competitive with stocks
Reduce the present value of future corporate earnings

Lower rates can produce the opposite effects.

This is particularly important for high-growth companies whose valuations depend heavily on profits expected many years in the future.

Don't Just Watch What the Federal Reserve Does

One of the biggest mistakes beginners make is watching only the current Federal Funds Rate.

Markets are forward-looking.

Traders constantly price what they believe the Federal Reserve will do months into the future. Consequently, Treasury yields can move dramatically before an actual rate change occurs.

The market reaction to a Federal Reserve meeting can therefore depend more on the Fed's language and future expectations than the rate decision itself.

6. Treasury Yields and the Yield Curve

Treasury yields provide another window into expectations for inflation, growth and monetary policy.

A particularly famous indicator is the yield curve: the relationship between yields on shorter- and longer-term Treasury securities.

Normally, investors expect greater compensation for lending money for longer periods. Occasionally, however, short-term yields rise above longer-term yields. This is known as an inverted yield curve.

Yield-curve inversions have historically attracted attention as recession warning signals.

However, there is an important distinction:

An inverted yield curve is a warning indicator—not a timer. Markets can continue rising after an inversion, and recession timing can vary substantially.

Technical Market Indicators: What Is Price Actually Doing?

Economic indicators tell you about the environment.

Technical indicators tell you what traders are actually doing with their money.

That distinction matters.

You can have a convincing bearish economic thesis while the stock market continues making higher highs. Price should therefore remain part of the analysis.

7. Moving Averages

Moving averages smooth price fluctuations and make the underlying trend easier to see.

Two of the most common are:

SMA — Simple Moving Average
EMA — Exponential Moving Average

EMAs put greater weight on recent prices and therefore react faster. SMAs generally move more slowly and smoothly.

For a detailed comparison, read my guide to EMA vs SMA moving averages.

8. EMA Clouds

A useful extension of traditional moving averages is the EMA Cloud indicator.

Instead of looking at a single moving-average line, an EMA Cloud shades the region between a faster and slower EMA. This makes trend direction and potential pullback zones much easier to visualize.

The important principle is not the color of the cloud itself. It is whether the market is demonstrating a persistent trend or repeatedly whipsawing through the indicator.

9. Trading Volume

Price tells you what happened.

Volume helps tell you how much participation was behind it.

Consider two stocks breaking above resistance:

Stock A breaks resistance on extremely low volume.
Stock B breaks resistance while trading three times its normal volume.

Everything else being equal, Stock B demonstrates much stronger market participation.

This does not guarantee the breakout succeeds, but volume provides valuable context.

I explain this in considerably more detail in How a Stock's Volume Affects Price.

10. RSI

The Relative Strength Index (RSI) is a momentum oscillator generally displayed on a 0–100 scale.

Many traders associate readings above 70 with "overbought" and below 30 with "oversold."

Be careful with that interpretation.

A powerful uptrend can remain overbought for an extended period. An oversold stock can continue falling.

Overbought does not automatically mean sell. Oversold does not automatically mean buy.

See my full RSI indicator guide.

11. ADX

The Average Directional Index (ADX) addresses a different question:

How strong is the trend?

That makes ADX particularly useful when combined with trend-following systems. A moving-average strategy may behave very differently during a powerful trend than during a sideways market.

Read: How the ADX Trend Indicator Works.

12. Market Breadth

A stock index can rise even when relatively few stocks are participating.

Market breadth attempts to look underneath the index by asking questions such as:

How many stocks are advancing versus declining?
How many stocks are making new highs?
How many stocks are above important moving averages?

Imagine the S&P 500 makes a new high, but fewer and fewer individual stocks participate in the rally.

The index still looks healthy on the surface, but weakening breadth may reveal deterioration underneath.

Another breadth tool worth understanding is the McClellan Oscillator.

Sentiment Indicators: Measuring Fear and Greed

Markets aren't controlled by economic statistics alone. Human behavior matters.

Fear can cause investors to dump assets below reasonable valuations. Euphoria can cause investors to pay increasingly irrational prices.

Useful sentiment measurements include:

Volatility measures such as the VIX
Put/call activity
Investor sentiment surveys
Fund flows
Speculative options activity

Sentiment becomes particularly interesting at extremes.

However, extreme optimism does not automatically mean the market is about to crash, just as extreme fear does not guarantee an immediate bottom.

Sentiment is best treated as context rather than a mechanical buy/sell signal.

How Market Indicators Work Together: Real Trading Examples

Example #1: The Bullish Alignment

Imagine the following environment:

Inflation is declining.
The Federal Reserve is becoming less restrictive.
Treasury yields are falling.
Employment remains healthy.
The S&P 500 is above its major moving averages.
Market breadth is improving.
Breakouts are occurring on strong volume.

Notice what happened here.

We did not make a bullish decision because of one indicator. Macro, monetary, technical and participation indicators all began telling a similar story.

Example #2: Good Economic News That Causes Stocks to Fall

Now imagine:

Payroll growth massively beats expectations.
Wages accelerate.
Inflation is already running hotter than desired.
Treasury yields immediately rise.

"Jobs are strong" sounds bullish.

But traders might conclude that the strong labor market increases the probability of tighter monetary policy.

Growth stocks could therefore decline despite apparently good economic news.

Example #3: A Technical Warning Before the Economic Data Looks Bad

Suppose:

GDP is still growing.
Unemployment remains relatively low.
Headline economic reports still appear healthy.

But simultaneously:

Market breadth deteriorates.
Major indexes fall below long-term moving averages.
Down-volume expands.
Momentum weakens.

The economic data may be lagging what financial markets are already anticipating.

This is precisely why combining economic and technical analysis can be more useful than declaring one school of analysis superior to the other.

My Framework for Using Market Indicators

Instead of collecting dozens of indicators, I prefer thinking in layers.

Layer 1: Economic Regime

Ask:

Is economic growth accelerating or slowing?
Is inflation accelerating or declining?
Is employment strengthening or weakening?

Layer 2: Monetary Environment

Ask:

Are financial conditions becoming easier or tighter?
Are yields rising or falling?
What is the market expecting from the Federal Reserve?

Layer 3: Market Trend

Ask:

Is price above or below important moving averages?
Are higher highs and higher lows forming?
Is ADX suggesting a meaningful trend?

Layer 4: Participation

Ask:

Is volume confirming the move?
Is market breadth expanding?
Are many stocks participating or only a handful?

Layer 5: Sentiment

Finally ask:

Is fear unusually high?
Is speculation becoming extreme?
Is investor positioning dangerously one-sided?

The objective isn't to find an indicator that predicts everything.

The objective is to build a weight of evidence.

Expectations Matter More Than Most Beginners Realize

This deserves its own section because it is one of the biggest conceptual mistakes people make when following economic news.

Markets continuously attempt to price the future.

Suppose everyone expects terrible earnings from a company. The company reports bad earnings—but the results aren't nearly as terrible as investors feared.

The stock can rally.

Conversely, a company can report record profits and fall because traders expected even better results.

The same principle applies to CPI, employment, GDP and Federal Reserve decisions.

Therefore, when a major indicator is released, ask three questions:

What was expected?
What actually happened?
How did the market react?

Number three is frequently the most interesting.

If supposedly terrible news cannot push the market lower, sellers may already be exhausted. If fantastic news cannot push the market higher, buyers may already be fully positioned.

The reaction to information can sometimes tell you more than the information itself.

7 Mistakes Traders Make With Market Indicators

Using one indicator in isolation. No single economic or technical indicator describes the entire market.
Ignoring expectations. Markets react to surprises, not simply whether a number appears objectively good or bad.
Confusing correlation with causation. Two indicators moving together does not prove one causes the other.
Treating lagging indicators as predictions. Many indicators confirm developments that price has already begun discounting.
Over-optimizing technical indicators. Finding settings that perfectly fit historical data can create a system that fails completely in the future.
Ignoring the market regime. Trend-following indicators behave differently in strong trends than in sideways markets.
Changing your interpretation to fit your existing opinion. Confirmation bias can turn market analysis into an elaborate way of telling yourself what you already wanted to believe.

I've written separately about common trading mistakes and why traders should build a repeatable stock trading system instead of improvising every decision.

Tools for Tracking and Testing Market Indicators

The best indicator is not particularly useful if you have no repeatable process for testing it.

For technical indicators, scanning and backtesting can help determine whether an idea actually worked historically instead of relying on a few attractive charts.

Trading & Research Tools I Use/Recommend

TrendSpider — All-in-One Market Research & Trading Software
Useful for charting, scanning and systematically testing technical-indicator ideas instead of relying on visual guesses. Exclusive discount available through my link.

TipRanks — Get 50% Off
Useful when you want to combine market-level analysis with company fundamentals, analyst data and individual-stock research.

Kalshi — Join and Get $25
Prediction markets can also provide an interesting view of how participants are pricing economic and event outcomes.

Learn How to Trade With AI and Python
For traders interested in moving beyond visual analysis and testing strategies quantitatively.

Disclosure: Some links above are affiliate links. I may receive a commission at no additional cost to you.

Market Indicators FAQ

What are the most important market indicators?

Important indicators include inflation, employment, GDP, interest rates, Treasury yields, market breadth, volume, moving averages and momentum indicators. The best combination depends on whether you are analyzing the economy, the overall market or an individual stock.

What is the best indicator for predicting the stock market?

There is no single best indicator. Markets are affected by economic growth, inflation, monetary policy, corporate earnings, liquidity, positioning and investor psychology. Combining independent indicators is generally more informative than relying on one.

What are leading market indicators?

Leading indicators are measurements that tend to change before broader economic activity changes. They can provide early clues about economic direction, but they cannot reliably predict every recession, rally or market decline.

Are technical indicators better than economic indicators?

They answer different questions. Economic indicators describe the economic environment. Technical indicators analyze price, trend, momentum and market participation. Combining both can provide a more complete view.

Can market indicators predict a stock market crash?

No indicator can reliably predict the exact timing of a crash. Deteriorating breadth, tightening financial conditions, weakening economic activity or extreme valuations can indicate elevated risk, but markets can remain strong or weak much longer than expected.

Why does the stock market sometimes rise on bad economic news?

Because markets trade expectations. Weak economic data can sometimes increase expectations for lower interest rates or easier monetary policy. If the bad news was already expected—or less bad than feared—stocks can rise.

How many indicators should I use?

More is not necessarily better. Using five indicators that measure essentially the same thing can create the illusion of confirmation. It is usually more useful to combine indicators measuring different dimensions such as trend, momentum, volume, economic conditions and sentiment.

Build Your Market Analysis Toolkit

If you want to go deeper, these guides cover many of the individual indicators and systems discussed above:

EMA Cloud Indicator Strategy — visualize trends and pullbacks.
How to Trade Using Ichimoku Clouds — trend, momentum and support/resistance in one framework.
EMA vs SMA — understand the two most important moving-average types.
ADX Trend Indicator — measure trend strength.
RSI Explained — understand momentum and overbought/oversold conditions.
Bollinger Bands Explained — visualize volatility and price extremes.
Elder Impulse System — combine trend and momentum.
How Stock Volume Affects Price — understand market participation.
MACD Indicator & Divergence — another approach to trend and momentum.
How to Create a Stock Trading System — turn indicators into repeatable rules.

Conclusion: Indicators Are Evidence, Not Answers

Market indicators are valuable because they reduce an extraordinarily complicated financial system into measurements we can analyze.

But indicators are not crystal balls.

GDP can tell you about economic growth. Inflation can influence expectations for interest rates. Treasury yields reveal information about financial conditions. Moving averages reveal trend. Volume measures participation. Momentum indicators show how aggressively price is moving.

None tells the entire story.

The real skill is learning how those pieces interact.

Instead of asking "What indicator tells me whether to buy?", ask:

"What is the weight of the evidence telling me about the market right now?"

That shift—from searching for a magic indicator to building a repeatable analytical framework—is where market indicators become genuinely useful.

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Top Stock Trading Books

2026-08-20T21:27:49.869-07:00

Best Trading Books (Short List)

If you only read 3 books, start here:

Hedge Fund Market Wizards (process + edge)
Technical Analysis of the Financial Markets (core TA foundation)
Trading in the Zone (psychology + probability mindset)

Jump to: Must-Read · Technical Analysis · Psychology · How to Read These · Free Resources · FAQ

Becoming a consistently profitable trader is hard—most retail traders never get there. In the beginning, I wasted a lot of time bouncing between random strategies, watching “guru” videos, and taking trades without a real framework.

The right books fix this by teaching how professionals think: risk management, probability, trade selection, and execution discipline. Below is my curated list of books that actually moved the needle, broken into: Must-Read Trading Books, Technical Analysis, and Trading Psychology.

Pro tip: Read + apply. Don’t just collect information.

