Archives of “consolidation” tag

rss

Risk Management For Traders

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

One of Sun Tzu’s most famous quotes is: “Every battle is won before it is fought.” The phrase implies that it is planning and strategy that wins wars and not the battles themselves. Similarly, successful traders commonly quote the phrase: “Plan the trade and trade the plan.” Just like in war, planning ahead can often mean the difference between success and failure.

Stop-loss (S/L) and take-profit (T/P) points represent two key ways in which traders can plan ahead when trading. Successful traders know what price they are willing to pay and at what price they are willing to sell, and they measure the resulting returns against the probability of the stock hitting their goals. If the adjusted return is high enough, then they execute the trade.

Conversely, unsuccessful traders often enter a trade without having any idea of at what points they will sell at a profit or a loss. Like gamblers on a lucky or unlucky streak, emotions begin to take over and dictate their trades. Losses often provoke people to hold on and hope to make their money back, while profits often entice traders to imprudently hold on for even more gains.

 Take-Profit Points, trading greed, trading fear, trading emotions, financial behavior 


A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. Often times, this happens when a trade does not pan out the way a trader hoped. The points are designed to prevent the “it will come back” mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible.

On the other side of the table, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. Often times, this is when there is limited additional upside given the risks. For example, if a stock is approaching a key resistance level after a large move upwards, traders may want to sell before a period of consolidation takes place. (more…)

4 Stages ..

  
Analysis, Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

Stan Weinstein’s concept of stage analysis as outlined in his excellent book entitled Secrets For Profiting In Bull and Bear Markets.  I decided to read Mr Weinstein’s book and find out what these stages are.  Here is what I discovered:

STAGE 1:  This is the basing area where a stock is losing downside momentum.  Buyers and sellers are starting to move in equilibrium and although the stock is not taking off it is not selling off either.  The buyers are not asking for a discount of the price but are buying what the holders no longer want.  This stage could last weeks to months so there is no need to jump in just yet. 

STAGE 2:  The advancing stage begins when the stock in question starts to break higher from the basing area.  This stage usually has a retest to the break-out area before the real move starts.  There begins here a pattern of higher lows best described as two steps forward and one step back.  These pullbacks provide a good risk/reward opportunity for the astute trader.

STAGE 3:  The top area is stage 3 where the good trending stock finds its eventual end.  The upward advance loses momentum and consolidation sets in.  The mirror image of stage 1 starts to take shape once again.  There are sharp moves and high volume in this stage and it is best to refrain from trading here as the reward/risk ratio is stacked against you.

STAGE 4:  The declining phase is the fourth and final phase as the factor’s that maintained the stock’s previous momentum are no longer present and the sellers step in.  The trader is advised to never go long in this stage or hold on to any winning positions.  It is time to exit. If a downtend begins then you can start to look at shorting the stock for the same reasons you went long: trend and momentum.

The market is really very simple in its design and structure; it is the trader who makes it difficult.  Although not all markets and stocks are text book examples of the four stages, the disciplined trader would be wise to consider whether or not the stages may be playing out in a current position or one being considered.  There may just be a very good reason why both Shannon and Weinstein have best selling books on the same subject.

Trade Like an O’Neil Disciple -Book Review

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

The CANSLIM enthusiasts, and they seem to be legion if the reviews on Amazon are any indication, have nothing but praise for Trade Like an O’Neil Disciple by Gil Morales and Chris Kacher (Wiley, 2010). I decided to be a little more focused and less ebullient in this post and write about a trade setup not found in the standard O’Neil repertoire. Consider this a follow-up to yesterday’s discussion about the eye of ambiguity.

The setup is alternatively described as a pocket pivot or buying in the pocket. It is “an early base breakout indicator, which is designed to find buyable pivot points within a stock’s base shortly before the stock actually breaks out of its chart base or consolidation and emerges into new high price ground.” (p. 128) The pocket pivot indicator provides direction in what might be seen as an ambiguous situation. It is, the authors claim, particularly valuable in sideways moving markets.

A major virtue of a pocket pivot buy point is that it is a low-risk entry point—relatively close to support and far enough from resistance to be profitable even if the stock can’t break through to higher highs. Or, as the more optimistic authors claim, “the pocket pivot buy point technique can get an investor into a stock at a lower-risk price point and thereby make it more possible for the investor to sit through a pullback if the all-too-obvious new-high breakout buy point fails initially and the stock retrenches, corrects, or sells off.” (p. 129)

