A Trader’s 5 Best Teachers

Trading Losses: There are two types of losses, one loss is caused by the market simply not being conducive for the profitability of your system. The other loss is due to your lack of discipline causing your system not to work. If you followed your trading plan and had a loss that is to be expected. If you are trading a proven and tested method then you have simply learned that taking a loss is simply part of trading. However if your breach of discipline caused your loss, whether not taking a stop, over riding your plan, not taking an entry, trading too big, etc. then it is time to learn why you had the loss. Ego? Fear? Greed? Overconfidence? Laziness? and many other things cause losses. It is crucial that you learn why you broke your trading plan so you do not repeat the mistake again.

Charts: Studying the past price action of charts is very educational. It will show you how prices have reacted at  support/resistance levels in the past along with moving averages and any other indicators that you may choose. It is important that you understand how your market has historically traded whether it is currencies, commodities, stocks, or bonds. It is crucial that you learn how to identify a trend, a swing trade, and a range bound market. (more…)


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.


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.


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.


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.


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

The Darvas System in a Nutshell

I  truly admire  author and trader Darrin Donnelly for bringing the system thatNicolas Darvas used to make over $2 million in the stock market into modern times by really setting more precise metrics for the Darvas system. He uses moving averages we have today to look at possible price supports in addition to the price boxes that Darvas used. Below is a concise summary of the Darvas system in an up trending market.

While O’Neil is a brilliant trader who has helped thousands make better investment decisions, I feel that there are some aspects of the CAN SLIM system that, frankly, aren’t all that important in picking winning stocks.

Therefore, we offer a new, easy-to-remember acronym for the Darvas System:

D – Direction of the Market
A – Accelerated Earnings and Sales
R – Relative Price Strength (and Return on Equity)
V – Volume Increasing
A – Aggressive Growth Group
S – Sound Base Pattern

To further explain:

D – Direction of the Market

Is the market, as a whole, in an uptrend?  It is highly unlikely that a stock will have huge gains when the overall market is in a downtrend, so make sure the direction of the market is moving upward.

A – Accelerated Earnings and Sales

Is the company seeing increases in earnings and sales this quarter compared to the same quarter last year?

Normally, you want to see stocks with at least 40% increases in earning AND sales in the most recent quarter compared to the same quarter last year.  And remember, the higher the increase in earnings and sales, the better.  If you have a choice between a stock with a 50% increase and one with a 90% increase, definitely go with the 90% increase stock.

R – Relative Price Strength (and Return on Equity)

Is the stock outperforming most other stocks in terms of its price increase?

Darvas wanted to see stocks that had at least doubled over the past year before he’d consider buying.  If a stock has already increased a great deal over the past year, most investors are fearful of a steep decline, but many studies have shown that Darvas was right in his assessment; if a stock had already made a powerful move, it proved that it had the ability to move in such a fashion and therefore, was likely to do it again.

Another important characteristic of ideal Darvas stocks is a high Return on Equity.  Fund managers love to see a high ROE.  Some put a higher value on ROE than they do earnings and sales. (more…)

Zen of Trading- 10 Rules

1. Have a Comprehensive Plan: Whether you are an investor or active trader, you must have a plan. Too many investors have no strategy at all — they merely react to each twitch of the market on the fly. If you fail to plan, goes the saying, then you plan to fail.
Consider how Roger Clemens approaches a game. He studies his opponent, constructs his game plan and goes to work.

Investors should write up a business plan, as if they were asking a Venture Capitalist for start-up money; just because you are the angel investor doesn’t mean you should skip the planning stages.