If you want a clean setup to study charts while you read, try TrendSpider (exclusive discount code) for charting + backtesting, and TipRanks for research context (news, analyst moves, sentiment).

Best Must-Read Trading Books

Hedge Fund Market Wizards: How Winning Traders Win — Jack D. Schwager

Schwager interviews elite traders and exposes the consistent pattern behind long-term success: edge + risk control + repetition. Profitable traders don’t “predict”—they run a process.

Stock Investing for Dummies — Paul Mladjenovic

A simple, surprisingly strong foundation for stocks, ETFs, diversification, and risk. Great if you want structure without overwhelm.

Best Books on Technical Analysis

Technical Analysis of the Financial Markets — John Murphy

The gateway into TA: trends, support/resistance, chart patterns, indicators, and confirmations. Also doubles as a reference guide.

Encyclopedia of Chart Patterns — Thomas N. Bulkowski

The chart pattern bible. The real value is the statistics and reliability behind each pattern (not just the drawings).

Japanese Candlestick Charting Techniques — Steve Nison

One of the fastest ways to improve entries/exits. Candlesticks (in context) help you avoid buying tops and shorting bottoms.

Two free candlestick articles on this site: Mastering the Art of Japanese Candlestick Reading (recommended first), and How To Unlock The Power Of Japanese Candlesticks.

Bollinger on Bollinger Bands — John Bollinger

A volatility framework that’s actually grounded in statistics: squeezes, mean reversion, and volatility expansion.

If you want the practical version, read my guide: Why Mastering Bollinger Bands Is A Must .

Best Books on Trading Psychology

The New Trading for a Living — Alexander Elder

Great blend of psychology + discipline + charting. Helps you become a more “complete” trader.

Trading in the Zone — Mark Douglas

The probability mindset. If you keep breaking rules or revenge trading, this book will hit you in the face (in a good way).

Also check out: 4 Top Must-Read Trading Books From a Hedge Fund Manager .

How to Read These Books Without Wasting Time

Most people read trading books like entertainment—then nothing changes. Here’s a simple method that actually works:

Pick one category (TA or Psychology) and commit to 30 days.
Extract rules: write down 10–20 actionable rules (entries, exits, risk, mindset).
Backtest 1–2 ideas (even basic manual review is fine).
Paper trade until execution becomes boring.
Go small and scale only after consistency.

If you want a structured path, start here: How to Create a Stock Trading System .

Free Resources

If you prefer free content, browse the (frequently updated) library here: Stock Market Education.

Want to practice probability trading without guessing direction? Prediction markets can be a good sandbox. If you’re curious, check out Kalshi (get $25 when you join).

FAQ

Which book should a complete beginner start with?

Start with Stock Investing for Dummies , then read Hedge Fund Market Wizards .

Which book helps the most with discipline and emotions?

Trading in the Zone . It forces you to think in probabilities, not predictions.

What’s the best “technical analysis foundation” book?

Technical Analysis of the Financial Markets (Murphy). It’s the clearest all-around TA base.

Which book is best if I want data-backed chart patterns?

Encyclopedia of Chart Patterns (Bulkowski).

Do I need to read all of these?

No. If you read one from each category and apply the ideas, you’ll beat most traders who only consume content. A solid trio is: Market Wizards + Murphy TA + Trading in the Zone.

How Stock Options Are Priced

2026-08-12T18:03:25.475-07:00

How Are Stock Options Priced? (Quick Answer)

An option’s price is mainly driven by intrinsic value (how in-the-money it is) plus time value (how much time + volatility is left). Practically, traders watch four forces:

Delta: how much the option moves when the stock moves
Gamma: how fast delta changes (especially near expiration)
Theta: time decay (the “rent” you pay as a buyer)
Implied Volatility (IV): how expensive options are relative to expected movement

Cheat Sheet:

Deep ITM calls = you’re mostly paying for delta (stock-like exposure)
ATM near expiration = you’re paying for gamma (explosive sensitivity)
OTM weeklies = you’re paying for theta + IV (usually the most punishing setup)

Jump to: Basics · Black-Scholes · The Greeks · Cheap vs Expensive Options · Implied Volatility · Common Mistakes · FAQ · Conclusion

Options are usually a bad deal for most retail traders because losses compound fast and the math is unforgiving. But since people trade them anyway, the real goal is to understand the mechanics deeply enough to: (1) avoid the common traps, and (2) recognize the rare situations where an option may actually be mispriced.

Most traders lose because they buy the wrong “ingredient” at the wrong time: they pay too much IV, underestimate theta, and confuse “being right” with “getting paid.” This guide explains how options are priced in plain English and connects the math to the only drivers that matter: Delta, Gamma, Theta, and Implied Volatility.

By the end, you’ll be able to look at an option chain and quickly answer: Is this option cheap or expensive? And what exactly am I paying for?

If you’re still deciding whether you should trade options at all, read: Why Options Trading Is Bad.

Basics of Options Pricing

An option is a contract that references an underlying asset (usually a stock). There are two main types:

Call: gives the buyer the right (not obligation) to buy shares at a fixed strike price before expiration
Put: gives the buyer the right (not obligation) to sell shares at a fixed strike price before expiration

Options are “priced” because the market is constantly updating two things: probability (will it finish in-the-money?) and magnitude (how big could the move be?).

Simple mental model: Option price = Intrinsic Value + Time Value.

Intrinsic value: how much the option is already in-the-money
Time value: what you pay for possibility (time + volatility + rates + dividends)

The Black-Scholes Model (Why It Matters)

There are multiple pricing models, but Black-Scholes is the classic framework used to price (primarily) European-style options under idealized assumptions. Even if the assumptions are imperfect, it’s still useful because it shows what actually moves option prices: current price, strike, time, interest rates, dividends, and volatility.

The Black-Scholes Pricing Formula

Where:
C = Call option price
S = Current stock (underlying) price
K = Strike price
r = Risk-free interest rate
t = Time to maturity
N = Normal distribution (probability function)
δ = Dividend yield
σ = Volatility

Understanding Options Pricing in Plain English

You don’t need to memorize the formula to trade better. You need to understand the levers the formula represents:

More time = more chance to move = options cost more
More volatility = wider possible outcomes = options cost more
Closer to the strike (at-the-money) = higher sensitivity = higher “premium”
Deep in-the-money = behaves more like stock (you’re mostly paying for delta)

The Greeks That Actually Move Option Prices

Delta

Delta tells you how much the option price tends to change for a $1 move in the stock (roughly, in small moves). Deep out-of-the-money options usually have low delta. Deep in-the-money options have high delta.

Example: If delta is 0.50 and the stock moves $10, the option might gain roughly $5 (all else equal).

Delta notes:

Delta generally changes fastest as the option approaches expiration (especially near the strike)
Delta is not constant—gamma adjusts it as price moves

Gamma

Gamma is the rate of change of delta. It’s biggest when the option is near the strike and close to expiration. That’s why options can feel “dead” and then suddenly explode when price approaches the strike late in the cycle.

Gamma notes:

Gamma is highest for near-the-money options
Gamma is smaller for deep in-the-money and far out-of-the-money options
Long options have positive gamma; short options have negative gamma

Theta

Theta measures time decay. If price doesn’t move enough (fast enough), your option bleeds value each day. This is why buying short-dated out-of-the-money options is so brutal: you’re paying a lot for possibility, and time is not your friend.

Theta notes:

Theta is typically negative for option buyers and positive for option sellers
Theta accelerates as expiration approaches
At-the-money options often have high theta
OTM options with high IV can have punishing theta

How to Tell If an Option Is Cheap or Expensive

Most traders obsess over direction. Professionals obsess over price vs value. An option can be “cheap” in dollars and still be expensive in implied probability. Use this framework to avoid overpaying:

4 ways to sanity-check option pricing:

IV vs its own history: if IV is high relative to recent levels, options are usually expensive
Time to catalyst: IV often inflates into earnings/Fed/CPI and deflates after (“IV crush”)
Days to expiration (DTE): short DTE means theta is aggressive; you need the move now
Liquidity: wide spreads quietly destroy your edge (avoid illiquid chains)

Rule of thumb: If you can’t explain what you’re paying for (delta vs gamma vs IV), you’re probably paying too much.

Implied Volatility (IV): The Real Pricing Battleground

Implied Volatility is the market’s expectation of future movement. When IV is high, options are expensive. When IV is low, options are cheaper. IV often expands ahead of major events (earnings, FDA decisions, Fed announcements) and collapses afterward (the classic IV crush).

Key idea: Big option wins typically come from mispriced volatility or mispriced timing, not “being right once.” In hype cycles, IV and order flow can distort pricing. When that distortion is wrong, options can become mispriced.

Practical IV rules:

Fast recent moves usually = higher IV
High IV can collapse even if price doesn’t reverse (be careful buying into hype)
“Cheap” options aren’t always cheap—sometimes IV is low for a reason

Want to spot IV + catalysts faster (and reduce guesswork)?

I use:

TrendSpider for charting, structure, and backtesting (exclusive discount code)
TipRanks for research context (analyst moves, sentiment, headlines)

These tools won’t make you profitable by themselves—but they can help you move faster and avoid obvious mistakes.

Common Option Pricing Mistakes Retail Traders Make

These are the traps that blow up most accounts:

Buying OTM options purely because they’re cheap (cheap can mean low probability + massive theta decay)
Ignoring IV crush around catalysts (earnings is the #1 offender)
Confusing “being right” with “making money” (timing + IV matters)
Overpaying for short-dated gamma without a strong reason the move must happen now
Using options to avoid position sizing (leverage magnifies errors)

Do this / Don’t do this:

Do:

Trade liquid chains (tight spreads)
Know the catalyst date and what “IV crush” means
Size small and survive long enough to learn
Take profits when you get the move (don’t worship settlement)

Don’t:

Buy OTM weeklies “because they’re cheap”
Hold through earnings without understanding volatility repricing
Confuse a high IV option with “more upside”
Go all-in on one idea

FAQ: Options Pricing Questions (Quick Answers)

What is IV crush?

IV crush is when implied volatility drops sharply after a major event (usually earnings). Even if the stock moves in your direction, your option can lose value because the “volatility premium” gets removed.

Which Greek matters most for beginners?

Start with delta (movement) and theta (decay). Many beginners lose because they underestimate theta and overpay IV.

Why do options lose value even if the stock doesn’t move?

Because time passes. If the stock doesn’t move enough, theta decays the contract each day. Also, IV can drop, which reduces premium.

Are deep ITM calls safer?

They can be less sensitive to IV and theta than OTM contracts because you’re paying mostly for delta. But they’re still leveraged, still risky, and still require risk management.

Conclusion

Options pricing is ultimately a probability game. The Black-Scholes framework points you to the real drivers: price, time, and volatility. Delta, gamma, and theta describe how your option responds as those drivers change. And implied volatility is the market’s “pricing glue” that often creates the biggest opportunities—and the biggest traps.

TipRanks 50% Off Discount Coupon Code

2026-08-06T22:09:03.650-07:00

TipRanks Discount Code

ChartLearning readers have a special offer: use my TipRanks discount link to get 50% off.

Quick take: TipRanks is an investment research platform that aggregates analyst ratings, fundamentals, insider activity, and sentiment data into one interface.

Best for: investors/traders who want faster due diligence without bouncing between 10 tabs.

TipRanks Features

AI Assistant (Spark): AI-generated stock breakdowns to summarize fundamentals, ratings, and competitive context.
Analyst Ratings: Aggregates Wall Street ratings and shows consensus signals.
Stock Performance Tools: Track historical performance and key moves around events.
Insider Trading: Visibility into insider buying/selling activity.
Hedge Fund Activity: Tracks reported institutional positioning.
News & Sentiment: Aggregates news and gauges sentiment shifts.
Portfolio Tracking: Monitor holdings and performance in one place.
Dividend Calendar: Track upcoming dividend dates and income planning.
IPO Tools: Research newly listed companies and IPO-related data.

TipRanks AI Assistant Video

✅ TipRanks 50% Promo Code (via my link)

Tip: Create your TipRanks account first. If you have questions about the service, email me at chartlearner@gmail.com before using the affiliate link.

Disclosure: This post contains affiliate links. If you use them, I may earn a commission at no extra cost to you.

Why You Should Sell Options Instead Of Buying

2026-07-31T18:37:11.426-07:00

Selling Options (Quick Take)

Selling options can look “easier” than buying because time decay often works in the seller’s favor. But the trade-off is brutal: many short option strategies have limited upside and large (sometimes unlimited) downside.

High-level rule: If you’re going to sell options, favor defined-risk structures (spreads, iron condors) or cash-secured puts / covered calls over naked positions.

Jump to: Why sell options? · Pros & cons · Safer “first” strategies · Strategy breakdowns · Risk management · Common mistakes · FAQ · Conclusion

Before we start: I’m firmly against options for most retail traders because the math is unforgiving and losses compound fast. I’ve written about that here: Why Options Trading Is Bad.