What are the characteristics of a pocket pivot buy point? “[A] stock should be showing constructive price/volume action preceding the pocket pivot. … [T]ighter price formations, that is, less volatility should be evident in the stock’s price/volume action as viewed on its chart. The stock should have been ‘respecting’ or ‘obeying’ the 50-day moving average during the price run that occurred prior to the time the stock began building its current base. … Except in very rare cases, … pocket pivots should only be bought when they occur above the 50-day moving average. Ideally, the stock’s price/volume action should become ‘quiet’ over the previous several days, which contrasts with the much larger and stronger volume move that comes on the pocket pivot itself. On the pocket pivot you want to see up-volume equal to or greater than the largest down-volume day over the prior 10 days.” (pp. 132-33)

The authors offer a series of variations on this generic trade setup. For instance, there’s the continuation trade: buying on volume after a pullback to the 10-day moving average. Or the bottom-fishing trade where a stock, after carving out a bottom, pushes through its 50-day moving average. They urge caution if a pocket pivot is too extended from its 10- or 50-day moving average when it begins its move or if a stock has been “wedging” upward instead of drifting downward before a pocket pivot. As they write, “context is everything.” (p. 162)

This setup is certainly not a revolutionary breakthrough in the world of technical analysis. In fact, anyone familiar with the literature might recognize several patterns rolled into one here. In the context of yesterday’s post, it is a “fast-follower” strategy because it requires a volume spike, created by the “first movers.”

Doubt and Disappointment-Two Friends of Traders

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #

We all want certainty both in and outside the charts. Problem is certainty is nothing more than hope wrapped in expectation.  Life is uncertain. A successful trade is uncertain.  If certainty is what we want then certainty we will get.  However, be prepared to meet certainty’s friends, doubt and disappointment.  Doubt and disappointment are, shall we say, in “cahoots” with certainty.  You can’t have one without the other.  This is a blessing really that we all too often turn into a curse.  A blessing because we have two new friends who can help keep us balanced, honest, and above all, human.  A curse because we choose to ignore their advice when we should be embracing it.  Embrace it you say?  Yes.  Because doubt and disappointment can lead to new discoveries and a deeper appreciation for what life has to offer.  Maybe, just maybe, what we believe to be certain, you know, that which we wrap up in hope and expectation, is not so certain after all.  Maybe, just maybe, our friends doubt and disappointment can lead us down a better path and a better life.  Maybe, just maybe, doubt and disappointment can teach us a new understanding about the markets and the charts, wherein we pin so many of our hopes and expectations. (more…)

Ten Principles of Short-Term Trading

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

1) Strength Begets Strength – A market rise that expands the number of stocks making new highs and that finds more stocks trading with strong upside momentum tends to persist in the short run.

2) Weak Rises Tend to Reverse – When markets move higher with fewer stocks making new highs and with fewer stocks showing strong momentum, the rise tends to reverse in the short run, often entering a trading range prior to making an extended decline.

3) Broadly Weak Markets Tend to Reverse – When the market is very weak (many stocks making new lows and many stocks displaying strong downside momentum), it is common to see the market make marginal new lows in the short run, but reverse after that.
4) Weak Tests of Prior Market Highs or Lows Tend to Reverse – When we get a market trading above or below its value area on low volume, few stocks making fresh new highs/lows, and weak momentum, we tend to get a “mean reversion”–a trade back into the value area. That’s basically what this week’s action has been about.

5) Strong Tests of Prior Market Highs or Lows Tend to Persist – When we see expanding volume and expanding new highs or lows on a move above or below the value area, such a breakout move tends to becoming a short-term trend. The longer the prior consolidation period (the heavier the volume within the value area), the more extended the subsequent trend tends to be.

6) Weak Pullbacks Following a Strong Move Will Reverse – When we have a strong market move that expands new highs/lows and momentum, a pullback on weak volume and with relatively few stocks participating will lead to at least a test of the impulse highs or lows and often to a resumption of the strong move.
 (more…)

How would you classify trading errors?

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

TRADINGERROR

  • Improper analysis, categorized as inadequate preparation or incorrect interpretation
  • Improper entry (early or out of sync with market and sector action)
  • Improper execution (inappropriate position size, failure to adhere to proper trading principles, e.g. momentum resumption)
  • Failed exit, e.g. profit turns into a loss, failure to recognize ‘windfalls’, etc.

So what ‘rules’ must we have.

  1. Identify your edge (specific market, specific techniques)…if making money on the short (long) side isn’t working, why persist at that which isn’t making it happen? Strive to do more of what is working and less of what is not.
  2. Trade with the market. Intraday ‘tells’ are huge. If breadth is negative and the dollar is positive, going long equities is going to be tough sledding.
  3. See the market as it is. If we’re wrong, having missed the exit ramp, are we going to stay on the highway into the next state, or get off?
  4. Understand the market structure. Is the market trending, detrending, breaking out of consolidation, bouncing off support or resistance, consolidating?
  5. Know how volatility is behaving…rising, falling, at extremes.
Go to top