When the market accommodates, trend trading can be highly lucrative. The trick, of course, is to divine the market’s often fickle moods. Tina Logan sets out to help the trader identify and exploit the “good times” in Profiting from Market Trends: Simple Tools and Techniques for Mastering Trend Analysis(Wiley, 2014).
The book is divided into two parts. The first, trend development, has chapters on trend direction, trend duration, trend interruptions, early trend reversal warnings, and later trend reversal warnings. The second part, putting trend analysis to work, deals with the broad market, bull markets, bear markets, and monitoring the market trends; it also includes a case study of the current bull market. Throughout, the text is illustrated with TC2000 (Worden Brothers) charts.
Let’s look at the chapter on early trend reversal warnings to get a sense of the book as a whole. Logan summarizes the warnings in a table. In an uptrend they are: a bearish climax move such as a key reversal or an exhaustion gap, bearish divergence, failure to break a prior peak, change of slope—rising trendline, break of tight rising trendline, approaching a strong ceiling, and bearish candlestick reversal pattern. The warnings in a downtrend are the reverse. (more…)
Archives of “chart patterns” tag
rssTwo Types of Traders
In general, I find there are two kinds of traders. The first kind trades visually, from patterns that are evident on visual inspection. Those include chart patterns, oscillator patterns, Elliott waves, and the like. Their trading decisions are discretionary, in that they elect to buy, hold, and sell based upon their perception of patterns and their judgment as to their meaning.
The second kind of trader distrusts visual inspection. Such traders are more likely to buy into the behavioral finance notion that unaided human perception and judgment are subject to a variety of biases. Accordingly, these traders use some form of historical/statistical analysis and/or system development to test ideas and trade only those that test out in a promising way.
Now here’s the interesting part: The first group of traders almost universally asks me to help them tame their emotions. They have problems with impulsive trading, failing to honor risk limits, failing to take valid signals due to anxiety, etc. The second group of traders, having researched successful strategies, almost universally asks me to help them take maximum advantage of their edge. They want help taking *more* risk and trading larger positions. (more…)
Rules for Bear Market
1. Good news in a bear market is like smoke in the breeze (i.e., soon dispersed). Don’t buy into upgrades or analyst recommendations. Analyst “upgrades” or recommendations can kill you.Every person reading this has access to some kind of trading platform, trading tools or systems that afford instant access to the financial markets. Good news like upgrades in bear markets typically has about five minutes of fame.
2. Bear markets are not a time to learn how to “day trade” in an effort to recoup losses (no matter how many times you hear that “this is a traders’ market”).
3. Accumulation days (there may be three or more in a row) are shorting opportunities, but resist being aggressive until the S&P 500 shows a 3- and 5-day moving average bearish cross. (Remember that it’s 50% market, 25% sector and 25% stock as far as direction, but some could argue in markets it’s 75% index, 15% sector and 10% stock.)
4. Chart patterns (unlike ice cream) come in just two flavors: continuations and reversals. Reversal patterns mostly form in weak trends. If the trend that the market or stock you are watching has been strong, then chances are that any pause is just a consolidation before the next leg down.
5. There is no such thing as “safe sectors.” Sure, each bear market brings sector rotation. But make sure if you are playing this game that you don’t have the flexibility of wood. And when the music stops, quickly find a chair!
That is, you must keep a flexible mindset so that you are able to change with the markets. The best traders are those who are nimble and approach the markets without bias.
6. Your stop-losses are YOUR stop-losses. The pain of being down 8% in a bull market is no different than being 8% wrong in a bear. If your risk tolerance requires you stopping out at 8%, then be consistent in any market you trade, but trade “with the primary trend.”
It takes greater emotional balance to trade a bear than a bull. So, always manage your risk — just remember that, in the markets, your money is always at risk.
Great traders manage emotions and risk. This makes them great. YOU know your risk tolerance and YOU control what happens between the “keyboard and chair.”
7. Bear markets are generally slow-moving affairs. However, stocks in bear markets can move much faster than you think (hence the reason that volatility rises drastically). But the “time” we spend in a bear is what everyone needs to keep in perspective. Bear markets last much longer than most are willing to wait. (more…)
Trading Your Personality
It’s been said too many times to count – that you must trade according to your personality. In the movies they might call it “being true to yourself” or something cheesy, but it’s a necessity in this job.