That said—people trade options anyway. So the goal of this article is not to hype options. It’s to explain how selling works, where the real risks are, and what “safer” option-selling structures look like.

Why People Sell Options (Instead of Buying)

The common idea is: “Most option buyers lose, so sellers must win.” There’s some truth here—option prices include time value, and time decay (theta) often benefits sellers.

But the part people ignore is the distribution of returns: sellers can rack up many small wins… and then take one large loss that wipes out months of progress. That’s why structure + risk control matters more than being “right.”

Advantages and Disadvantages of Selling Options

Advantages

Theta tailwind: time decay can work in your favor when you sell premium.
Defined “edge” concept: many options are overpriced during hype/volatility spikes.
Flexibility: spreads and condors let you tailor payoff to your thesis (range-bound vs directional).
Premium collection: you get paid upfront (but that does not mean it’s “free money”).

Disadvantages (the real ones)

Asymmetric risk: many short-option trades have small upside and big downside.
Gap risk: stocks can gap overnight and skip your stop entirely.
Assignment + margin: you must understand assignment, buying power, and liquidation risk.
Time + monitoring: managing short premium positions can be more work than people expect.
Volatility regime changes: quiet markets can turn violent fast (and short premium gets punished).

If You Sell Options, Start Here (Safer “First” Strategies)

If someone insists on selling options, these tend to be the least reckless starting points:

1) Cash-Secured Put (CSP)

You sell a put while keeping enough cash to buy 100 shares at the strike. If assigned, you own the stock at an effective discount (strike minus premium).

Best use: when you genuinely want to own the stock at a lower price and can hold through volatility.

2) Covered Call

You own 100 shares and sell a call against them. You collect premium but cap upside above the strike.

Best use: when you’re fine selling your shares at the strike and want to monetize sideways periods.

These two “covered” approaches avoid the worst blow-up behavior of naked options because you have collateral: cash (CSP) or shares (covered call).

Types of Option Selling Strategies (Explained)

Naked Calls (High Risk)

A naked call means you sell a call option without owning the stock (or without another option “covering” the risk). You’re betting the stock stays below the strike through expiration.

Max profit: the premium collected.
Max loss: theoretically unlimited (a stock can double/triple, especially during squeezes).

This is one of the fastest ways to blow up because one outlier move can wipe out a long string of small wins.

Naked Puts (Medium/High Risk if Unsecured)

Selling a put without a stock position means you’re betting the stock stays above the strike. If price falls below the strike, assignment can force you to buy shares at the strike.

Max profit: the premium collected.
Max loss: large (stock can fall dramatically), but not infinite.

Important distinction: A “naked” put becomes much more reasonable when it’s truly cash-secured. If you don’t have the cash, it’s basically leveraged risk.

Butterfly Spread (Defined Risk)

A butterfly combines multiple contracts at three strikes to create a trade that benefits if price finishes near a target. This is a defined-risk strategy: you know your maximum loss when you enter.

Best use: when you believe price will stay near a specific level into expiration (lower volatility thesis).

There are many variations of the butterfly spread.

Iron Condor (Defined Risk Range Trade)

An iron condor is a range-bound premium-selling strategy: you sell a put spread and a call spread, collecting premium while defining risk with “wings.”

When it works: the stock stays between your short strikes until expiration.
When it fails: volatility expands and price trends hard past one side.

Common use-case is when you believe a stock will chop sideways (including some earnings setups), but you must respect gap risk and IV crush dynamics.

Earnings Premium Selling (High Variance)

Earnings season offers big premiums because uncertainty is high. Sellers try to exploit that by selling IV into the event.

The problem: earnings can cause violent gaps, and short option positions can get destroyed in one print. Many traders underestimate how quickly “one bad earnings” wipes out weeks of gains.

My personal view: I’ve rarely seen a consistent retail earnings-selling strategy that survives across market regimes. It can work for a while, then fail hard.

Selling Volatility (Naked Premium Selling)

“Selling volatility” often means selling naked calls/puts or short strangles/straddles without defined risk. Your upside is capped to premium collected, while downside can be huge.

If you sold naked calls during something like a squeeze, losses can become catastrophic quickly. This is often amplified by a gamma squeeze.

Risk Management (What Actually Keeps Sellers Alive)

Most “option selling” advice is incomplete because it explains setups but skips survival rules. Here are the risk controls that matter:

Prefer defined risk: spreads/condors over naked positions.
Size small: don’t allocate a huge % of your account to one short premium idea.
Avoid meme/low-float squeeze candidates: tail risk is real.
Respect liquidity: wide spreads and illiquid chains make exits painful.
Plan exits before entry: profit target, max loss, and “what if it gaps?” scenario.
Know assignment mechanics: especially around ex-dividend dates and deep ITM options.

If you want to understand the drivers behind premium, read: How Options Are Priced.

Common Mistakes (That Blow Up Option Sellers)

Calling premium “income” without accounting for tail risk.
Selling naked calls because “it never goes that high.” (Famous last words.)
Overleveraging with margin, then getting liquidated at the worst time.
Selling earnings premium without accepting gap risk is the real product you’re short.
Holding too long (not taking profits early when premium collapses).
Ignoring regime: short premium is easier in calm markets than in volatility expansions.

FAQ

Is selling options “better” than buying options?

Often, selling has a structural edge because of time decay, but the trade-off is tail risk. Selling is not automatically “better”—it’s a different payoff profile.

What is the safest way to sell options?

Generally: cash-secured puts, covered calls, and defined-risk spreads. The “least safe” are naked calls and uncovered short volatility strategies.

Why do sellers have many wins but still lose money overall?

Because the average win is small and the occasional loss is huge. One tail event can erase a long streak of gains. That’s why sizing and defined-risk structures matter.

Conclusion

Buying options often behaves like a lottery ticket. Selling options can be more “grindy” and statistically favorable— but only if you respect the asymmetry and avoid strategies that hide unlimited downside.

If you insist on selling options, the best approach is usually: start with covered/cash-secured positions, use defined-risk structures when possible, and keep size small enough that one bad move can’t end your account.

Tools (Optional)

If you’re building a real trading process (and not gambling), tools that help with research, process, and probability thinking can matter. Here are a few I use/recommend:

TrendSpider — all-in-one market research & charting (exclusive discount code)
TipRanks — analyst/research platform (promo link)
Kalshi — trade real-world outcomes with defined risk (get $25)

A Guide To Becoming A Profitable Trader

2026-07-23T14:38:37.154-07:00

How To Make Money Trading Stocks (TL;DR)

If you want to survive long enough to become profitable, your job is to:

Learn the foundations (risk, charts, process)
Master 1–2 core tools (candlesticks + one volatility/trend framework)
Backtest so you don’t “pay tuition” with real money
Trade a repeatable system and avoid leverage traps (options + aggressive shorting)

Jump to: Step-by-step · Tools · Common mistakes · FAQ · Conclusion

Most retail traders lose long-term, and an even smaller percentage consistently beats the market. If you keep trading randomly long enough, the odds catch up.

I had the classic start: losing, breaking even, then losing again. The turning point wasn’t a “secret indicator.” It was building a repeatable process: studying price action, learning volatility, and testing rules before risking real capital.

This guide is the noise-free checklist I wish I had early. If you follow it seriously, you’ll at least lose a lot less money. If you do the work, you can build a system that gives you a real chance at becoming profitable.

Step-by-Step: How To Make Money Trading Stocks

1) Start With One Beginner Foundation Book

Most people skip the basics and jump straight into “setups.” Don’t. Read one beginner book that covers market structure, risk, chart reading, and position sizing.

Recommended: Trading For Dummies — a no-ego starting point that gives you the broad base most traders are missing.

2) Master One Volatility Framework: Bollinger Bands

Bollinger Bands help you see when price is statistically stretched and when volatility is expanding or contracting. They won’t “predict” the future, but they dramatically improve timing and help you avoid holding too long.

Start here: Master Bollinger Bands and my “starting point” guide: Why Mastering Bollinger Bands Is A Must.

3) Master Japanese Candlesticks (Price Action)

Candlesticks compress a ton of information into one view: trend, momentum, rejection, and potential reversals. They’re also one of the quickest ways to stop making obvious entry mistakes.

Guide here: Master Japanese Candlesticks.

4) Build a Trading System (and Backtest It)

This is where the real money is: a trading system is just rules that you can repeat. Example: “If X happens, I enter. If Y happens, I exit. If Z happens, I cut risk.”

You have two choices:

Learn the hard way with real money (expensive).
Use backtesting to see if your idea has any edge before risking capital (smart).

Start here: How to Create a Stock Trading System (with backtesting) .

5) Use a “Cluster of Signals” (Don’t Overtrade)

One indicator is noise. Two to three aligned signals is a setup. I recommend requiring a cluster to enter and to exit:

Example buy cluster: price touches the lower Bollinger Band + a bullish reversal candle forms + trend context supports a bounce.

This reduces overtrading and increases selectivity. More on the concept: Why Most Indicators Fail (and how to think differently).

6) Avoid the Two Fastest Account Killers: Options and Aggressive Shorting

Options: most beginners get destroyed by time decay and leverage. Read: Stop Trading Options (and why).

Shorting: upside is capped, downside can be extreme, and squeezes happen. Read: How to Short Stocks (and why you probably shouldn’t).

7) Automate Your Watchlist (Scan, Then Decide)

You can’t manually review thousands of charts every day. Build a pipeline:

Use a scanner to surface candidates
Apply your checklist (trend + volatility + candle context)
Only then consider entries

Automation saves time and prevents “random chart hunting.”

8) Don’t Make “Full-Time Trader” the Goal

Trading full-time is often boring, stressful, and mentally unhealthy for most people. Treat trading like a serious side craft. If full-time happens later, fine—but don’t build your identity around it early.

9) Maintain a “Ban List” (Avoid Landmines)

Create a list of things you do not trade:

companies you don’t understand
illiquid small caps with wide spreads
low-float squeeze magnets (unless that’s your specialty)
foreign listings you can’t confidently evaluate

The goal is survival. You don’t need every trade—just the ones with good asymmetry.

Tools That Help You Improve Faster

Tools don’t create edge by themselves, but they can speed up your learning and reduce mistakes:

TrendSpider — charting + scanning + backtesting (exclusive discount code)
TipRanks — research/analyst context (promo link)
Kalshi — defined-risk event markets (get $25)

Common Mistakes That Keep Traders Losing

Random entries with no tested edge
Overtrading because you “need action”
Position sizing too big (one loss breaks the account mentally and financially)
Switching strategies weekly instead of mastering one system
Using leverage (options) before you can trade stock profitably

FAQ

How long does it take to become profitable?

If you’re actually testing rules, journaling, and trading small, most people need months to years—not weeks. The fastest path is focusing on one system and removing randomness.

What should I learn first: indicators or price action?

Start with candlesticks + basic trend, then add one volatility tool (Bollinger Bands). Use indicators as structure, not as fortune tellers.

What’s the best “first” book if I’m serious?

Start with: Trading For Dummies — then move into your system-building and backtesting work.

Conclusion

Making money trading stocks isn’t about finding a secret indicator—it’s about building a repeatable process: learn the foundations, master candlesticks + volatility, backtest a simple system, and avoid leverage traps.

If you liked this guide, read: Mistakes Traders Should Avoid .

Four Advanced Books To Take Your Trading To The Next Level

2026-07-18T08:43:45.640-07:00

Dylan Johnson — Hedge Fund Manager

4 Advanced Trading Books (Read In This Order)

These are not beginner books. They’re for traders who want to design, test, and evaluate systems with hedge-fund style rigor (risk management, robustness, and statistical validation).

Best for: traders who already understand the basics (charts, order types, position sizing) and now want to build quantitative / systematic strategies that can survive real markets.

Jump to: Who this is for · Reading order · FAQ

If you’re eager to take trading to the next level, the four books below (in the exact order listed) will help you think about markets like a professional systems trader.

They cover the full lifecycle of systematic trading:

Idea generation (types of systems and why they work)
Research process (design, testing, evaluation)
Evidence-based validation (statistics, robustness, and realistic expectations)
Optimization without overfitting (walk-forward, out-of-sample testing)

Warning: if you’re a new trader, start with the basics first. These books assume you already know foundational concepts.

Helpful Tools for System Testing

If you want to speed up research and validation, having proper charting + backtesting infrastructure matters. For many traders, the fastest “non-coding” on-ramp is a platform that supports scanning, alerts, and backtesting: TrendSpider (exclusive discount code).

The Books (In Chronological Reading Order)

1) New Trading Systems and Methods

This is the “systems encyclopedia.” It surveys major system families—trend-following, momentum, regression, time-based methods, and more—while tying each approach to testing, risk, and money management.

