Saturday, June 24, 2006

Chart Patterns and Indicators

There are hundreds of indicators that one can use to interpret stock behavior. We stick to price, volume, and action. We also like to know where the 9, 20,50, 100, and 200DMA are within a chart pattern, as they often are useful as levels of support and resistance.

Everything else we believe is secondary.

Finding a System

It takes approximately five minutes of perusing trading forums and doing simple searches in Google to realize that there are literally thousands of ways that traders make money in the market. Many systems appear to work as there are many traders who make a good living.

What we would recommend for a person who is just beginning to enter the trading world is to read and research these systems and see what approach they feel most drawn to. The next step unfortunately is the most painful one, and that is the trial and error stage. To form a system for oneself can only come from some hardship. However as time progresses, and if the individual is sufficiently self-reflexive, then a manangable system emerges that not only functions well as a career but that fits the personality of the trader.

As for the thousands of ways to make a living in this business -- they all seem to have several things in common. One has to be self-critical and to constantly try to learn from one's trades -- the winners and the losers. We would recommend a trading journal to aid in this effort. Second, one has to control one's emotions and never ever lose one's discipline. Discipline is the thin blue line between becoming a great trader or washing out, as do the overwhelming majority of people who enter this career.

Trading is like any other job -- you need to work hard, do your homework, and at all times, act like a disciplined professional.

The Psychology of Trading: Rules which we live by

1. When you feel most frustrated at missing moves, you are most vulnerable to losing money and trading in a self-destructive manner (hereon called "trading on tilt" to quote Charles Kirk from The Kirk Report). Do not let it play with your head. Every trade is fresh.

2. Do not overthink or get spooked – stay as close to neutral as possible. Don’t predecide anything, just look for your conditions to be met. Calmness is everything in this profession – in the technical setup system itself and in your own emotions.

3.Remember many big losses have come after innocent small initial losses, and then from attempts to make up that loss and frustration – that is when one forces trades -- lousy setups with no volume, chasing spikes or even worse, following other people’s trades.

4. If you get stopped out and are feeling frustrated then market most likely is in a no win mode – step aside and start fresh next day. Emotion is key. There are some days where it is very difficult to make money.

5. Remind yourself how difficult it is to make money and how incredibly easy it is to lose money. There has to be a reason for every trade.

6. Have Vision -- many times stocks sit there for HOURS ABOVE the entry point– remain in the trade as long as the breakout point is held and then hold for the angle change (as buyers pile in) into real profits.

7. Be on your toes with opens in which you miss several quick trades. Do not go tilt. Many tilt days come from opens that one has missed. Just regroup and try again. If stocks are going up or down in a hyberpolic fashion, there is high chance of reversal. If the move indeed is for real then there will be plenty of opportunities later in the day. Remember that. Just wait for the pitch.

8. On a deeper note -- be at peace with yourself. If you feel like you do not deserve to do well, then most likely you will not do well. Do good, treat your body well, work hard, and everything else will fall into place

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