2. Expect to Be Wrong: We’ve discussed this previously, but it is such a key aspect of successful investing that it bears repeating. You will be wrong, you will be wrong often and, occasionally, you will be spectacularly wrong.
Michael Jordan has a fabulous perspective on the subject: “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

Jordan was the greatest ball player of all time, and not only because of his superb physical skills: He understood the nature and importance of failure, and placed it appropriately within a larger framework of the game. (more…)

Ciana, New Frontiers in Technical Analysis

For those of us without a Bloomberg terminal New Frontiers in Technical Analysis: Effective Tools and Strategies for Trading and Investing by Paul Ciana (Bloomberg/Wiley, 2011) is an idea book, not a plug and play manual. But even though some of the software tools described in Ciana’s book are not available on run-of-the-mill trading platforms (and where they are, they are available by subscription only) clever programmers may get inspired. Moreover, even without access to proprietary software the imaginative reader can add some new arrows to his quiver.
The six chapters in this book are written by six different authors: “Evidence of the Most Popular Technical Indicators” (Paul Ciana), “Everything Is Relative Strength Is Everything” (Julius de Kempenaer), “Applying Seasonality and Erlanger Studies” (Philip B. Erlanger), “Kase StatWare and Studies” (Cynthia A. Kase), “Rules-Based Trading and Market Analysis Using Simplified Market Profile” (Andrew Kezeli), and “Advanced Trading Methods” (Rick Knox).
Ciana provides some fascinating data about the preferences of those who use the Bloomberg Professional Service. For instance, Europe opts for log charts 47% of the time and Asia only 9% of the time. Asia prefers candlestick charts, the Americas bar charts. Worldwide the most popular technical indicators (excluding moving averages) are RSI, MACD, Bollinger bands (BOLL), stochastics (STO), directional movement index (DMI), Ichimoku (GOC), and volume at time (VAT). RSI is the clear winner, with a 44.4% worldwide preference; MACD comes in second at 22%. Some indicators have geographical ties. GOC has a 10.8% popularity rating in Asia as opposed to 2.5% in the Americas and 2.8% in Europe. VAT has a 5.3% rating in the Americas and only 1.8% in Europe and 1.6% in Asia. (more…)

Common Mistakes to Avoid while Trading:



  • Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
  • Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin).
  • Average down in price: Placing good money after bad is a loser’s game.
  • Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
  • Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
  • Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision. (more…)

Book Review : Cloud Charts: Trading Success with the Ichimoku Technique by

David Linton’s Cloud Charts provides a good introduction for new traders seeking to learn more about Ichimoku (or Cloud Charts).

It is divided into 3 sections with a total of 16 chapters.

The first section (comprising of 7 chapters) deals with general Technical Analysis

The second section (comprising of 5 chapters) introduces the reader to Ichimoku

The last section (comprising of 3 chapters) discuss more about Advanced Cloud Chart Techniques.

For the experienced traders, it is possible to skip the first 7 chapters and head straight to the second section where it introduces the Ichimoku indicators, the constructions of the chart and the various signals for trading.

In my opinion, the author (David Linton) is able to depicts pretty clearly on the construction of the charts; how various Ichimoku indicators are constructed and how it is represented on Ichimoku.

As a trader, there are times where we choose to neglect the construction of the indicators. On hindsight, I am glad that the chapters reinforce my understanding of the charts and its possible implications when I am looking for support/resistance and the possible change in trend.

One important aspect of Ichimoku charts is the use of colours to differentiate different ‘moving averages’ and the change in cloud direction (or kumo twist). The book did not fall short in this area with all the charts in colour. (more…)

Method-Pyschology-Risk Management for Traders


  1. I am a trend hunter I want a stock that has the potential to move 10-20  points in my favor.
  2. My top pivot points for trades is the 5 day EMA  (3 & 7DEMA for NF )
  3. I play the long side in bull markets primarily and the short side in bear markets primarily.
  4. I go long the top monster stocks in up trending markets.
  5. I never short a monster stock above the 50 day moving average.
  6. I short the biggest  junk stocks in down trends, the ones that are unprofitable and made major missteps with customers and investors.
  7. I like to trade with all time highs or all time lows in stocks with in striking distance.
  8. Moving averages are my best indicators.
  9. I never have targets, I let a trend run until it reverses.
  10. My watch list for longs is the Investor’s Business Daily IBD50.
  11. I use Darvas Boxes at times to trade stocks.