Why it’s first: it expands your menu of researchable ideas and gives you language to think in “system components” instead of random indicators.

Takeaway: you’ll stop asking “what indicator should I use?” and start asking “what market condition does this exploit, and how do I measure it?”

2) Quantitative Trading Strategies

Kestner walks you through building trading strategies using a scientific process: hypothesis → design → test → evaluate → iterate. He emphasizes proper evaluation and optimization, and includes examples of implementable systems.

Why it’s second: it helps you turn “cool ideas” into testable systems and shows how professionals structure research.

Takeaway: you’ll learn how to compare strategies fairly (apples-to-apples) and avoid fooling yourself with bad testing.

3) Evidence-Based Technical Analysis

This book bridges technical analysis and quantitative finance by focusing on statistical validity, methodology, and realistic expectations. It helps you understand which “technical” ideas have evidence behind them—and how to test them properly.

Why it’s third: it inoculates you against weak TA thinking and pushes you toward probability, sampling, and robustness.

Takeaway: you’ll become much harder to deceive—by marketing, by curve-fit backtests, and by your own confirmation bias.

4) The Evaluation & Optimization of Trading Strategies

This is the advanced “how to not fool yourself” book. It goes deep on proper optimization, out-of-sample testing, walk-forward analysis, and identifying overfitting.

Why it’s last: optimization is where most traders destroy otherwise decent strategies. This book teaches you how to do it correctly.

Takeaway: you’ll learn to judge whether a strategy is robust enough to trade live—and how to monitor real-time performance against historical expectations.

FAQ

Are these books good for beginners?

No. If you’re still learning basics (order types, position sizing, basic trend/volatility), start with beginner resources first, then come back to this list.

Do I need to code to benefit?

Coding helps, but you can still learn the research process, testing principles, and what “robust” actually means. If you want to speed up testing without heavy coding, use a backtesting platform (example: TrendSpider).

What’s the biggest mistake these books help you avoid?

Overfitting—building a system that looks amazing in the past but fails live. Robust testing, proper optimization, and out-of-sample validation are the difference between “interesting” and “tradable.”

Also, check out the full guide on the best stock trading books.

TrendSpider Discount Code

2026-07-12T17:44:53.397-07:00

TrendSpider Coupon Code / Discount (Quick Answer)

The easiest way to get the best available TrendSpider discount is to use my link here: TrendSpider Discount Pricing (auto-applies best available offer).

I typically recommend the Enhanced plan if you want weekly 1-on-1 training.

Jump to: What TrendSpider is · Best features · Who it’s for · Use cases on this site · Video demo · FAQ

TrendSpider Coupon Code

TrendSpider is a ChartLearning-endorsed charting + backtesting platform. If you want the current best discounted price, use this link: TrendSpider Discount Pricing. The discount / promo will show on the pricing page when you click through.

My quick recommendation: If you’re serious about improving faster, the Enhanced plan is often worth it because it includes weekly 1-on-1 training sessions.

What TrendSpider Does (Best Features)

TrendSpider helps traders reduce manual chart work and test ideas faster. Here are the features that matter most:

Automated Technical Analysis: Automatically detects key chart levels and common technical structures so you spend less time drawing lines manually.
Dynamic Trendlines: Trendlines that adapt as market structure changes, which helps keep your analysis consistent across time.
Multi-Timeframe Analysis: Quickly align higher-timeframe structure with lower-timeframe entries (useful for swing traders and active traders).
Alerts & Notifications: Build alerts around price levels, trendline breaks, indicator conditions, and pattern events so you don’t have to stare at screens all day.
Strategy Backtesting: Test rules on historical data to see if a “great idea” actually holds up before risking real money.
Raindrop Charts: A chart style that blends price + volume behavior into a single view (useful for spotting momentum/rotation shifts).
Seasonality Tools: Check historical seasonal tendencies (best used as a supporting input—not a standalone strategy).
AI / Script Assist: Helpful for generating or iterating on scripts/rules faster (still needs human validation and testing).

Who TrendSpider Is Best For

TrendSpider tends to be a strong fit if you:

Want to scan and filter charts faster (less manual charting)
Prefer rule-based trading (entries/exits you can actually define and test)
Care about backtesting and avoiding “trust me bro” strategies
Want alerts to monitor setups while you work a normal life

If your goal is “buy random options and get rich,” no software helps with that. A tool only amplifies what you already do well.

TrendSpider Use Cases on This Site

Here are posts where I use TrendSpider concepts/tools:

EMA Cloud Indicator: The Next Generation Of Indicators?

How to Create A Winning Trading System

RainDrop Stock Charts - Taking Charting To The Next Level

Ready to sign up? Use this link for the best available discount at the time: TrendSpider Discount Pricing.

TrendSpider Video Demo

If you want a quick overview, here’s a demo:

Sign up using my TrendSpider discount link for the best available pricing, and consider the Enhanced plan if you want weekly 1-on-1 training sessions.

FAQ

Is there a TrendSpider coupon code?

The simplest way is to use the discount pricing page here: TrendSpider Discount Pricing. Any active promo / discount should show when you click through.

Is TrendSpider good for beginners?

Yes, as long as you focus on the basics: trend, levels, and one simple rule set. The danger is trying to use every feature at once. Start with: alerts + automated levels, then graduate into backtesting.

What’s the best feature if I only use one thing?

Backtesting (strategy tester). It forces reality. Most “strategies” fail instantly when tested.

Which plan should I pick?

If you want the fastest learning curve, I usually point people toward Enhanced because of the weekly 1-on-1 training. If you’re purely testing ideas solo, pick what fits your budget and upgrade later.

How To Create A Winning Trading System

2026-07-08T15:31:49.484-07:00

How Do You Create a Winning Trading System? (Quick Answer)

A “winning” trading system is a repeatable set of entry + exit rules with risk management, validated by backtesting and kept honest with out-of-sample testing. The workflow is:

Define a simple rule set (entry, exit, risk)
Backtest on broad markets (SPY/QQQ) and multiple regimes
Evaluate stats (returns, drawdown, win rate, avg trade, exposure)
Iterate carefully (avoid overfitting)
Paper trade → small size → scale only after real results

Jump to: Why you need a system · Backtesting tools · Step-by-step tutorial · How to evaluate a backtest · How to improve the system · Common mistakes · FAQ · Conclusion

“If you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.”

That quote maps perfectly to trading. Most traders don’t have a system—so they end up relying on: subscriptions, alert services, and social media “experts” (which is usually a fast track to losses).

A trading system doesn’t have to be perfect on day one. In fact, most systems start mediocre. The point is to build something you can measure, iterate, and improve over time. Once you have a real process, you stop guessing—and you stop outsourcing your decisions.

Related (important): Stop Trading Options

Backtesting Tools (What I Use)

To build a system, you need a backtester. This article uses TrendSpider’s strategy tester / backtesting tools (exclusive discount code).

If you’re serious about system-building, prioritize tools that let you:

Backtest rules across multiple symbols (SPY, QQQ, major stocks)
View trade-by-trade results + metrics (drawdown, exposure, avg trade)
Iterate quickly without “coding everything from scratch”

Step-by-Step: How to Backtest a Stock Trading System

Here’s the exact framework I recommend for building your first “real” system:

Pick a market + timeframe.
Start with daily candles for swing trading. (Day traders can test hourly/15-min later, but daily is easier to validate.)
Pick a baseline benchmark.
Your system must be compared to buy & hold on the same symbol. If you can’t beat buy & hold after realistic frictions, you need a reason to trade it.
Define entry + exit rules.
You need both. A strategy without a clean exit rule is not a system—it’s a hope.
Test across regimes.
Don’t only test bull markets. Your system should be survivable in chop and drawdowns.
Iterate one variable at a time.
If you change five things at once and results improve, you won’t know why.

Below is the TrendSpider layout used for this tutorial:

A Simple Starter System (5/10 EMA Crossover)

We’ll start with a basic momentum framework:

Buy when the 5 EMA crosses above the 10 EMA
Sell when the 5 EMA crosses below the 10 EMA

You can build and test this using the TrendSpider strategy tester (exclusive discount code).

Important: this is a “starter system” to demonstrate the process. Most simple crossovers do not beat buy & hold over long periods on major indices—testing will prove that quickly.

How to Evaluate a Backtest (What Actually Matters)

Don’t fall for a backtest that looks good but has hidden problems. These are the metrics you should care about:

Total return vs buy & hold (the baseline)
Max drawdown (how deep it can go underwater)
Exposure (how often you’re in the market)
Average trade and median trade (is edge consistent or one lucky period?)
Number of trades (more trades = more realistic sample size)
Whipsaw / chop sensitivity (crossovers often get destroyed here)

Also: always assume slippage and imperfect fills. If your average trade is tiny (e.g., <1%), real-world friction can erase it.

Example results screenshot:

Iterating: Improving the System With a Second Signal

One common improvement approach is using a cluster of signals (two independent reasons to enter). For example: keep the EMA crossover, but add a second entry based on volatility extremes.

Here’s a simple add-on: Bollinger Bands.

Entry #1: 5 EMA crosses above 10 EMA
Entry #2: price touches the lower Bollinger Band
Exit: 5 EMA crosses below 10 EMA (starter exit rule)

Bollinger Bands guide: What Are Bollinger Bands?

If your results get closer to buy & hold, you’re moving in the right direction. The point isn’t that this exact combo is “the answer”—it’s that iterative improvement is how edge is built.

Common Backtesting Mistakes (That Ruin Results)

These are the traps that cause “great” backtests to fail live:

Overfitting: adding rules until the past looks perfect (then the future collapses)
Testing only one symbol: your system might just be “optimized for that stock”
Ignoring drawdown: high returns are meaningless if you can’t survive the dips
Too few trades: a strategy with 12 trades in 10 years is not validated
No realism: slippage, spreads, and imperfect fills can erase small edges

FAQ

What symbols should I test first?

Start with SPY and QQQ (broad indices), then test major liquid stocks across different “personalities” (AAPL, AMZN, MSFT, TSLA, etc.). Your goal is to see if the idea survives different regimes—not just one lucky chart.

How much history should I use?

Longer is generally better as long as the data includes multiple environments (bull, bear, sideways). But also test more recent periods so you don’t build something that only worked in the past.

Can you beat buy & hold?

It’s hard. The easiest “win” is sometimes not higher returns, but lower drawdown with similar returns (better risk-adjusted performance). The market has a built-in upward drift—your system must earn its keep.

Conclusion

A trading system is how you stop guessing. Backtesting forces brutal honesty: either your rules produce an edge, or they don’t.

If you want to build a real system, your job is simple (not easy): test ideas, measure results, iterate slowly, avoid overfitting, and validate in real time with small size.

Next step: read How To Create A Trading Edge.

Backtesting tool used in this tutorial: TrendSpider (exclusive discount code).

How to Master Meme Stock Trading (Satire Guide)

2026-07-04T10:49:28.879-07:00

Master Meme Stock Trading (Satire): 9 Tips to Go Broke Faster

Disclosure: This post is a joke. It’s intentionally written like a meme-trader handbook. If you want serious education (systems, indicators, discipline), use the resources below.

Jump to: Monitor Setup · The 9 Meme Tips · Real Resources (Not a Joke)

If you’re here by accident and want real trading education:
• Common Mistakes Traders Make (examples)
• How to Create a Winning Trading System (Backtesting)
• How to Create a Trading Edge (Free)
• Stock Trading Scams & Ponzi Services (Social Media)
• Stop Trading Options (seriously)

Trading is a hard “career” that almost everyone will fail at. But after 1100+ trades, I evolved into a Jedi of meme stock trading—the sacred art of rockets, moons, and emotionally-charged entries.

My success can be described in one metric: number of monitors. Ideally you want a minimum matrix of 10×10 monitors. My personal setup is shown below.

The Correct Monitor Setup (Required for Profit)

Unfortunately, many cannot afford this setup. So I will provide an alternative: priceless meme trading tips that will help you accelerate your portfolio’s journey toward… character building.

9 Tips to Master Meme Stock Trading

Within days of absorbing these tips (via a 10-minute movie-like montage), you’ll master meme trading stocks like AMC, GameStop, and Carvana— making your portfolio sprint to $0 faster than ever before.

