Support and Resistance
Support is where buyers buy with greater intensity than sellers
sell.
Resistance is where sellers sell with greater intensity than
buyers buy
The system encourages you to enter cautiously but exit fast. This
is the professional approach to trading.
Beginners tend to do the opposite; jump into trades and then take
forever to exit, hoping for the market to turn their way.
In trading, cooler and more passionate people tend to gravitate
toward mechanical trading, while the more swashbuckling types (daring and
adventurous) turn to discretionary trading.
·
Mechanical trading - a
set of rules, back-tests them on historical data and then puts his system on
autopilot
·
Discretionary trading - examine more factors,
weigh them differently at different times, and be more attuned to changes in
current market behavior.
Mechanical trading can be less emotionally tense whereas discretionary
trading is the openness to fresh opportunities
(Advanced traders combine mechanical and discretionary methods)
Proper money management is essential for successful trading. A disciplined trader takes his profits at targets, cuts losses short, and outperforms those who keep hoping and hanging on to bad trades
Clusters of insider buying tend to have a better predictive value
than clusters of selling - they are willing to buy for one main reason, they
expect their company’s stock to go up.
While major trends and trading ranges can last for years, all are
punctuated by short-term upswings and downswings. Those moves create multiple
trading opportunities
Fundamental analysis can help you find a stock that may be worth buying. Use technical analysis to time your entries and exits. Be prepared to buy and sell more than once during a major uptrend.
The market is not a mechanical entity that follows the laws of physics. It is a huge crowd of people acting in accordance with imperfect laws of mass psychology
Swing trading = The
expected duration of a trade is measured in days, sometimes weeks
Day-trading = The
expected duration of a trade is measured in minutes, rarely hours
As
swing traders, we use daily (end-of-day) and weekly charts
Short-term upswings and downswings create multiple trading
opportunities.
13 weeks to a quarter
4.5 weeks to a month
5 trading days to a week
approximately 5–6 hours to a trading day
always start with the longer timeframe for a strategic view and
then switch to the shorter timeframe for tactical timing
·
first examine weekly charts, then daily
charts
·
day traders - if you want to day-trade using
10-minute charts, you first need to analyze hourly charts
The more experienced analysts and traders tend to entering trades
too early. They recognize approaching reversals and emerging new trends from
far away—and jump in too soon.
Often buy before the market finishes tracing a bottom or sell
short well before it completes a top.
·
become aware that the market time is much
slower than your own
·
It pays not to be greedy and trade a smaller
size
·
A better signal may well emerge later
Divergences between MACD-Histogram and prices do occur (often mark
major turning points).
The breaking of the centerline
(neutral-line) between two indicator bottoms (or tops) is an
absolute must for a true divergence
Crossovers of the MACD and Signal lines identify shifts in the
balance of power of bulls and bears (changes of flow of the market)
When the fast MACD line rises above the slow Signal line, it shows
that bulls dominate the market.
When the fast line falls below the slow line, it shows that bears
dominate the market
Markets are too complex to extract money from them with a single tool.
One of the key concepts in market analysis is that prices are
different from values.
We buy stocks when we feel that their current prices are below
their true value and expect prices to rise. We sell and sell short when we
think that stocks are priced above their real value and are likely to come down
—but how to define value?
The most important message of a moving average is the direction of
its slope.
When it rises, it shows that the crowd is becoming more
optimistic—bullish.
When it falls, it shows that the crowd is becoming more
pessimistic—bearish.
When prices rise above a moving average, the crowd is more bullish
than before.
When prices fall below a moving average, the crowd is more bearish
than before.
If indicator signals aren’t clear, simply leave that stock alone
for the time being and look for another one.
One of the great luxuries of private traders is that no one pushes
us to trade—
we can wait for the best and clearest signals.
Prices are primary; indicators are derived from them.
We can divide indicators into three groups: trend-following
indicators, oscillators, and miscellaneous
Trend-following indicators work best when markets are moving
(moving averages, MACD Lines)
Oscillators catch turning points in flat markets (MACD-Histogram,
Stochastic)
Miscellaneous indicators provide insights into mass psychology
(New High–New Low Index)We recognize approaching reversals and emerging new trends from far away—and jump in too soon. We often buy before the market finishes tracing a bottom or sell well before it completes a top.
By getting in too early we can end up losing money in trends that
are too slow to turn.
(or sometimes sold too early?)
Volume usually stays relatively low in trading ranges because
there is relatively little pain. People feel comfortable with small price
changes, and flat markets can drag on a long time.
