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3 Simple Techniques

  
  Education
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Once you sort through all the trading jargon and strategies, making a good stock trade is much easier than people tend to make it. In other words, most people make stock trading harder than it needs to be.

After all, when trading we are generally dealing with thousands of dollars per holding, so it can be easy for traders to continually second guess and put pressure on themselves before finally pulling the trigger.

Below are 3 simple techniques that will having you making good stock trades more often than not.

  1. Create an entry point – Where is a good spot to buy the stock? Based on your strategy, this could be after a breakout, after a pullback, and so on. Once you choose an entry style stick to it and use it every time.
  2. Create a failure point – This is also know as creating stop losses. Basically determine the eject button before entering the stock. Based on your analysis, this should be the price where the trade is considered a bust when it falls below that price.
  3. Create a price target – It is easy to say a stock will go up, but when do you know when to sell? Are you necessarily tying up your capital in a stock that already saw its boost? By creating a price target before entering a stock, you better utilize your capital as you collect gains and move on to the next stock.

That’s it! Yes, it is really that simple, by determining these 3 critical points, the hardest part of stock trading should be deciding how to spend all that money you made.

Continue to tweak and perfect your criteria for determining these critical points, and eventually you’ll master a surefire trading system.

Recipe for catching a reversal:

  
  Education
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recipesIngredients: For this recipe you will need one (1) well-known or “classic” technical chart pattern on a daily time frame, preferably near the high or low of the mid-term price range. When your pattern of choice has been observed, you will then need to collect at least two (2) or more instances of public expressions of sentiment which confirm the prognostication of said pattern: pre- or post-market media bytes, business news website headlines, confident/fearful declarations on your favorite trading forum, or any other variety of before-the-fact assumption.

Preparation: When the above ingredients have been secured, wait for a daily close which would confirm “ripeness” of the pattern. Next morning, enter a stop order at the confirmation price in the opposite direction of pattern breakout to initiate position. If stop is triggered, immediately enter protective stop at prior low/high.

Parboiling: If market moves quickly in your favor, take profits on at least a partial portion; mentally “set aside” closed profit for re-entry if market pulls back towards initial entry price with next few days. If pullback manages to hold above prior high/low, re-enter full position at your discretion.

Cooking: Set protective stop for entire position at breakeven and let sit undisturbed for a few days or more if possible.

Presentation: Dish is ready when “failure” point of pattern is breached; serve at market or with trailing stop, whichever you prefer.

Develop yourself-Trading Mastery

  
  Education
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“Learning any new skill involves relatively brief spurts of progress, each of which is followed by a slight decline to a plateau somewhat higher in most cases than that which preceded it…the upward spurts vary; the plateaus have their own dips and rises along the way…To take the master’s journey, you have to practice diligently, striving to hone your skills, to attain new levels of competence. But while doing so–and this is the inexorable–fact of the journey–you also have to be willing to spend most of your time on a plateau, to keep practicing even when you seem to be getting nowhere.”   – George Leonard (Mastery)

As a trader, sometimes it feels as though all the efforts you are investing into trading are not paying off.  This is in fact normal. 

Embrace the suck and realize that the most pivotal moments of your development will be spent on a plateau. 

Think of the plateau as a pullback in a stock that has just had a large run up.  In this light, recognize that the plateau is just a healthy consolidation before the next leg up. 

The key however is to not overextend yourself during this phase by trying to make something happen.  This is where I see a lot of traders do harm to their development. 

If you notice you have plateaued, keep active, stay focused, and engaged but don’t make earning a lot of money your focus.  The key at this stage is to not to lose money which will undo all the positive emotional and psychological progress which will cause you to start to look for changes in all the wrong places.

Make Friends

  
  Education
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The trend is your friend. Trading is like swimming. You can swim with the current or against it. In a survival situation, you can swim with the current forever. Outside factors such as water temps, need for food and sleep are another matter, but as for pure swimming ability you could swim with a slow or strong current forever.

Not so with swimming against the current. You will eventually tire and drown. That is an absolute certainty. Unless you find intricate ways to reserve kinetic energy and escape the current’s ravage for periods of respite, you will die. The same concept is true for trading with market direction versus against it. If I only had Rs 10000 for every person I heard say, “I’m a contrarian… I don’t follow the herd” through the past fifteen years, I’d have Rs One Crore for free money right now. Any idea where all those market contrarians are today? Other professions than trading. (more…)

Do's and Dont's For Traders

  
  Education
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  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 traders’ wisdom is a lie. Trade in the direction of gap support whenever you can.
  8. Trends test the point of last support/resistance. Enter here even if it hurts.
  9. Trade with the TICK not against it. Don’t be a hero. Go with the money flow.
  10. If you have to look, it isn’t there. Forget your college degree and trust your instincts.
  11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.
  12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don’t expect anyone to change the channel.
  13. Avoid the open. They see YOU coming sucker
  14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.
  15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.
  16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.
  17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.
  18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.
  19. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.
  20. Beat the crowd in and out the door. You have to take their money before they take yours, period.