Watch CNBC and read viral finance headlines. When they panic, you know it’s time to really panic.
(If you want the opposite: Common mistakes traders make.)
Sing nice songs to your stocks so they feel supported. When you’re mad, don’t revenge trade—your stocks remember.
(Also: if you ever get the urge to short: Do not short stocks.)
Follow all the best “hindsight traders.” Their after-the-fact commentary will upgrade your trading IQ instantly.
Read everyone’s opinion on social media. The most popular opinion is always correct.
(If you want an actual edge: Create a trading edge.)
Only learn from 18–22-year-old hotshot traders selling courses. Especially those posting beach photos with quotes about freedom.
(If you want real structure: Build a trading game plan.)
Live, eat, and breathe WallStreetBets. Trade YOLO out-of-the-money options because sleep is for the weak.
(Real warnings: OTM options risk + Options pricing (gamma/delta) + Why options are bad.)
If you lose money, blame a non-existent hedge fund for “manipulation.” Bonus points for saying “naked shoring” and “ladder attacks.”
(If you want one real mechanic that gets confused for sorcery: What is a gamma squeeze?.)
Since blowing up accounts is part of meme trading, you need new funding sources. Find brokerages that offer “free” sign-up bonuses and speedrun adulthood.
(If you want to stop repeating this cycle: Trading discipline.)
Trade naked. Be one with the market. Feel the candles inside of you.
(Do not do this. Any of this.)

Want to graduate from meme trading? Start here:

Bollinger Bands (practical guide)
Japanese candlesticks (read charts better)
EMA explained + EMA Cloud
RSI explained + MACD explained
ADX trend strength + Stochastic oscillator

Real Resources (Not a Joke)

If you want the serious path:

Pick one upgrade: If you’re new, read Mistakes Traders Should Avoid. If you’re intermediate, build structure with Backtesting + a trading system.

Stop Trading Options! You Are Being Scammed!

2026-07-02T07:32:17.594-07:00

Stop Trading Options (Quick Summary)

Most retail traders lose money trading options. The leverage looks attractive, but time decay, volatility pricing, and liquidity mechanics are stacked against beginners.

Many “successful” options traders online make more money selling subscription services than trading.

What this article covers:

How options subscription services manipulate followers
Why leverage + time decay destroys small accounts
Why even good traders struggle with options precision
How front-running happens in trading groups
Where to focus instead if you want real consistency

Related reads: How Options Are Priced · Risks of OTM Options · Trading Scams Guide

Why Trading Options Is a Losing Game (Especially for Retail Traders)

Trading options is sold as the fast lane to wealth. Small account. Big leverage. Overnight wins.

Reality? Most retail traders lose money trading options.

I’m not writing this as a bitter trader. I’ve been a market-beating trader since 2012. I’m writing this because I almost blew up several times thinking options were the shortcut.

The Options Trading Service Scam

I believed the dream:

Start small → Use leverage → Get rich fast.

Social media was full of “options traders” posting massive gains. Conveniently, many were also selling subscription services.

I joined several.

What actually happened?

Erratic entries
Impossible fills
Victory screenshots no one could replicate
Excuses when trades failed

These “FURUs” often post trades after the move. They cherry-pick winners. They delete losses. And followers rarely question it.

Remember the ATLAS Trading Group indictment ? Pump-and-dump schemes disguised as education.

Why Options Are Structurally Difficult

Options are not just directional bets. You must be correct on:

Direction
Timing
Magnitude
Volatility

And you’re fighting:

Theta decay (time decay)
Spread costs
Implied volatility crush
Liquidity issues

The short-term market is largely random. Options require precision. Precision and randomness do not mix well.

If you want to understand pricing mechanics, read: How Options Are Priced (Gamma & Delta Explained)

Leverage Is a Double-Edged Sword

Leverage magnifies gains. It also magnifies mistakes.

One bad trade can wipe months of progress.

Weekly options? Even worse. Pure time decay machines.

I’ve written about the risks here: Why Options Are Dangerous

Front-Running & Liquidity Problems

Options markets are thinner than stock markets.

When a subscription service alerts thousands of members:

They buy first.
You buy after.
The price moves.

That movement benefits them — not you.

Even if unintentional, the structure works against followers.

If They Had an Edge… Why Sell It?

Think logically.

If someone truly had a consistent edge trading leveraged options:

They would compound rapidly.
They wouldn’t need $79/month subscriptions.
They wouldn’t need Discord communities.

Real edges compound. Fake edges sell access.

FAQ: Trading Options

Can you make money trading options?

Yes — some professionals can. But most retail traders do not outperform over time.

Is selling options safer?

Selling options changes the risk profile, but it still requires strong capital, discipline, and risk management.

What should beginners do instead?

Build a trading system first: How to Create a Trading System

Or focus on improving discipline: Stock Trading Discipline Guide

Conclusion

There is no shortcut to wealth.

Trading options — especially weekly contracts — is closer to gambling than investing for most retail traders.

If you see someone aggressively selling an options service: Run.

Remember:

Those who can’t trade, sell trading subscriptions.

Complete Anti-Options Education (Read These Next)

If you are serious about understanding why options trading destroys most retail traders, read these in order:

Why Options Are Dangerous – The structural flaws retail traders ignore.
How Options Are Priced (Gamma, Delta, Theta Explained) – Why time decay works against you.
The Ugly Truth About Out-of-the-Money Options – Why lottery-style trades fail.
Types of Stock Option Strategies – Why complexity doesn’t equal profitability.
Stock Trading Scams & Subscription Services Exposed – How social media traders deceive followers.
What Is a Gamma Squeeze? – Why meme-option traders get trapped.
Futures vs Options: Which Is Riskier?

If you want to build actual trading skill instead of gambling with leverage, start here:

How To Create A Real Trading System

Master Trading Discipline

What Is a Gamma Squeeze? How Options Hedging Drives Explosive Stock Moves

2026-06-29T19:22:13.054-07:00

Gamma Squeeze (Quick Explanation)

A gamma squeeze happens when heavy call option buying forces option sellers (often market makers) to buy shares to hedge. As the stock rises, the hedge requirement can increase quickly (gamma), which can create a feedback loop of more share buying → higher price → even more hedging.

Jump to: What it is · How it works · Strike crossing · Risks · FAQ · Related posts

The term "Gamma Squeeze" exploded into mainstream finance during meme-stock chaos (GameStop, AMC, etc.). People usually mention it to explain “why did this stock go vertical when nothing changed?”

Important: A gamma squeeze is options mechanics interacting with liquidity and positioning. It’s not magic — and it can reverse fast.

What Is a Gamma Squeeze?

A gamma squeeze is a rapid price move that can happen when:

Traders aggressively buy call options, often close to the current price.
Option sellers (often market makers) hedge by buying the underlying shares.
As the price rises, the hedge requirement can increase quickly due to gamma.

The key idea is that hedging flows can become a self-reinforcing loop.

How It Works (Step-by-Step)

Here’s the simplified mechanics:

Call buying spikes: traders buy lots of calls (often short-dated).
Market makers hedge: to reduce risk, they buy shares.
Delta rises with price: as the stock rises, calls become more sensitive to price (delta increases).
Gamma accelerates hedging: delta changes faster near key strikes → MMs may need to buy more shares quickly.
Feedback loop: buying pushes price up → price up increases hedging → hedging pushes price up.

Plain-English version: call buying can “pull” share buying behind it, because option sellers try not to get wrecked.

Why “Crossing Strikes” Can Matter

Gamma effects often get more intense around big, obvious strike prices (like 50, 100, 150) when open interest is high. When price approaches/crosses these strikes, hedging needs can change quickly — especially into expiration.

Reality Check: Gamma Squeezes Cut Both Ways

Even when the squeeze story is “true,” squeezes are fragile because the same mechanics can reverse:

If call buying slows, hedging demand can fade.
As options expire, the hedging flows can drop off suddenly.
When price falls, deltas fall — which can trigger selling from hedgers.

That’s why meme-stock moves often look like a rocket up… and an elevator down.

FAQ

Is a gamma squeeze the same as a short squeeze?

Not exactly. A short squeeze is driven by short sellers buying shares to cover. A gamma squeeze is driven by options hedging (often market makers buying shares). They can happen together — and that’s when things get extra violent.

Why do market makers buy shares when calls are bought?

Because if they sold calls, they’re exposed if price rises. Buying shares helps neutralize that exposure. The amount they buy depends on delta — and how fast delta changes depends on gamma.

Can gamma squeezes happen on any stock?

They’re more likely when options volume is heavy, liquidity is thin, and open interest clusters around key strikes.

Conclusion

A gamma squeeze is basically options flow + hedging mechanics creating a feedback loop. GameStop is the poster child because call buying + positioning + hype created repeated episodes of “forced” share demand. Just remember: when the flows stop, the squeeze can stop too.

How To Exploit Chart Patterns to Make Money

2026-06-24T11:04:47.669-07:00

Chart patterns can provide a rare clarity signal in the daily noise of market price action. And no matter what security or asset class you’re trading, chart patterns can help you make sense of the numbers and interpret random information into actionable insights. In my experience, this is especially true for trend followers and other traders with price action at the heart of their trading strategy.

I wanted to write this short article to share exactly how I use different reversal and continuation chart patterns to orient myself in any market environment. So by the time you’re done reading, hopefully, you’ll have a much deeper understanding of how chart patterns can be one more valuable resource in your technical analysis toolbox. So where do we start?

How Chart Patterns Help Trade:

As a trend-following trader, my main trading and investing strategy is to buy stocks going up in price and try to hold on for the ride. This momentum-driven approach works well in bull markets and keeps me out of trouble during flat or bear markets.

But the problem with this approach is it can be hard to know when a trend is too extended or might have further to run. And that’s exactly where chart patterns can help shine a light! Let me show you what I mean.

Using Stock Chart Patterns:

For starters, chart patterns can really help you manage your expectations. As you probably know, in trading, staying grounded in reality is key to a consistent P&L. So when you see a stock hit a new high, only to fall back into a long, sideways consolidation pattern, you can accept this pattern and adjust your expectations to the reality that you may not see capital gains right away. You might even decide to sell your stock and move on, depending on your timeframe.

On the contrary, though, chart patterns can also help alert you to high probabilities of continued follow-through. So, for example, I often scan for stocks hitting new 52-week highs. But it can sometimes be scary to buy these stocks when they appear they’ve gone up too far, too fast. However, if there is a clear chart pattern in recent history, I often feel more confident taking a swing.

For instance, I’m much more comfortable buying a technical breakout in an uptrend if it has also recently broken out of a multi-week ascending triangle pattern because the projected measured move provides some forward-looking reassurance that this stock might have more gas in the tank.

Reversal Chart Patterns

The contextual information chart patterns provide is especially true with reversal patterns. When combined with the signs of a new uptrend, a clearly identifiable multi-week or multi-month reversal pattern (like a big double-bottom or head-and-shoulders top) can give me the conviction to bet big on an entry signal. In fact, some of my biggest wins over the last couple of years have benefited directly from incorporating reversal chart patterns like this.

Bottom line? By adding chart pattern analysis to your existing trading or investing toolset, you can get an important context to help you manage your expectations for a given trade (both to the upside and the downside!)

For me, by focusing on longer-term chart patterns, I can better manage my mental and emotional expectations of a given trade. And I can adapt my trend-following trading strategy to bet bigger or smaller depending on confirmation from reversal or continuation patterns on the charts.

So that’s why chart pattern trading has been a big win for me personally, and I suspect if you can add it to your decision-making tools, you’ll be better off too!

Using ChatGPT For Stock Trading: Ten Prompts for Traders

2026-06-20T20:16:27.659-07:00

AI has surprised the world, revolutionizing numerous industries with its capabilities. For those who understand how to harness its power, there's a significant potential to make a lot of money. AI bots such as ChatGPT can offer traders and investors a way to gain insights, compile data, and make informed decisions regarding stock trading and investing.

So, what exactly are "prompts"? In AI, a prompt is a specific instruction or question you pose to the AI. The AI then interprets this prompt and generates a response based on its training and knowledge. These prompts can range from simple queries to more complex requests for analysis or suggestions.

In this article, we delve into the realm of stock trading, providing a few starter or beginner trader prompts. These are designed to help you begin leveraging AI for trading. Remember, the prompts we provide here are just a starting point. As you grow more familiar with AI tools and they evolve, it is a must to iterate on these prompts, refining and customizing them to better suit your trading strategies and needs. Here are five prompts to help you get into the world of AI when it comes to the Stock Market

How to Use Artificial Intelligence For Stock Trading

In the list below, I will be providing basic AI prompts that are to be used on an AI Chatbot. The most popular one right now is ChatGPT. As you continually use these prompts, you will gain experience and insight into improving the prompts to your desired needs. So keep that in mind, that these are starting points to get started. It's important to think outside the box when using AI to trade. There are many ways to do it, and some are better than others!

Market Analysis

1. Market Analysis and Insights: "Provide a detailed analysis of the current trends in the tech stock sector, including key players and recent market movements."

This prompt helps traders comprehensively understand the tech sector, crucial for identifying investment opportunities and understanding market dynamics.

2. Sector Performance Comparison: "Evaluate the performance of renewable energy stocks compared to traditional energy stocks over the last year, considering market trends and future outlook."

