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Your questions -My answers

  
  Education
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questionandanswerThe Cardinal Sin Of Trading

Q:  Do you believe in the rule of not letting a winning position turn into a loser? If you do, how do you handle a situation where a stop out at the ATR would cause you to take a loss on a position that was a winner at one time?

A:  This has been called the cardinal sin of trading – to let a profitable position turn into a loser. But, it happens. And, just because it does happen, doesn’t mean that it provides you with an excuse not to take your medicine and own the loss.

When we are wrong and we do have a good trade go against us, our top priority remains capital preservation. Therefore, if when painful, we cannot let a small loss grow into a larger one. The worst thing in the world is letting a bad trade turn into an investment and being held hostage by the break-even curve. That’s why stops are important and why sticking to them, even if it requires you to exit with a loss, is mandatory.

Buy The Dippers

Q:  You sometimes refer to the “buy the dippers” in a what seems to me to be a negative tone and yet you also describe part of your style as buying on pullbacks. How do you distinguish these two ideas?

A:  That’s funny you mention this and I appreciate it especially as you say I fall well within the “buy the dip” camp. I have no problem with the buy the dippers as long as they’re present and in charge of the tape, we’ll be just fine. But, the problem is, of course, that if every dip gets bought, at some point Mr. Market will figure out a way to roll back that trade and gain back some respect for his ability to cause the most amount of frustration to the majority. This will ultimately lay the foundation for a nasty bull trap scenario where everyone is long at the wrong time and then caught with their pants down in a sizable reversal. In my experience, when any trade becomes a routine money-maker, you have to expect the market to throw you a monkey wrench. There’s no room for complacency and whenever I have something that works like clockwork and others have figured out the same, I get nervous.

4 Stages ..

  
Analysis, Education
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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.

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.

The Art of Trading

  
Analysis, Education
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trading-floorA GOOD Trader WILL: 1. Always wait for the setup: No Setup-NO Trade. 2. Knows that winning trades work almost right away. 3. Never takes a big loss. Sell it and start over. 4. Takes small loses regularly. Winners will come. 5. Lets the stock keep working until it does NOT! 6. Is eager to sell a loser, NOT a winner! 7. Buys pullbacks/patterns on the strongest stocks. 8. Will always trade small so he is not emotional. 9. Takes responsibility for his own trades.

Ten Laws of Technical Trading

  
  Education
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1. Map the Trends

Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale map of the market provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you’re trading in the same direction as the intermediate and longer term trends.

2. Spot the Trend and Go With It

Determine the trend and follow it. Market trends come in many sizes – long-term, intermediate-term and short-term. First, determine which one you’re going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you’re trading the intermediate trend, use daily and weekly charts. If you’re day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.

3. Find the Low and High of It

Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old “high” becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies – the old “low” can become the new “high.”

4. Know How Far to Backtrack

Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.

5. Draw the Line

Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes. (more…)

Change Of Market Character

  
  Education
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trend-tradingAs a trend develops, the reactions, or pullbacks, tend to become smaller. Traders looking to enter the trend wait for reactions to place their orders; as the move becomes more obvious, these reactions will get smaller and the increments of trend movement will become larger. When the reaction suddenly is larger, the move is ending; the change in the character of the move signals a prudent exit, even if prices continue erratically in the direction of the trend.

Trading Do's and Dont's

  
  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.

Ten Principles of Short-Term Trading

  
  Education
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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…)

Trading Do's and Dont's

  
  Education
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In no particular order of importance

  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. (more…)

10 Trading Points

  
  Education
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1) When you see a market extended to the upside or downside, in which many new buyers or sellers pile in at the new highs or lows, be on the lookout for opportunities to fade the move. The market, on average, doesn’t reward those who chase highs or lows or who panic out at price extremes.
2) A market that trades above or below its value area on weak volume is likely to return to that value area. A breakout turns into a trend when higher/lower prices attract market participation.
3) A broad, high volume breakout move to new highs or lows from an extended range is more likely to continue in its breakout direction (and move significantly in its breakout direction) than a narrow, low volume breakout move from a briefer range. Such moves are sustained by the larger number of traders on the wrong side of the market who will have to cover their positions, thus accentuating the breakout move.
4) A breakout move accompanied by a fundamental catalyst (earnings report, news event, shift in interest rates, currency movement) is more likely to continue in its breakout direction than a breakout move that occurs without other asset repricing. Large institutional traders are more likely to reprice equities in the face of significant fundamental drivers in correlated markets.
5) Don’t chase price highs or lows; sell when buyers take their turn and can’t move the market highs; buy when the sellers take their turn and can’t move the market lower.

6) Identify what the market’s largest traders are doing and go with it on weak countertrend action. The large traders account for the majority of the market’s volume and volatility. If they are buying or selling stocks, you don’t want to get caught fighting them. Wait for pullbacks to enter in the direction of the institutions.
7) If it’s a slow market (relatively few large traders), consider the possibility of range bound action. Low volume means low volatility, and that is generally associated with relatively narrow price ranges. Take profits quickly in such markets and set targets modestly; moves tend to reverse readily.
8) If it’s a busy market (relatively many large traders), consider the possibility of volatile market action. A market with high volume means that large traders will be capable of pushing price up and down to a greater degree than average. Adjust your stops and targets to account for this incremental volatility.
9) If many sectors don’t participate in a new high or low for the broad market index, consider fading the new high or low. A trend with staying power will tend to lift or depress all major stocks/sectors. When many issues or sectors don’t participate in a market move, the buying or selling in the index is often confined to a few issues that are highly weighted. Such moves generally are not sustained.
10) If you anticipate a broad move by equities, consider trading the most volatile indexes and the sectors with greatest relative strength. What you trade is just as important to results as the timing of trades. Go with the dominant market themes unless you have tangible evidence that those themes have changed.

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