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.
Jimi Hendrix was an extraordinary guitarist, but most people focused just on his guitar playing abilities, not realizing his lyrics were often quite poetic. In one song, he sings “Castles made of sand, fall in the sea, eventually.” This is a great phrase to think about while trading.
There are two good lessons for traders in this simple song lyric. First, just as you should not trade based on a faulty idea, you should not use sand as a building material. Second, you need a solid trading plan as your foundation – without it, you’ll slip into the sea, where 90% of traders reside. Let’s look a bit more at both ideas.
First, you need to trade with a sound concept. This means you can throw all those hot tips out the window, and ignore the talking heads on television. What you need to do is have an idea or strategy that has been properly researched and tested. Then, you need the emotional power to trade the proven idea as is, without fail. Obviously, there are a lot to these two steps, but if you ignore them your trading house might as well be built of sand.
Second, a trading plan is essential to have a solid foundation, BEFORE you enter the markets with real money. What is involved in a trading plan? A good trading plan is written just like a business plan, since if you don’t treat trading as a business, you are destined to fail. So, all the sections that make up a good business plan (Mission, Products, Operation, Strategies, Disaster Plan, Financials, etc) should be in your trading plan. The more time you spend on this plan, the stronger your foundation will Be. (more…)
1. Work on yourself and your personal issues so that they don’t get in the way of your trading. This step must be accomplished first; otherwise, it would interfere with each of the other steps.
2. Thoroughly understand your objectives and develop a position sizing strategy to meet those objectives. Probably less than 10% of all traders and investors understand how important position sizing is to trading performance and even fewer understand that it is through position sizing that you meet your objectives.
I keep coming across an interesting problem. People say they want things to be simpler — investing, life insurance, retirement planning, etc. But when a simpler (and effective) option is proposed, they reject it as too simple.
In most of the money situations I’ve come across, the best solution is almost by definition the simplest. (Note: I didn’t say the easiest.)
So why don’t we go for simple?
1) We don’t believe it will work.
We’re attracted to complexity because anything that requires a lot of something — time, details, money — should work, right? By default, if it’s simple, say only two steps instead of ten, we think we’re missing out.
2) We think simple should be easy.
It’s like the guy who goes to the doctor and says he doesn’t feel well. There must be something wrong with him that a pill could fix. But all the doctor says is, “Get more sleep, eat healthier food and exercise three times a week.” (more…)