Useful for comparing sectors and understanding which might offer better investment prospects, especially in light of evolving market and environmental trends.

Historical Insights and Risk Management

3. Historical Performance Review: "Can you compare the historical performance of stocks X and Y over the past five years and highlight major growth or decline phases?"

This prompt aids in making informed decisions by revealing the growth trajectory and stability of specific stocks based on their historical data.

4. Risk Assessment: "Analyze the risk factors associated with investing in emerging markets stocks in the current economic climate."

Crucial for investors looking to diversify into emerging markets, offering insights into potential risks and rewards in these markets.

Strategy and Decision Making

5. Investment Strategy Formulation: "Suggest a diversified investment strategy for a portfolio focused on long-term growth with moderate risk."

This prompt guides the creation of a balanced portfolio, suitable for those seeking stable, long-term growth with managed risk levels.

6. Global Economic Impact Assessment: "Assess the impact of current global economic events, such as trade agreements or international conflicts, on the financial and banking sectors."

Helps traders understand the global economic landscape's effects on specific sectors, essential for well-rounded investment decision-making.

7. Trend Analysis: "Identify and explain the top three trending investment themes or sectors in the current quarter, including reasons for their popularity and potential sustainability."

Enables traders to stay ahead by identifying and understanding the market's emerging trends, crucial for both short-term and long-term strategies.

Technical Analysis and Earnings

8. Technical Indicator Insights: "Explain how the moving average convergence divergence (MACD) and relative strength index (RSI) indicators are currently signaling for Stock Z."

Provides interpretations of technical indicators, helping traders make informed short-term trading decisions based on market momentum and trends.

9. Earnings Analysis: "Analyze the quarterly earnings reports of Company A and B, highlighting key financial metrics and their implications for future stock performance."

Valuable for understanding the financial health and growth potential of companies, guiding investment decisions based on fundamental analysis.

Current Events and Market Impact

10. News and Event Analysis: "Summarize the potential impact of the recent Federal Reserve's interest rate decision on the stock market."

Essential for staying updated with major economic decisions and understanding their broader impact on the stock market, aiding in strategic adjustments.

Conclusion

In utilizing these prompts, it's important to remember that AI bot responses should be used as a starting point for further research and analysis. Although AI bots have huge potential to provide valuable insights and data aggregation, it's not a substitute for professional financial advice. Always cross-verify information and consider consulting with a financial advisor for investment decisions (I know almost no one will, though).

If you enjoyed this article and are a beginner, feel free to read my beginner's guide to trading. For those who want more and are a bit more advanced, take a look at my step-by-step guide on how to create a winning trading system. Also, for those looking for AI trading tools, take a look at TrendSpider charting service, and use the link for 40% off.

Mistakes Traders Should Avoid At All Costs

2026-06-10T13:32:04.759-07:00

I'm a winning trader who has crushed the market since 2013, specializing in swing trading. I am mostly in cash and profit from extremely oversold/overbought trading stocks for quick gains. I have compiled a list of common mistakes traders make. Using this list has helped me become profitable and have a trading system with over a 95% win rate. Please add it to your trading regimen.

List of Mistakes Traders Make

Don't trade stock on the OTC. This is the wild wild west here; most of these companies are entangled in fraud (very little regulation on the OTC Exchange).
Don't trade foreign stocks, especially Chinese. A lot of fake accounting and government intervention.
Don't trade commodities (Oil and Gold). They follow geopolitical events that are simply unpredictable.
Don't trade companies that profit from commodities (see #3).
Don't trade forex and futures. Completely different beast, a lot of it requires leverage and is prone to manipulation on light volume.
Don't listen to TV pundits. They know less than you do :-).
Don't trade options. They are very complicated instruments rigged against you, like Casinos.
Don't subscribe to real-time subscription trading services. A lot of them are scams.
Don't listen to WallStreetBets (WSB) on Reddit. For every millionaire you see, thousands lose money.
Don't short stocks. The market is designed to always go up due to the Fed's help. If you do use puts, that way you don't expose yourself to unlimited losses (Imagine Shorting GameStop $GME at $10)
Don't trade healthcare stocks, as Congress has a huge say on how these will trade. One new law and the stock you are trading could have their profits wiped out!
Avoid stocks that end with "Holdings." Their finances are pretty complicated, and reporting is hard to follow. They often have their revenue and assets in a plethora of places. Just stay away.
Invest in companies that have great growth, but do not hold any sort of proprietary IP. What ends up happening is companies like Amazon, Google, and Apple will take hold of how much growth opportunity the company has and then just end up copying them. One example is how Amazon is attempting to enter the telehealth space, aiming to capture market share from companies like Hims.

Conclusion

The list above highlights several common mistakes that traders make. It advises against trading on the OTC due to potential fraud, avoiding foreign stocks with fake accounting and government intervention, and steering clear of commodities, forex, futures, and options trading due to their complexity and manipulation risks. It cautions against relying on TV pundits, real-time subscription trading services, and following WallStreetBets on Reddit.

Shorting stocks is discouraged, with a focus on the potential for unlimited losses. Healthcare stocks are deemed risky due to congressional influence. Additionally, stocks ending with "Holdings" are recommended to be avoided due to their complex finances.

Hopefully, following this list to a T will help you become a more profitable trader and reduce the frustration that goes with stock trading. Feel free to read a few of my other lists, including Ten Signs You Are Probably A Terrible Trader and How To Master Meme Stock Trading.

Also, I would like to see how well I have done in trading over the last decade, head over to breaking down my 95% Win Rate Trading System.

Why Fundamental Analysis Matters For Stock Trading

2026-06-07T15:47:32.631-07:00

This site heavily focuses on technical analysis, but through experience, I learned that a company's fundamentals must be understood to properly assess risk. The stronger the company is fundamentally, the less risk there is when holding. Keep in mind the best trader out there, Warren Buffett, is famous for value investing, so it's always good to have a solid understanding of this strategy, even if you will only be using it a little going forward.

This article will cover five fundamental financial metrics before trading and investing in a stock. As fundamentals do matter (unless day trading), even if your trading strategy heavily focuses on Technical Analysis. I can't emphasize this enough; you need to understand what you are investing in. Investing in the hype with no fundamentals to back the stock up will humble you in the Market.

Always be asking, do the fundamentals support the hype? What happens if the company enters a rough patch in the next few months/years? Do they have enough cash, or will they have to go bankrupt, thus wiping their stock to $0? These are the questions you need to have answered. For example, the fundamentals are never there when trading small-cap oil stocks. A sharp drop in oil prices usually causes these companies to go bankrupt.

Fundamental Analysis

For analyzing the fundamentals of a stock, let's use Tesla ($TSLA) as an example, where the CEO, Elon Musk is always in the news for various reasons. Tesla has been making all the right noises lately and just continues to defy everyone's expectations as it powers to never-ending all-time highs. Many people think the stock is overvalued, but what is the basis for this claim? Hopefully, the basic metrics covered will give you a starting point to answer whether Tesla's market cap is justified.

The following are five value investing metrics. They are easily found when looking up stock quotes in your favorite broker or app, as well as covered in quarterly reports by every publicly traded company.

Earnings Growth: Tesla's year-on-year revenue improvement reported for the third quarter is 39.16%, marginally lower than its recent surge of a staggering 193%. However, Tesla Inc. stands 2nd in the Auto and truck manufacturing industry when it comes to revenue growth. Always remember that the fluctuation in revenue growth for a stock doesn't need to be huge, but should be consistent.

Plowback Ratio and Reserves: Dividends and plowbacks are a part of the company's net profit. These are obtained after deducting all expenses of a company, including all applicable taxes. A dividend is what the company gives to its shareholders. Plowback is that part of the company's net profit that the company adds to its existing reserves, which are further used for the growth/expansion of the company. Strong reserves indicate strong fundamentals and growth.
Debt-to-Equity Ratio: The latest report for Tesla Inc. indicates this ratio at 1.80. It is obtained by dividing the total debt of the company by shareholders' equity. The biggest companies have liabilities and debts on their balance sheets. Ideally, companies with lower debt-to-equity ratios are considered to be the best bet, but it depends on the magnitude of the industry, too.

Price-to-Earnings Ratio: The trailing twelve-month P/E of Tesla stands at 129.12X. This is not at par with the Automotive - Domestic Industry's P/E, which stands at 15.71X. The P/E ratio is one of the major indicators of how a stock is performing and how much a shareholder is earning. For example, if a stock has a P/E ratio of 25, it indicates that the stock is trading at 25 times its TTE (trailing twelve months' earnings). The lower the number, the better it is considered to be. In my opinion, the P/E ratio is outdated and really doesn't apply to the most popular growth stocks today.

Dividend: Tesla doesn't pay a dividend to its shareholders. However, the stock's share price has returned over 850% within the last few years, despite being negative in 2021. If a company pays dividends consistently, it shows that it is stable and deep-rooted. A higher dividend may often be an indicator of instability within the company. Also, it shows that the company has no growth plans. So you may get worse returns with stocks that pay "good" dividends (basically those that pay higher than a savings rate).

Bonus Tip: Never trust reports that come out of China or any other company outside of the United States, as the majority of the time, the accounting and reporting are greatly exaggerated to the point that it is often fraud!

Conclusion

Hopefully, this article gives you a nudge into thinking about fundamentals, even if you are purely a technical trader. You always need to think outside the box and consider every edge you can get, and also protect yourself from the worst-case scenario when you decide to hold a stock overnight. Because worst-case scenarios unfortunately happen way more than you think!

For more into understanding Fundamental Analysis, I suggest checking out Fundamental Analysis: A Beginner’s Guide.

Ten Signs You Are Probably A Terrible Trader

2026-06-02T09:12:57.428-07:00

Warning: The following article is beyond harsh and contains information no seasoned trader will tell you. Before reading further, I have been trading since 2011, when I was still in college. I have over 1,100 trades and have beaten the market (S&P 500) since 2013. I have also earned well over six figures in profits. So, the information below comes from experience and honesty. Take what you will from it.

Over 90% of traders will lose money in the stock market. If you are reading this, you are a loser in the Market. To encourage you to quit before you lose all your money, I created a list below to make you realize you are terrible at trading and should find another dream to pursue.

1 - You follow "professional" traders on Twitter. The truth is, many on Twitter are complete phonies and have built a fake trading persona to end up selling you something in the end. More on this can be found in my guide on identifying fraud traders.

2 - You look at inspirational quotes or quotes from "famous" traders as part of your trading regimen. This is nonsense; this won't help you.

3 - You assume psychology is a major part of trading, much more than an actual system. As such, you constantly remind yourself that you lost money in your last trade because of psychological mistakes, and thus, you refer to #2 on the list to regain focus (useless trading quotes). If psychology were such a big part, the simple solution would be to write programs that would trade for you (this isn't a moneymaker). Many "professional" traders instill that psychology is big enough to sell you their products to improve your "weak" psychology. To be clear, I am sure most of you lack discipline, but even with discipline, you still would lose money.

4 - You watch CNBC or look at mainstream media for advice on trading the Market. News flash, journalists, and people who write articles are unlikely to understand the exceedingly complex and random forces that are the Market. Always ignore the headlines when trying to justify market movements.
5 - You think the more time you put into the Market will directly result in actual profits. No, this is not true. Again, this is false information given by "professional" traders to up their winning persona so that in the end they can sell you something. If indeed one has developed a winning system, it does not require hours of looking at charts on Friday night while your wife gets dressed up before you guys go out. It's done with programs and scripts scanning the markets, which take seconds a day (after the initial work done to develop a winning edge..this will likely never happen).

6 - You buy a lot of trading books and software. The information from trading books or software may have been profitable. However, once that information is public and its knowledge is known by many, it will likely yield an edge in the Markets. Hence, a reminder that if you have something truly profitable, you should keep it a secret.

7—You subscribe to a trading service. By 2024, you should have learned that all these services are bogus scams. The article linked provides a plethora of information to understand why I claim that stock trading services are bad.

8 - You trade options. Options are gambling. It always gives the person who sells the options a massive edge. Let's hope you have yet to be inspired by WallStreetBets on Reddit to go all-in with out-of-the-money options, YOLOing your life away.

9 - You hindsight trade. If you do this, you have no business even owning a stock trading account. Should of, could of, and would of is not a winning strategy! It's a strategy for the fastest way you can lose your house to the bank!

10 - Finally, your account continually goes to $0. Take a hint. Quit.

How many of the ten listed above are you guilty of?

For those who want to stop losing, look at our article on creating a trading edge based on your current system. It's an in-depth guide I have yet to see anywhere else online.

Also, I wrote an in-depth article on how to create a winning trading system. These two articles will take your trading to a level you have never imagined, as long as you put in the work!

Options Vs Futures: Should You Be Trading Futures?