Recently I was asked which chart patterns I prefer to trade, continuation chart patterns or reversal chart patterns. My answer was that while I will actually trade either, I suppose the continuation and breakout type of patterns are the ones I trade more often than reversals or buying on support levels.
I don’t think one setup is superior to the other, they both have their pros and cons, and you have to go with what fits your style best.
Buying on support is an anticipatory play, which may take a few extra days to get moving. It can give you a lower cost basis than another trading strategy, but will require greater patience on your part while you wait for the stock to find traction.
Buying a stock which is breaking out puts you (by definition) in a stock that’s already on the move. This is a confirmation play. You get instant feedback on how your trade is developing and how much momentum the stock has.
The setups you select for your trades need to incorporate your personality tendencies on managing those trades once you are in them. For me, I tend to be a bit impatient and I want to know as soon as possible whether or not I’m right or wrong on a trade. Other traders don’t live in the left lane, and they’re willing to give a stock some time to get moving one way or another. They place their protective stop and turn their attention to something else in the meantime while waiting for their trade to make a move. Personally, I prefer to have my money at risk for the shortest timeframe possible. I really prefer the times when the market conditions are producing breakout plays and continuation patterns like the bull flag or ascending triangle patterns.
So, when you’re doing your homework and looking for quality setups to trade, be sure to consider the ones which fit your personality and your style of trading. Those will be the trades which you ultimately will manage the best.
Getting Started in Chart Patterns -Thomas Bulkowski (Book Review )
Thomas Bulkowski is probably the best known chart pattern researcher. Among his credits are theEncyclopedia of Chart Patterns and the three-volumeEvolution of a Trader. In this second edition ofGetting Started in Chart Patterns (Wiley, 2014), a book originally published in 2006 and newly revised and expanded with updated statistics, he introduces more than forty chart formations. Better yet, he explains how to trade using them.
Although the title indicates that the book is for novices, it is equally valuable—perhaps even more valuable—for more experienced pattern traders. Without continually reviewing, testing, and revising pattern trading strategies, it’s all too easy to trade yesterday’s market.
In two action-packed chapters Bulkowski explores trendlines and support and resistance. He considers support and resistance to be “the most important chart patterns” because “they show how much you are likely to make and how much you are likely to lose on each trade. That’s like playing poker and knowing the hands of your opponents. You won’t always win, but it helps.” (p. 35)
Top 10 Trading Influences
If New Trader University had a campus this would be the professors:
Dan Zanger is a world record holding trader that taught me to use in the money stock options on the biggest monster stocks to amplify my returns with no added risk at key points. He is the king of chart patterns.
Alexander Elder taught me how the trader’s Mind, Method, and Money Management have to all work together for a trader to be successful.
Michael Covel showed me how the best trend following traders in the world win over the long term by simply following the trend. Finding the big trends is now my focus above all else.
Jesse Livermore knew how to make a fortune in bull and bear markets, in commodities or stocks. His only weakness was the management of the risk of ruin. He made some of the biggest fortunes in the history of trading and also blew up his account more times than other legends.
Nicolas Darvas showed me how to ride monster stocks 100 points farther than anyone else seemed to believe they could go. His lessons also showed me how to miss bear market draw downs.
Van Tharp‘s marble game on how to manage the risk of ruin was a game changer for me. Managing risk is really what determines a trader’s long term survival not stock picking.
William O’Neil showed me how to pick the real winning stocks based on historical models not opinions. He has studied what has really made money in the stock market historically better than anyone else I know. I get my stock watch list from his publication Investor’s Business Daily’s IBD 50.
Ed Seykota is truly a master trader and he has the returns to prove it. Mr. Seykota believes that a trader’s psychology determines a trader’s success more than any other factor. I believe him.
Jack Schwager wrote “Market Wizards” and really got into the specific nuts and bolts of what makes them win.
Paul Tudor Jones I have picked up a lot of trading wisdom form his documentary, quotes, and interview. He is truly one of the greatest traders of our time.
If you decide to study these great traders keep what actually makes you money in the long term and discard what does not.
