Caution: This advice only pertains to short-term trading and not longer-term investing, swing trading, position trading, etc.
We do not open our newsletters with charts of the Nasdaq, S&P, VIX, discussion of Stochastics, etc., not because we are too lazy but rather because we think it is counterproductive to analyze such matters for the type of trading that we practice.* The more you study the indices and attempt to interpret the stream of information that the plethora of indicators offer, the more you will form an opinion before the market even opens. We follow the leaders of the market and the leaders of the market are usually on the avante-garde of market moves. The leaders will signal when a bottom has formed or when a correction is due. In addition to the leader stocks we watch a host of momentum stocks which are often also great early tells for market moves.
There is a very important reason that we have told our clients in our newsletters-- leave your opinions and emotions at the door before entering your office in the morning. Emotions are the enemy of the trader. Most traders will have heard of the story that if a man sits in front of a great trader and watches him all day, he will not know at the end of the day whether the man made a million dollars or lost a million dollars.
The best traders just simply react to the circumstances. For example -- stock HCPG is approaching the price at which you would like to buy it based on a break of a 2 month consolidation.
Above Average Volume? Check
Is the Trend with you? Check
Is the stock showing greater relative strength than the market? Check
Is the intraday nice and tight without big volatile spikes up and down? Check
Is the breakout coming off of an intraday base instead of a chase of a vertical move which is to be avoided? Check
Trade entered. After that you obey your risk management and profit taking rules for the remainder of the trade. Many traders miss out on great opportunities because they think that the market is too overbought or oversold. Just trade the setups. That's it. When the market finally does decide to turn there will be ample signs and new setups will emerge in the correct direction.
* Usually we aim for 1-3% profits on daytrades and occasionally hold positions 1-2 days. We trade on average probably 1-3x a day, all depending on available setups.
Thursday, June 29, 2006
The sitting
Jesse Livermore said it well in the now much-quoted, “It never was my thinking that made the big money for me. It always was my sitting.” He was referring to entering a position, and then sitting on it for possibly months at a time. We as short term traders like to decontextualize the quote and place it within our own reality : It’s the sitting, the waiting for that perfect setup, that makes us the consistent money. Waiting for a setup that meets all your conditions is the most important and the most difficult thing we have learnt from our years of trading.
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.
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.
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
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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