2026-05-30T09:04:03.560-07:00

In the financial markets, traders and investors often debate the merits and risks of different securities. Two of the most commonly compared are Futures and Options. Understanding the differences between these two can help traders decide which suits their trading style and risk tolerance.

In short, Options contracts allow traders to trade but not the obligation. In essence, investors can buy or sell Options shares at certain prices at any time if the contract is in effect. On the contrary, Futures trading requires a seller to sell shares and buyers to buy them on a specific date unless the holder closes their position before it expires. Therefore, the transaction is solid and must proceed, as futures often involve physical commodities (such as corn, gold, and oil). There is no backing out when it comes to Futures; the transaction must go through at the expiration date. This is partly why oil prices went negative during the COVID-19 pandemic.

While both futures and options are financial products that make money, their markets are widely different and pose considerable risks. This article considers the differences between these two financial products to help you make a better-informed trading decision as an individual investor.

Futures: Defined and Demystified

Futures contracts are standardized agreements to buy or sell an asset at a predetermined price at a specified time. These contracts are legally binding and typically involve commodities, such as agricultural products, energy resources, and metals. However, Futures are also prevalent, including those based on market indices.

Futures contracts are time-oriented. They expire, forcing you to make certain decisions, such as selling the contract to take your profits or losses, staying out of the market, or taking the delivery of the equity, product, or commodity the contract represents.

Most Futures contracts can be traded from Sundays, 6 PM (EST) to Fridays, between 4:30 PM and 5 PM (EST) – depending on the commodity. Technically, trading stops for thirty to sixty minutes daily. So, essentially, Futures are traded 24 hours, which can add to individual investors' stress and workload. Where your sleep may be severely hindered.

What Are the Risks of Trading Futures?

Simply put, Futures contracts can lead you to huge debts. While other traditional financial products, such as bonds and stocks, are associated with high-end risks, Futures undoubtedly generate high yields but even higher possibilities of extremely severe losses. Futures allow for significant leverage, meaning that a small margin deposit controls a large amount of the underlying asset.

Futures expose investors to maximum risk, potentially losing all their money within the twinkle of an eye. You have to put some money down when buying a Futures contract, and your rewards and costs aren’t established until such a contract expires. It is not until then that both involved parties discover their outcomes. What does this imply? You have “almost zero” control over your risk profile.

Futures prices are accounted for daily, meaning a certain amount of money is transferred between the seller and buyer at the end of the day. If the prices are unexpectedly volatile, you may be required to add additional funds at the end of each trading day, so you don't get margin-called. So, you will either have a massive account or be heavily leveraged.

Lastly, the Futures market is traded on a relatively thin volume, as not many people can afford to trade it. As a result, it is heavily prone to manipulation by hedge funds and other trading entities. You will often see a huge crash or weird price action, wondering what just happened, only to find out a month later it was manipulated by a firm under investigation. This really makes it difficult for the individual investor to be successful.

These three issues listed above make trading Futures extremely dangerous for retail investors. If you don’t have just enough assets to cover your losses, you can end up losing both your trading portfolio and personal finances.

Understanding The Basics Of Options

Options, like Futures, are also risky. The Options contract is based on the value of underlying assets, like stocks. As mentioned earlier, an Options contract offers the opportunity to buy and sell assets at a certain price, but not the obligation. In essence, you don’t have to buy or sell an asset if you don’t want to. As a derivative investment form, even when you buy or sell shares, it doesn’t represent the actual ownership of the underlying investment until you finalize the agreement.

Is Options Trading Risky?

The technicalities associated with Option trading risks are that it is relative. This means that not all Options contracts have the same risk. As a buyer – otherwise called a holder – you have a different risk than if you are the seller – otherwise called the writer.

You can continue reading more about Options contracts and the associated risks.

The Bottom Line – Futures or Options?

Both Futures and Options offer unique opportunities and risks for traders. Futures contracts may be suitable for those looking for a straightforward, high-leverage way to trade commodities and financial instruments. Options, with their ability to structure varying degrees of risk and potential return, can be attractive to traders with a more nuanced market outlook or those with a lower risk appetite.

However, with one wrong move when trading Futures contracts, your account may be wiped out, and maybe even plunge into enormous debts for your entire life. Technically, it’s not worth the risk.

Ideally, you should stay away from both!

Is Your Stock Trading Service Scamming You?

2026-05-25T11:16:57.027-07:00

The following is a guide I compiled to help prevent people from being conned by fraud when dealing with stock trading. Remember this applies to any medium (e-mail, websites, forums, TV, Discord rooms, Twitter (X), and so on).

Stock trading and Social Media are a match made in heaven. Stock traders heavily rely on social media for news and trading ideas. However, there is one alarming trend: many con artists can profit from their followers by selling misleading subscription services or having them follow their pump-and-dump schemes. Recently, the ATLAS trading group was indicted for stealing 125 million from inexperienced, naive traders via Twitter/X and Discord. However. Somehow, they got out of a jail sentence.

The finance world is the most unethical/dishonest place (remember the economic collapse of 2008). Some of the dishonesty that accompanies subscription services is due to competition. Each service has to do a "bit more" than competitors. It snowballs! People must advertise in "creative" (dishonest/misleading) ways to gather their followers' attention.

It is important to highlight that even the slightest twist of the truth is still misleading, as that can be a huge difference when trading the Market. Here are a few tips that should help identify dishonest/misleading stock traders on social media:

11) The trader in question speaks with 100% certainty. If someone speaks as if something in the market will happen at 100% (ex, "Apple will go to $200 by Friday"!), that person is full of it. Markets, for the most part, are unpredictable. There are just too many forces coming together for predictions to be consistently reliable.
10) The trader claims to have the market figured out with a special formula (ex. a better way to price options). Uh no! Not possible. This is an outrageous claim; only those not well-versed in the market will accept this reasoning. If it were true, a hedge fund manager would hire this person. They would be bigger than BlackRock.

9) The trader claims to be making 1000% on each option trade. If this is true, what is this person doing on Twitter? This seems to be the source of many retail investors messing with out-of-the-money option strategies, due to a lot of "fakes" promoting this dangerous strategy. If someone is making 1000% on each trade, what are they doing on Twitter, babysitting their subscribers for a fraction of the profits they are allegedly making? After the 10th trade, that 1000% gain becomes over a million dollars.

Also, beware of those who trade options professionally for a living. Trading options and being profitable over a long period is nearly impossible. Either they are lying, or their subscription services involve them buying low-volume option strikes, which, when followed in the trade, causes the price to spike, thus making their trades quite profitable. In other words, a low-volume option pump-and-dump (similar to penny day trading services).

I've noticed scammers have adapted through the years; they will often post one huge loss over social media along with an inspirational quote. Their simps will often just reply, thanking them for their honesty and how humbling this is. This strategy is there to let your guard down. It's often a trade they gave that is really hard to hide so being honest about this particular loss just gets you to trust them more, for "being honest" unlike others out there. BEWARE.

8) The trader in question never makes a bad call. A lot of charismatic people can spin any call they make into a "good call". Beware. I see this happen all the time. Also, watch out for quantity versus quality. A good strategy to trick people is just to spew a bunch of trade setups nonstop, so many that people can't keep track of them. Then at the end of the day or week, just retweet your "good calls". It's not that hard; 50% of the time you will be right in guessing the direction!

7) The trader doesn't act professionally, and tweets don't seem to be written intelligently. Warning SIGN! If someone can trade the market using a winning strategy, their IQ should be high enough to speak and act properly on Twitter!

6) The trader is a "beautiful" girl (ex., current model on the side) and is now trading the market.

People used to post pictures of fake "model" women on social media pretending to be traders when social media first became a thing. However funny enough, "model" women caught on, and now actually pretend to be successful traders, posting traders every so often, and then posting their travel, with the occasional bikini picture every 10-15 days. They will also mix and mingle with other traders in person and post pictures. This gives the idea that they are legitimate. You will see them at your favorite Trading Conference in Vegas or Hawaii. All this is designed to make them seem more legitimate.

Their trading content is often very superficial and generic, but guess what? Some guys eat that stuff up! I guess there is some biological feature where guys tend to drop 50 IQ points in front of a woman they find attractive.

Beware of this model turned "amazing trader". Eventually, they end up building a huge follower base and will launch a private trading service. They have no business offering trading advice. Some may be savvy and just end up peddling a pump-and-dump scheme with no paid service to be found.

This is not to say that because they are women, they cannot trade. This could be said about "model" guys. Often, these types of traders will trade crypto and provide commentary on that market closely.

5) The trader doesn't keep a proper account of his/her calls. If someone is making claims, at least try to find a PnL spreadsheet with actual exits and entries that a person leading the subscription service actually took. This, unfortunately, doesn't fully verify anything, but this is the best we can do.
Also, if a service shows you a spreadsheet with a crazy amount of positions (hard to put a number on how much is too much), they are probably paper trading. It's ridiculous to think someone can manage 15+ live positions; this is a huge hint at paper trading. Since it's very possible they took 30 positions, stopped out of 15, and now have 15 positions all green (of course, all theoretical). Not practical. The slim chance these are real, you will get eaten up alive, trying to pick and choose these winners anyway, since it's doubtful one can follow all these "buy signals". In reality, even if these claims are real, one must have a huge, good-sized account, at least $50K.

4) Doubt theoretical profits. It’s not that easy to spot fraud; there really doesn't exist any way to fully verify actual profits (maybe a neutral hired auditor). Another way to spot fakes is to ignore whatever claims they make about their service (I've noticed people have been very creative in spouting less-than-impressive results as something amazing). You will notice that with a lot of services, if you dig through their websites, they keep actual trading results in an Excel sheet. You'd be surprised how truthful these are, versus the claims these people make on Twitter. For whatever reason, these Excel sheets show more of the true story, and you will usually see something less impressive (ex., those .5% theoretical gains are actual .5% losses coupled with the fact that this service costs $100 a month).

Here is the catch, though: the results on the Excel sheet are sometimes shown using fuzzy math. They don't always include the cost of commission (especially with options), and they often include theoretical buys and sells. Being able to show your results in terms of theoretical buys and sells can give the appearance that a Twitter trader is making a lot of money, but in reality, they are not. The theory is one thing, the actual execution is different (so many variables can cause these trades to go wrong).

Try to ignore results that show cash value. I see many services touting that we made "$1,000 this week". What you should be asking is: What is the return on the investment? That $1000 could be a profit of $100,000, and often, a 1% gain when the market is up 6% is not very impressive. Profits should be shown in terms of percentages, not actual money (this is the easiest way people trick others). That 1% gain for you may be $19 when you are paying $100 a month for that sub-service.

In conclusion, anyone using theoretical profits should doubt; this is a major red flag! The actual trades being executed by this stock Twitter trader should be recorded. At the very least, percentages should be shown of actual trades.

3) Ignore CNBC/Fox Business and other TV Channel Personalities. It is best to avoid CNBC traders’ advice on Twitter; don't even touch the services they are selling.

2) Be wary of stock traders with a lot of subscribers who probably no longer trade (they make at least $150K a year with their subscription service). You can tell those who no longer trade by how often they tweet during trading hours; they tweet lots of ideas (as opposed to tweeting about their actual POSITIONS). They also often post obnoxious trading quotes. Real traders don't have time to mess with Twitter talking (tweeting 5+ tweets an hour) about stock setups and market commentary.

This means they are making more money with subscribers and are content not putting their money at risk in the market. In other words, whatever edge they are trying to sell to you is not that impressive (however, it might be better than what you can do by yourself). There is nothing wrong with this ethically. Just be aware of it.

1) Avoid those who are not humble when it comes to the market and those who brag about huge gains (ex, "Only I know this stock"). Real winning/consistent traders know the market is not something you can take for granted. Those who get cocky will eventually get a huge beating from the market. Either that or the person in question is a paper trader.

A Beginner's Guide On Learning How To Trade

2026-05-21T12:39:31.294-07:00

Stock trading can be a rewarding skill to acquire, offering insights into financial markets and potential opportunities for personal economic growth. For beginners, the journey into stock trading requires a solid foundation of knowledge and understanding. This article provides a starting point by highlighting various resources beneficial for learning stock trading.

Ask Experienced Traders For Advice

One of the best ways of learning how to trade is by approaching experts in the area and asking intelligent questions. Successful traders may be reserved about the methods they use to trade, of course. However, if you ask them what they think and feel in particular situations, and how they deal with their emotions when trading, you may receive many life-changing tips. In fact, we can almost assure you they’d love to do it. Everyone likes to be a mentor if the mentored person is truly interested. After all, if he is a trader, he is most likely passionate about it.

