1. Never, under any circumstance add to a losing position! Ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!
2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.
4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is too low. Nor can we know what price is too high. Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed cheap many times along the way.
5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.
6. Markets can remain illogical longer than you or I can remain solvent according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.
7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds as they shall carry us higher than shall lesser ones.
8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect gaps in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.
9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In good times even errors are profitable; in bad times even the most well researched trades go awry. This is the nature of trading; accept it.
10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade. (more…)
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…)
Different shapes and forms.
Failure comes in all different shapes and forms. The distance you fall after a failure, time it took to get to the failure,and whether you get back up determines that shape and form. I realize there are a million posts on why failure is important but success is important, especially in trading.
Failure is different in trading.
Failure/losing in trading is not the same as failure in other contexts. What is working right now is always changing. What happens to many traders is that they waste money until their system is working again or they run out of money before it happens. I believe in having a process so you can adapt to that change. When you find something that works continue to do it till it does not work. A 100x easier said than done.
Trading is gambling for some. (more…)
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)
1. Forget the news, remember the chart. You’re not smart enough to know how news will affect price. The chart already knows the news is coming.
2. Buy the first pullback from a new high. Sell the first pullback from a new low. There’s always a crowd that missed the first boat.
3. Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.
4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.
5. Don’t buy up into a major moving average or sell down into one. See #3.
6. Don’t chase momentum if you can’t find the exit. Assume the market will reverse the minute you get in. If it’s a long way to the door, you’re in big trouble.
7. Exhaustion gaps get filled. Breakaway and continuation gaps don’t. The old trader’s wisdom is a lie. Trade in the direction of gap support whenever you can. (more…)
A Hindu folktale tells of three blind men encountering an elephant. “It’s a tree,” says one, stroking a leg. “No, no, it’s a snake,” says another, feeling the trunk. “No, this must be a house,” insists a third, spreading his arms against the bulk of the elephant’s body.
All three had a different perception of the elephant based on the part they examined, and all three conclusions were wrong. The elephant was larger and more complex than any of the men realized.
A similar tale is told everyday in the market. Each market participant has different needs, agendas, histories, perceptions, and sees the market completely differently. As with the three blind men examining the elephant: (more…)
We’ve all read innumerable times that we learn more from failure than from success. Well, that’s not quite accurate. The sentence should probably read: “Failure provides a better opportunity for learning than does success.” Not all people—in fact, probably few people, take advantage of the opportunity that failure offers.
John C. Maxwell, a prolific author of self-help books, wants to increase the number of learners. Sometimes You Win—Sometimes You Learn: Life’s Greatest Lessons Are Gained from Our Losses (Center Street/Hachette, October 2013) explains how to turn failure into learning. John Wooden wrote the foreword to the book, based on its outline, a few months before he died.
Losses are tough, there’s no getting around this fact. They cause us to become emotionally stuck and mentally defeated, they create a gap between knowing and doing, they never leave us the same. They hurt, but when we don’t learn from them they really hurt.
Maxwell approaches learning from multiple perspectives: the foundation of learning, the focus of learning, the motivation of learning, the pathway of learning, the catalyst of learning, the price of learning, and the value of learning. His final chapter is entitled “Winning Isn’t Everything, But Learning Is.” He incorporates anecdotes, insights from others, and apposite quotations such as Bill Gates’s famous line: “Success is a lousy teacher. It makes smart people think they can’t lose.” (more…)
David Halsey throws out the old notion of a measured move: that you copy an AB move up (or down) and paste it on a retracement low (or high) of C to get your price target D. In Trading the Measured Move: A Path to Trading Success in a World of Algos and High Frequency Trading(Wiley, 2014) he substitutes Fibonacci levels.
He uses three trade setups: the traditional 50% retracement measured move (MM), the extension 50% MM, and the 61.8% failure. When a trade is entered, its target is 123% from a swing high or low (and sometimes from a breakout) that is followed by a retracement (50% in the traditional setup). That is, the target is AB + 23%. Halsey shows both successful and failed MM trades on charts—unfortunately usually grey bars on a black background, which makes them hard to decipher.
The measured move trade setups are not stand-alones. Halsey discusses the use of multiple time frames, seasonality, NYSE tools, tick extremes and divergences, and gaps. He also discusses how to manage positions and take profits, advanced (actually, pretty basic) risk management, trading psychology, and having a trading plan and journal. (more…)
Average True Range is an indispensable tool for designers of good trading systems. It is truly a workhorse among technical indicators. Every systems trader should be familiar with ATR and its many useful functions. It has numerous applications including use in setups, entries, stops and profit taking. It is even a valuable aid in money management. The following is a brief explanation of how ATR is calculated and a few simple examples of the many ways that ATR can be used to design profitable trading systems.How to calculate Average True Range (ATR):
- Range: This is simply the difference between the high point and the low point of any bar.
- True Range: This is the GREATEST of the following:
- The distance from today’s high to today’s low
- The distance from yesterday’s close to today’s high, or
- The distance from yesterday’s close to today’s low
True range is different from range whenever there is a gap in prices from one bar to the next. Average True Range is simply the true range averaged over a number of bars of data. To make ATR adaptive to recent changes in volatility, use a short average (2 to 10 bars). To make the ATR reflective of “normal” volatility use 20 to 50 bars or more.
Will write more with Examples …Next week !!