  1. I am not trying to prove anything about myself I am only trying to make money.
  2. I will quickly admit when I am wrong when a stock moves against me enough to show me I am wrong.
  3. I trade my own method, I do not trade others advice.
  4. If I am losing and very unconformable with a trade I get out of it.
  5. I trade position sizes I am mentally comfortable with.
  6. I do not try to predict the future I look for what the chart is telling me.
  7. I trade the chart not my personal opinions.
  8. I am not afraid to chase a trending stock.
  9. I understand that I chose my entries, exits, risk, and position size and the market chooses when I am profitable.
  10. I do not worry about losing money I worry about losing my trading discipline.
  11. I have faith in myself and my method.
  12. I do not blame myself for losses.
  13. I do not blame myself for losses where I followed my rules.


  1. I attempt to never lose more than X % of my total capital on any one trade.
  2. I NEVER add to a losing trade.
  3. I use trailing stops to get out of winning trades.
  4. I use mental stop losses to get out of losing trades.
  5. I use position size to limit my risk.
  6. I use stock options to limit my risk.
  7. I know my biggest advantage in trading is small losses and big profits.
  8. I never expose more than X % of my capital to risk at any one time.
  9. I understand the market environment I am trading in.
  10. I understand the volatility of the stock I am trading.

Trading Mistakes: Avoid at all Costs

Common Mistakes to Avoid while Trading:

  • Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
  • Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin). (Learn to position size)
  • Average down in price: Placing good money after bad is a loser’s game.
  • Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
  • Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
  • Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision.
  • Buying 52-week lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom along with weakness and downward momentum. Buy strength and the momentum moving higher.
  • Pure Fundamentalist: Technical analysis is a must! Use candlestick charts that show the price, volume and major moving averages – this is all you need, don’t complicate the process.
  • Making trading decisions based on taxes: Never buy or sell based on taxes alone.
  • Buying based on dividends: Don’t buy based solely on dividends; most growth stocks will never give out dividends
  • Buying familiar names: Yesterday’s leaders are not likely to be tomorrow’s stars. Look for solid new companies with great earnings, sales and a product in demand. Don’t buy a stock based on a popular household name.
  • Lack of action: Be able to move on a dime. Time is money, don’t procrastinate or hope for something that may never happen.
  • Lack of Consistency: Develop a method suited to your personality; stick to it and don’t trade blindly.

Donchian rules

Richard Donchian is known as the father of trend following. His original trend following ideas form the basis for all trend following success that has followed. Below in an excerpt from an article written in 1995 about his 5 and 20 day moving average system:

Title: Donchian’s five- and 20-day moving averages. 
Author: Richard Donchian
Publication: Futures (Cedar Falls, Iowa) (Magazine/Journal)
Date: November 15, 1995
Publisher: Oster Communications, Inc.
Volume: v24 Issue: n13 Page: p32: ISSN: 0746-2468

On Wall Street there are two conflicting adages:

1. “You’ll never go broke taking a profit.”

2. “Cut your losses short and let your profits ride.”

Experience has shown that in commodities trading, the first of these “old saws” is dangerous and misleading, while the second may well be regarded as the one lesson the inexperienced commodity trader should learn if he wishes to have a better-than-even chance to come out ahead.

Every well-designed, trend-following, loss-limiting method for trading in futures (or stocks) rests on the basic principle that a trend in either direction, once established, has a strong tendency to persist, at least for a time. Among the many trend-following approaches now in use are the Dow Theory, point-and-figure chart techniques, swing methods (other than the Dow Theory), trendline methods, weekly-rule methods and moving average methods. We’ll focus on moving average methods and, in particular, the comparatively simple five- and 20-day moving average method.

The Method (more…)

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