Learn by Reading and Researching

Suppose you don’t have the opportunity to learn directly from an expert trader, probably because you don't know any. In that case, there are other ways you can acquire knowledge on trading: reading and researching. In the stock market, an incredible variety of books are written on the subject. However, for beginners, it is vital to know about the specific strategies and methods of analysis, traders, and the way they think. The Internet is crowded with information; finding some for ourselves to learn is as simple as googling what we want to know and identifying reliable sources. Then read 10 articles about it and draw your own conclusions.

A good starting point is reading all the articles on this site under "Stock Market Education". For those who don't have the time to read all the articles here, a few great starting points from this website would be learning about Japanese candlesticks, as well as a breakdown of technical indicators and how useful they really are.

Great Trading Books

Let’s recommend a quick book trading checklist that I’m sure will help you in the process of becoming a successful trader. Here is a handful of useful and valuable books:

Henri Lefevre’s book Reminiscences of a Stock Operator (1923), written in honor of Jesse Lauriston Livermore, is well-known as Wall Street’s "Great Bear" and "Boy Plunger", and is a really practical book. At the beginning of the 19th century, Livermore was one of the main traders on the Wall Street stock market. Through the book, Lefevre illustrates Livermore’s way of thinking, strategies, and concepts regarding trading.

Jack Schwager’s The Market Wizards and The New Market Wizards are really useful and enlightening pairs of books created from the basis of conversations with the best traders from markets of diverse markets. By reading these books, you will have the golden opportunity to get familiar with the habits that top traders have to be successful.

Michael Covel’s The Complete Turtle Trader portrays a trial whose origin was a discussion between a pair of traders. Led by a trading expert, the training process of some specifically chosen people, as well as what comes out of it, is shown in the book.

You can also head over to my list of the best Must-Read Stock Trading Books to help you become a winner.

Internet, Research, and Trade

There are countless online resources to learn how to trade. You can research specific topics related to trade on specialized websites. Additionally, you can try different stock trading platforms using demo accounts and see which one fits you most. In these, you will quickly see how possible and even easy it is to find a great deal of valid, useful information.

What you can do to learn:

Learn from other traders through the interaction between them in discussion forums.

Use your Stock trading platform information, Discord trading rooms, social media, and also Reddit boards. Here is a list of the 100 Best Stock Trading Blogs.
Learn via YouTube Videos, a simple search like this will lead you to countless educational materials: Learn How To Stock Trade via YouTube.

Use the technical indicators provided by your stock trading platform or broker. These will lead you to acquire experience and knowledge on analysis and technical indicators. I personally recommend TrendSpider charting software. They have the latest cutting-edge indicators and a great price (use the link for up to 40% OFF). Additionally, they have one of the most extensive YouTube libraries explaining how to use their site's indicators and features. I recommend their Enhanced package, which comes with weekly one-on-one training.

The Internet and online trading also allow more accessibility to trade. You can open a Stock account with a tiny amount of money and test yourself in the business, especially with the Robinhood era, as now the cost to trade is essentially free. However, I recommend one of the bigger brokers like E*Trade or Ameritrade, as Robinhood and other budget trading platforms are not reliable when the market becomes very volatile.

New Era of Learning - Artificial Intelligence

Utilizing AI bots for stock trading is an increasingly popular method among traders. Platforms like ChatGPT offer a fresh perspective on market analysis and trading strategies. These tools are in their early stages, often compared to the 'Wild West' due to their novel and untested approaches, yet they hold potential for both educational and financial benefits in the stock market. As AI technology continues to evolve, these bots are rapidly improving, providing more sophisticated market insights. It's important, however, to use them with an awareness of their limitations and the inherent risks involved. For those interested in using AI bots in trading, my article is a helpful resource. It outlines effective ways to utilize tools like ChatGPT for stock trading, serving as a good starting point for anyone looking to integrate AI into their trading strategy. You can read it here: Top Stock Trading Prompts for ChatGPT.

Conclusion

To summarize, becoming skilled in stock trading involves various learning methods and resources. It's crucial for beginners to seek advice from experienced traders and to engage in extensive research and reading. Starting with basic concepts such as Japanese candlesticks and technical indicators is highly recommended. Reading the established trading books mentioned above can be a great starting point.

The AI revolution now adds additional learning opportunities through online resources, interactive platforms, and new tools like AI trading bots, which can provide different perspectives and trading simulations. However, these tools should be used with caution due to their novelty. Online trading platforms can also provide valuable hands-on experience, crucial for understanding market dynamics, especially those that allow accounts for "paper" trading (trading without real money).

Remember, practice makes perfect, but it's important to acknowledge that many people struggle to become profitable in stock trading. You might be one of the few who succeed. Finally, I strongly advise avoiding options and flashy traders on social media, as they are often involved in scams.

How to Make Money on Kalshi

2026-05-16T10:23:32.258-07:00

Most people approach Kalshi the wrong way.

They try to “be right.” They argue macro narratives. They hold positions to settlement.

That’s not how experienced traders approach it.

Kalshi is a pricing market.

If you understand probability, expected value, liquidity, and settlement mechanics, you can build an edge. If you don’t, it slowly drains your account.

What Kalshi Really Is

Kalshi is a CFTC-regulated binary prediction exchange.

Every contract settles at:

$1 if YES
$0 if NO

If a contract trades at $0.32, the market implies a 32% probability.

Your job is not to predict the future. Your job is to determine whether 32% is mispriced.

Edge = Expected Value (EV), not conviction.

How Traders Actually Make Money on Kalshi

Mispriced probabilities
Timing & liquidity shifts
Settlement rule precision
Event-driven volatility

This is closer to probability-style trading than traditional betting.

Want to test it without committing real capital? Get $25 free on Kalshi and treat it like a structured practice account.

The “Bet Everything NO” Idea

Short answer: It works sometimes.

Long answer: It works selectively and fails badly when misused.

Why NO Positions Often Look Attractive

Many markets are structured around deadlines:

“Will approval happen by X date?”
“Will CPI exceed Y?”
“Will recession be declared by Z?”

Processes take longer than expected. Deadlines slip. Bureaucracy moves slowly.

Because of that, YES contracts can be slightly overpriced due to optimism.

When NO Has Real Edge

Short-dated contracts
Process-based approvals
Multi-step regulatory outcomes
Hype-driven narratives

You are betting against timing, not truth.

Why NO Eventually Fails as a Blind Strategy

1) Fat-tail risk
One low-probability YES resolving true can erase weeks of NO gains.

2) Capital drag
NO positions tie up capital for long durations.

3) Market efficiency improves
Edges shrink as participation increases.

Kalshi Strategies That Work in Practice

1) Selective NO Bias (Low Risk Base Strategy)

Tight timelines
Multi-step approvals
Over-optimistic sentiment

Risk small. Exit early if pricing shifts.

2) Buy YES Early, Sell the Hype

Buy when liquidity is thin
Sell into media-driven price spikes
Do not hold through binary resolution

This converts Kalshi into a volatility market, not a prediction contest.

3) Settlement Rule Arbitrage

Every contract specifies:

Data source
Time cutoff
Specific wording

Minor wording differences create opportunity.

4) Event Volatility Harvesting

During CPI, Fed decisions, elections, spreads widen. Skilled traders enter early and exit before normalization.

Common Mistakes

Confusing belief with probability
Holding every trade to settlement
Ignoring capital efficiency
Oversizing positions
Trading headlines emotionally

Simple Framework

Risk 3–5% per contract
Track expected value, not win rate
Favor short-duration contracts
Take profits before settlement when possible
Always read settlement wording

FAQ

Is Kalshi gambling?

No. It is a CFTC-regulated exchange trading binary event contracts.

Can you consistently make money on Kalshi?

Yes — but only if you approach it as probability trading and manage risk appropriately.

Is betting NO a guaranteed strategy?

No. It works selectively, not universally.

Final Takeaway

The edge on Kalshi is pricing, structure, and discipline.

Test it with $25 free: Claim $25 on Kalshi

Trading event contracts involves risk. This article is educational and not financial advice.

The EMA Cloud: The Next Generation Of Indicators?

2026-05-12T10:34:00.000-07:00

EMA Cloud Indicator (Quick Answer)

The EMA Cloud is a trend-following indicator (popularized by Ripster) that plots two exponential moving averages (EMAs) and shades the area between them. Traders use the cloud to quickly see trend direction and likely support/resistance zones during pullbacks.

TL;DR

Green cloud (fast EMA above slow EMA) = bullish bias
Red cloud (fast EMA below slow EMA) = bearish bias
Best in trending markets; can whipsaw in sideways chop
Common settings: 5–12, 8–9, 20–22, 34–50

Jump to: How to use · Best settings · Step-by-step · Backtesting (TrendSpider) · Examples · FAQ · Conclusion

Most traders use the same public indicators in the same obvious ways—so they end up with the same results. Real edge comes from thinking outside the box, testing variations, and building a repeatable process. The EMA Cloud is a “simple-but-useful” twist on traditional EMAs that makes trend and pullback zones much easier to see at a glance.

How to Use the EMA Cloud Indicator

EMA Clouds are built from two EMAs. When the faster EMA is above the slower EMA, the shaded area becomes a bullish (green) cloud. When the faster EMA drops below the slower EMA, the cloud flips bearish (red).

In the SPY example above, the 20 EMA is above the 50 EMA, creating a green cloud. As price pulls back into the cloud, many traders treat it like a dynamic support zone—a place where price may bounce and continue the trend.

If this concept feels familiar, that’s because it overlaps with the logic behind the Ichimoku Cloud System: a shaded zone that helps visualize trend and likely support/resistance.

Best EMA Cloud Settings

Common EMA Cloud settings include 5–12, 8–9, 20–22, and 34–50. The first number is the faster EMA, and the second number is the slower EMA. The shaded region between them becomes the cloud.

According to Ripster, popular combinations include:

5–12 or 5–13 for a fluid trendline (often used for day trades)
8–9 to help identify pullback/bounce areas
34–50 as a higher-timeframe trend filter (bullish above / bearish below)

Below is an example where the 34 EMA is below the 50 EMA (34–50 setting). The cloud turns red and starts acting as resistance.

Many traders layer multiple clouds: 34/50 as the long-term trend filter, plus faster clouds for pullbacks, adds, and exits. This creates the “rainbow” cloud effect shown below.

Step-by-Step Guide on Using the EMA Cloud

Find the indicator on your preferred platform such as TrendSpider (exclusive discount code available via the link). As new as this indicator is, it’s only available on a few platforms—currently TrendSpider and TradingView.
Add your preferred moving average type (commonly the exponential moving average). Use one longer-term set (e.g., 34–50) and one shorter-term set (e.g., 8–9).
Much like Ichimoku, you can shift the cloud forward/backward using an Offset. Offset 0 keeps it aligned to current price; higher values push it forward. Test this—offset can improve visuals, but can also create false confidence if you don’t validate it with real results.

Backtest EMA Clouds (Instead of Guessing)

EMA Cloud settings can work great in trending markets, but the best combo changes by ticker, timeframe, and volatility regime. The fastest way to improve results is to backtest and scan setups consistently.

Backtest EMA Cloud settings across markets/timeframes
Use automated scanning to find strong trends faster
Confirm entries with multi-timeframe analysis
Reduce whipsaws by filtering out sideways chop

Open TrendSpider (exclusive discount code)

Disclosure: This is an affiliate link. If you use it, I may earn a commission at no extra cost to you.

Chart Interpretation

Bullish: When the short-period EMA crosses above the long-period EMA, the cloud turns green.
Bearish: When the short-period EMA falls below the long-period EMA, the cloud turns red.

Pay attention to inflection points where the cloud flips colors—these can act like trend confirmation signals. But avoid getting chopped up: use settings that don’t flip too easily in sideways markets.

Examples

Here is another example showing how SPY repeatedly reacts to the EMA Cloud over time (daily chart, 20/50 EMAs):

Below is an annotated example from Ripster using a 1-minute AAPL chart and the 34/50 EMA cloud:

EMA Cloud FAQ

Is the EMA Cloud good for day trading?

It can be, especially in trending sessions. For choppy markets, consider stricter filters (higher timeframe trend, fewer flips, or confirmation).

What timeframe works best?

There is no universal “best.” Many traders use a higher timeframe (daily/4H) for trend bias and a lower timeframe for entries.

What are the best EMA Cloud settings?

Common sets include 5–12, 8–9, 20–22, and 34–50. The best settings depend on the market, timeframe, and volatility.

Is EMA Cloud the same as Ichimoku?

No. They share a “cloud” concept visually, but Ichimoku has multiple components and different logic. EMA Cloud is simply two EMAs with shading.

Next Reads (Build Your Edge)

Conclusion

The EMA Cloud is a rare “simple innovation” that improves how traders visualize trend and pullbacks using EMAs. The real key is to backtest settings on your markets/timeframes and learn when it works (trends) versus when it fails (chop).

If you want a faster workflow to test EMA Clouds and scan for strong trends, use: TrendSpider (exclusive discount code via the link).