Market Poem
u know the old School chartists
are looking at the daily,
and can’t help but notice
what they believe to be
an inverted complex head and shoulders (bottom/continuation) pattern
replete with upward sloping neckline and a higher right shoulder
and the attendant bullish implications
they have come to expect,
or
perhaps they visualize a diamond pattern (debatable implications, there)
ironically,
if the market does indeed trade higher
and makes new historical highs,
or fails to do so,
it will have nothing to do
with the perceived formations
Do successful traders have different mental models
While much of the focus on trading is around chart patterns, scanners, analytical techniques, indicators, quantitative techniques etc., most of it is commodity. Everyone has access to same tools, techniques, books, research or analysis. So why is it that some traders are very successful and some are not. You can largely divide the traders in to those with consistently good returns, those with mediocre returns and those who are unsuccessful. Most of the time you will find mediocre traders continue to have mediocre returns for long time and their best years never exceed beyond a certain thresh hold.
Much of the same things you will notice in life in general. Vast majority remains stuck in sea of mediocrity. It has nothing to do with innate talent or efforts. Much of it has to do with mental models.
Mental models are deeply held mental images, beliefs, and assumptions. The mental models play a very important role in dealing with world around us. We interpret the world according to our mental models. Two people with different mental models react and interpret same data and same situations differently. Mental models include what a person thinks is true but not necessarily what is actually true.
Successful people in most walks of life have different mental models than mediocre people. That is why successful people can see and act on opportunities which others do not see.
One thing which you can do to be successful in trading or in life in general is to change your mental models. But in reality it is one of the most difficult things to do. Movies often have very dramatic scenes of mental model change leading to transformation in leading character. But in real life changing mental models requires a sustained and structured process and many times requires facilitation by an outside entity. There is a vast array of books and techniques dealing with this field. I have spent years studying this fascinating field of mental modeling.
Once you have the right mental models you see the markets and the trading opportunities differently.
Candlestick Pattern Dictionary
- Abandoned Baby:
A rare reversal pattern characterized by a gap followed by a Doji, which is then followed by another gap in the opposite direction. The shadows on the Doji must completely gap below or above the shadows of the first and third day. - Dark Cloud Cover: A bearish reversal pattern that continues the uptrend with a long white body. The next day opens at a new high then closes below the midpoint of the body of the first day.
- Doji: Doji form when a security’s open and close are virtually equal. The length of the upper and lower shadows can vary, and the resulting candlestick looks like, either, a cross, inverted cross, or plus sign. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level.
- Downside Tasuki Gap: A continuation pattern with a long, black body followed by another black body that has gapped below the first one. The third day is white and opens within the body of the second day, then closes in the gap between the first two days, but does not close the gap. (more…)
A rare reversal pattern characterized by a gap followed by a Doji, which is then followed by another gap in the opposite direction. The shadows on the Doji must completely gap below or above the shadows of the first and third day.
A bearish reversal pattern that continues the uptrend with a long white body. The next day opens at a new high then closes below the midpoint of the body of the first day.
Doji form when a security’s open and close are virtually equal. The length of the upper and lower shadows can vary, and the resulting candlestick looks like, either, a cross, inverted cross, or plus sign. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level.
A continuation pattern with a long, black body followed by another black body that has gapped below the first one. The third day is white and opens within the body of the second day, then closes in the gap between the first two days, but does not close the gap. 5 Lessons From Legendary Traders: Michael Marcus
Lesson #1: Each Trader has A Distinct Style
“You also have to follow your own light. Because I have so many friends who are talented traders, I often have to remind myself that if I try to trade their way, or on their ideas, I am going to lose. Every trader has strengths and weaknesses. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and the bad in your own approach. When you try to incorporate someone else’s style, you often wind up with the worst of both styles. I’ve done that a lot.”
This is a very important point: You have to find out your strength and weaknesses and develop a trading style that suits your personality best. If you are good at holding winners – trade trend-following systems. If you are comfortable with several consecutive small losses and several big wins – trade chart patterns. If you are highly disciplined and not too aggressive – you could focus only on high-quality trades which come rarely. Let your personality choose your trading style.
Lesson #2: Always Use Stops
“Always use stops. I mean actually put them in, because that commits you to get out at a certain point”
This one’s a no-brainer, but worth mentioning. Many beginners tend to discard stop losses after seeing several trades touching their stop loss and then continuing in their direction. Very wrong approach. Putting stop loss is crucial for your trading success and performance. If you stop loss is placed in logical place (A.K.A: Support or Resistance level), you should have no reason not to respect it – if price touched it, the basis for your position has voided and staying in the position is highly risky. Also, always have an emergency stop in case of sudden news or catastrophe. (more…)