Recipe for catching a reversal:

  
  Education
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Ingredients: For this recipe you will need one (1) well-known or “classic” technical chart pattern on a daily time frame, preferably near the high or low of the mid-term price range. When your pattern of choice has been observed, you will then need to collect at least two (2) or more instances of public expressions of sentiment which confirm the prognostication of said pattern: pre- or post-market media bytes, business news website headlines, confident/fearful declarations on your favorite trading forum, or any other variety of before-the-fact assumption.

Preparation: When the above ingredients have been secured, wait for a daily close which would confirm “ripeness” of the pattern. Next morning, enter a stop order at the confirmation price in the opposite direction of pattern breakout to initiate position. If stop is triggered, immediately enter protective stop at prior low/high.

Parboiling: If market moves quickly in your favor, take profits on at least a partial portion; mentally “set aside” closed profit for re-entry if market pulls back towards initial entry price with next few days. If pullback manages to hold above prior high/low, re-enter full position at your discretion.

Cooking: Set protective stop for entire position at breakeven and let sit undisturbed for a few days or more if possible.

Presentation: Dish is ready when “failure” point of pattern is breached; serve at market or with trailing stop, whichever you prefer.

The Importance of Timing the Market

  
  Education
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Any investor can find and research the “greatest” stock on the market; one with huge potential but if the general indexes are negative, it will most likely be the wrong time to buy. A stock with accelerating earnings, rising sales, an up-trending chart pattern and a strong industry group may sound excellent to buy on the surface but will mean absolutely nothing if the market is positioned to move in the opposite direction of your expectations. As soon as a stock is purchased, the time comes for an investor to make a decision to hold or to sell. If the position shows a profit, hold as your judgment is correct. If the position shows a loss, cut it quickly and don’t rationalize the situation before the loss doubles in size. Timing will play an important role in determining if you are right or wrong.

Losers must be cut quickly, long before they materialize into enormous financial disasters. The company and underlying stock may not be a loser but rather your timing may be premature to a strong movement, forcing you to sell on a pullback. After a stock is cut from your portfolio, the transaction must be forgotten about and eliminated from your subconscious mind and/or emotional bank. This may sound as if I am contradicting myself from Monday but I am not. I said the transaction must be eliminated from your memory bank but not the actual trade. (more…)

Three Blind Men And The Markets

  
  Education
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elephant-3

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…)

Brooks, Trading Price Action Reversals

  
  Education
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The third and final volume of Al Brooks’s series is Trading Price Action Reversals: Technical Analysis of Price Charts Bar by Bar for the Serious Trader (Wiley, 2012). A trader does indeed have to be serious to read all three volumes because, according to the author himself, the task is daunting: some 570,000 words.
Only half of the final volume is about trend reversals. The rest deals with day trading, the first hour (the opening range), and putting it all together, including 78 trading guidelines, some of which you may not have encountered elsewhere.
This volume is the most accessible of the three, but then my very tired eyes did a lot of work before getting here. It would be difficult to skip the first two volumes and expect to understand the third.
Brooks himself is not primarily a reversal trader. As he writes, “I prefer high-percentage trades, and my most common trades are pullback entries and trading range fades. I especially like breakouts because when they are strong the probability of follow-through is often more than 70 percent. I look less often for reversal trades, because most reversal attempts fail, but I will take a strong reversal setup.” (p. 463) (more…)

Trading Lessons

  
  Education
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The market is a tough battle.  Each day there are chances and opportunities to make money though, it is the greatest form of free market capitalism known to man.  It’s a vast ocean with treasures; we just have to be able to unearth them at the right moment.  We have the ability to navigate carefully through markets, put our bets out there and see where the chips fall.

But if we are too loose with our capital then we are headed for a bad ending.  Discipline is one of the keys to success:  learn your craft and practice.  Each day that passes is one more great learning experience – capture it, analyze it and grow from it.  Use a trading system, pay attention to the timeless patterns of price/volume and believe in what you see and not what you hear. (more…)

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