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TECHNICAL ANALYSIS FOR IDIOTS

  
  Education
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The outline of the book is very simple and well designed, consisting of four parts: Introduction to Technical Analysis, Tools For Technical Analysis, Time to Trade, and Trading Mechanics.  There is a wealth of information here so let’s look at a few nuggets.

INTRODUCTION TO TECHNICAL ANALYSIS

Arps does a good job of explaining the purpose of technical analysis as a way to “help you anticipate potential changes in the direction of market prices resulting from crowd behavior driven by the emotions of greed and fear” and not as a “business of absolute predictions.”  All too often the new trader considers technical analysis to be the answer to predicting future price action; Arps tempers this expectation with a good analogy:  “Like weather forecasting, technical analysis doesn’t result in absolute predictions about the future.  Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time.”  After laying the foundation Arps begins to build a firm structure by covering topics that include market structure, charting, and various swing patterns.

TOOLS FOR TECHNICAL ANALYSIS

Part 2 covers the technical of technical analysis.  Here Arps dissects just about every tool available to traders from trendlines to moving averages; oscillators to point and figure charts; and price to support and resistance.  These tools help the trader better  anticipate future price direction by considering recent price support/resistance areas, overbought/oversold areas, trending/consolidation conditions, divergence, etc.  “Answers to these questions can alert you in advance as to when prices are likely to change direction and thus provide you with powerful information that can significantly improve your trading profits.”  Much of what is covered here is your traditional meat and potatoes but there is a little extra gravy, such as Arps’ own Fear-Greed Index, a chapter on Volume Float analysis, made popular by Steve Woods, and the Jackson Probability Zones, a method named after J.T. Jackson.

TIME TO TRADE

Understanding the basics of technical analysis is one thing: applying it to current market conditions is quite another.  In part 3, Arps discusses how to use technical analysis for building the skills necessary to become a successful trader.  What is of particular interest to me is Arps discussion of developing a trading plan, which, he says, consist of four parts:  rules for entry, rules for exit, money management rules, and the selection of a strategy.  Anyone who has traded for any length of time will quickly point out that the trader may have more degrees in technical analysis than a thermostat but if he does not have a plan for using that knowledge it will be worthless.  In fact, it could be dangerous.  Arps does a great job of cautioning the would be trader who believes that technical analysis knowledge is key when it is not.  “There are several reasons to have a trading plan, but probably the biggest is the way it simplifies things.  Decision making becomes very clear cut.  The trading plan defines what is supposed to be done, when, and how.  Just follow the plan.  The plan serves as a roadmap to entering and holding, profit taking, or cutting losses.  Writing down your plan gives you an immediate edge over most traders and investors.”  Bottom line: the trader’s edge is following a plan; not the plan itself.

TRADING MECHANICS

In part 4, Arps takes the trader through the (more…)

Trader's mindset?

  
  Education
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How does someone know that they reached the trader’s mindset? Here are a few characteristics:

1. No anger whatsoever.
2. Confidence and being in control of the self
3. A sense of not forcing the markets
4. An absence of feeling victimized by the markets
5. Trading with money you can afford to risk
6. Trading using a chosen approach or system
7. Not influenced by others
8. Trading is enjoyable
9. Accepting both winning and losing trades equally
10. An open mind approach at all times
11. Equity curve grows as skills improve
12. Constantly learning on a daily basis
13. Consistently aligning trades with the market’s direction
14. Ability to focus on the present reality
15. Taking full responsibility for your actions

Developing the trader’s mindset takes time. It usually takes traders 2-5 years before they can read through the above list and honestly say that it describes themselves.

Look Inside Yourself

  
  Education
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One trader wrote in that he was in a slump and wondered if he should switch markets or find another indicator.

Do you ever find that you also want to blame something outside yourself?

One of my favorites used to be blaming ‘the system’ – the system is rigged against me: the brokers are the only ones getting rich, robbing me on these bid/asked spreads, hunting all my stops, etc.

When you blame an external situation, you are giving up control, and instead letting yourself be controlled by outside events. This converts you from a proactive trader into a reactive trader. Or a winner into a whiner.

If you are reacting after the fact in the markets, you are then letting your emotions start to control you, instead of planning how you will react to any set of circumstances.

You know how letting emotions control you turns out in the markets. You go broke.

You must believe that you control your own destiny. If you are not getting the results you expect of yourself, look inside yourself.

Start analyzing your actions and behavior. Are you hanging on to losses too long? Are you cutting profits too soon? Are you having trouble pulling the trigger only to watch in frustration as your trade wins without you?

These and other frustrations should clue you in that you need to fix some element of your trading plan. Evaluate your present situation, and if it needs to change, take decisive action and change it.

When Strengths Become sabotage

  
  Education
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The tricky thing about playing to our strengths is that it is often our strengths, applied across situations uncritically, that can hold us back.  The dark side of strengths are sometimes called derailers, because of their potential for interfering with progress and derailing success.
Consider the following examples:
1)  The diligent hard worker who periodically burns out and fails to maintain valuable friendships and personal relationships;
2)  The process-oriented trader who develops good trading habits, but fails to innovate and expand those habits;
3)  The trader who processes information very well through teamwork and social interaction, but who falls prey to consensus thinking; 
4)  The caring manager who has great relationships with employees, but avoids conflict and does not effectively uphold work standards;
5)  The trader who is passionate about markets and learning about trading and who loses money by overtrading.
In each case, a strength carries the seed of its own undoing:  what powers us down the track can also derail us. (more…)

How Traders Used To Instant Message Each Other Back In 1922

  
Analysis, Education
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One of the cool things we learned while we were there was how traders communicated with each other back in the 1920s.  
They used this pneumatic tube system, which carried reports/stock order in capsules through a system of pipes. 
Let’s walk through how it works.
Here’s the pneumatic tubing station that dates from 1922. It was located on the 7th floor at the Stock Exchange Luncheon Club. 
Here’s the pneumatic tubing station that dates from 1922. It was located on the 7th floor at the Stock Exchange Luncheon Club.

pneumatic tubing

 

These capsules traveled through the pneumatic tube system carrying orders and reports of stock sales from the broker’s booth, to the trading post, and to the Ticker Department. (more…)

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