Professionals don’t hang on while the market beats them up. They
quickly close out losing trades and reverse or wait on the sidelines, ready to
re-enter.
(i.e cut losses quickly)
If a sudden price change hits traders, they jump from pain and liquidate losing positions. On the other hand, losers can be very patient if their losses increase gradually.
Sharp moves make losing traders cut their losses in a panic.
(note the difference between panic sell and downtrend sell)
Swing and position traders enter and exit trades within days or
weeks, while day traders enter and exit within a few hours if not minutes.
End-of-day data is sufficient for position traders, but day
traders need real-time data.
(so
are you a swing or day trader?)
Finding good entry points is extremely important in trading
ranges. You have to be very precise and nimble because the profit potential is
limited.
When professionals are in doubt, they look at the big picture,
while amateurs tend to focus on the short-term charts. Taking a longer view
works better.
(look at weekly and monthly charts)
The best time to buy an upside breakout on a daily chart is when
your analysis of the weekly chart suggests that a new uptrend is
developing.
True breakouts are confirmed by heavy volume, while false breakouts
tend to have light volume
false breakout.
If prices dip below support and then rally back into the support
zone, they show that bears have lost their chance
Similarly, a true upside breakout should not be followed by a pullback
into the range, just as a rocket is not supposed to sink back to its launching
pad
support and resistance
The main advantage of a candlestick chart is its focus on the
struggle between amateurs who control openings and professionals who control
closings
Chart patterns reflect the sum of buying and selling, greed and
fear among investors and traders
“Each price is a momentary consensus of
value of all market participants expressed in action.”
The market doesn’t know diagonals. It remembers price levels,
which is why horizontal support and resistance lines make sense, but diagonal
trendlines are subjective and open to self-deception.
(not
so easy to draw a downtrendline?)
What happens to a man after a fall?
If he falls down a few steps, he may dust himself off and run up
again. But if he falls out of a second-story window, he’s not going to run
anytime soon; he needs time to recover.
(i.e the difference between small pullback and a major correction)
To make money trading, you don’t need to forecast the future. You
have to extract information from the market and find out whether bulls or bears
are in control.
(You need a system to decide for you)
Technical analysis is a study of mass psychology. It is partly a science and partly an art.Technicians study the behavior patterns of market crowds.
Markets fall because of fear among bulls and greed among bears
A proper plan is a written one. You need to know exactly under
what conditions you will enter and exit a trade
When the trend is up, bulls feel optimistic and don’t mind paying
up. They buy high because they expect prices to rise even higher. Bears feel
afraid in an uptrend, and they agree to sell only at a higher price.
When greedy and optimistic bulls meet fearful and defensive bears,
the market rallies
If the trade goes against you—cut your losses and run. Never argue
with the crowd
An amateur who takes several losses in a row often feels so
demoralized that he cannot place an order.
When fear grips you, you’ll miss profitable trades.
A trader has to admit that he is a loser, just as a drunk has to
admit that he is an alcoholic
(my interpretation here is, you must know your sickness before you
can find a cure)
Price is the leader of the market crowd
When children feel frightened, they want their parents and other grown-ups to tell them what to do. Traders turn to gurus, trading system vendors, newspaper columnists,,,,,,,
…the main leader of the market is price
The market doesn’t know you exist. You can do nothing to influence it.
(BUT) You can only control your behavior
A bull fights by striking up with his horns. A bull is a buyer
A bear fights by striking down with his paws. A bear is a seller
The high of any period marks the maximum power of bulls during that time.
The low of that period shows the maximum power of bears during that time.
Develop a money management plan.
Your first goal must be long-term survival;
your second goal, a steady growth of capital;
and your third goal, making high profits.
Most traders put the third goal first
Loser keeps switching between different markets, gurus, and trading systems. His equity shrinks.
Losers’ desperate hopes for magic solutions help advisors sell their services to the public. They switch to new trading systems, buy more software, and look for tips from new gurus.
…doesn’t know why he keeps losing
Emotions in trading
{Most traders cannot stand the pain of severe losses.
They die as traders after hitting rock bottom and wash out of the markets. The few survivors realize that the main trouble is not with their methods—it is with their thinking}
trading system compromised?
Most amateurs feel like geniuses after a short winning streak. It is exciting to believe that you are so good that all your trades are sure to be winners. That’s when traders start deviating from their rules and damage their accounts.
emotions in trading
You may have a brilliant trading system, but if you feel arrogant, frightened, or upset, your account is sure to suffer. If you become aware of fear, greed, or a gambler’s high, close your trades.
The above quotes are extracted from “Trading for a living” – Alexander Elder
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