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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Many swing traders assume that violation of a trendline or channel signifies the start of a new trendPREPARING FOR THE MARKET DAY THE CLOSING BELL The closing bell signals the start of preparation for the next market day. Use this valuable time to measure current cycles and find winners for the next session. Probe markets for the best new opportunities and apply price chart techniques to identify the likely trading conditions. Take a look back and critique actions taken during the preceding session. Adjust watch lists to remove lost opportunities and add new stocks that show promise for the future. Update the personal trading plan and current strategy after reviewing the events of each session. Make small strategic adjustments on a daily basis, but do significant editing only after weeks of data mining and personal introspection. Look back at the day with complete honesty. Were exits taken when offered? Did hope replace good judgment? Were personal rules followed, and did that make a difference in the profit and loss statement? Make sure to revise all trading records daily to avoid a backlog of old tickets and account statements. Every market of interest generates new feedback as the trading day comes to a close. Trendlines break and shock gaps change important assumptions. Significant news may dictate new strategies or establish a fresh bias on short-term direction. Review specific issues that will likely move the markets when the new day begins. How has sentiment changed and what impact will it have on the crowd? Quickly categorize the current market and refresh tactics that will respond to it. Review the economic calendar for important government reports. Exercise greater caution on Fridays that release the unemployment report or unwind options positions. If volatility will surge sharply due to unpleasant news or conditions, don’t hesitate to take the day off and let the competition assume the risk. The market will still offer many opportunities after others get caught in sharp whipsaws or take dramatic profits. Avoid information overload. Set aside a reasonable time for preparation and limit analysis to focus on key stocks and indices in detail. Reduce watch lists, news, and charts until they conform to a healthy personal lifestyle. Get recreation, eat right, and get plenty of sleep before the new market day begins. Exhausted swing traders make terrible decisions. Use the quiet hours to locate and evaluate trade setups. Hurried analysis of new opportunities during the market day invites danger. Important charting features go unnoticed and the pulse of the Level II screen becomes difficult to ignore. The swing trader also faces many chores that interfere with clearheaded reward: risk evaluation during the active session. Prior preparation frees the schedule so that the active session can receive full attention. When the market opens, be prepared to respond to a flood of fresh data quickly and without hesitation. Apply original 3D chart skills that quickly filter opportunity and manage risk. Use new twists on classic strategies to place each issue within its Pattern Cycle and generate continuous feedback through all conditions. Watch the ticker closely to defend against external influences, and exercise tactics that swing against the crowd to book consistent profits. SUPPORT-RESISTANCE Support-resistance (S/R) organizes the charting landscape into well-marked levels that predict swings and breakouts. Price action at these important boundaries depends on their unique characteristics and specific locations within the trend-range axis. Stocks can swing back and forth across a central S/R pivot rather than find a floor or ceiling. Support-resistance may present an absolute barrier that cannot be crossed or exhibit elasticity that can be stretched but not broken. In common horizontal S/R, resistance becomes support when price mounts it and vice versa when it falls through. Swing traders earn their livelihoods as they find and execute setups along S/R interfaces. Diverse S/R boundaries print on every chart in all time frames. Most carry a unique load factor and will break when buying or selling intensity exceeds it. Once price pierces a level, it normally expands toward the next S/R barrier. This mechanism provides the source for many profitable strategies. The classic swing trade buys at support and sells at resistance. Therefore, these levels define both reward and risk. Look to buy support when the nearest resistance is far above, and look to sell resistance when the nearest support is far below. But make sure the landscape hides no dangerous obstacles. A single overlooked level can have disastrous results. Profitability depends on accurate prediction at S/R interfaces. The skilled eye must quickly locate these points and evaluate their impact on every setup. Begin with a dense chart template that layers all types of S/R boundaries directly on price. Then study the individual elements and how each affects reward:risk. Start with highs and lows in the longest applicable time frame and work down to recent price action. Pay special attention to shock events that may produce significant S/R in a single bar. For example, strong gaps can stay unfilled for many years. Apply a simple hierarchy that rates the importance of each S/R feature. Horizontal levels that persist over time carry more weight than those from shorter periods. Major highs and lows provide stronger S/R than moving averages or other price derivatives. Hidden levels offer cleaner opportunities than well-known ones that invite whipsaws and fading strategies. S/R strengthens when many barriers converge at the same price and weakens when a single obstacle blocks the progress of price movement. TYPES OF S/R Horizontal price marks the most common form of S/R. These important highs and lows reveal scarred battlegrounds between bulls and bears. They carry an emotional shadow that exerts lasting influence whenever price returns. Markets tend to draw bottom support on high volume and then test it repeatedly. Over time these become significant floors during future corrections. Alternatively, tops that print during frantic rallies may persist for years. Failed tests at these levels reinforce resistance and generate a pool of investor supply that must be absorbed before the uptrend can continue. In both cases, horizontal S/R levels should be obvious at first glance of a promising new setup. Look for price to fail the first test of any significant high or low horizontal S/R level. But then expect a successful violation on the next try. This classic price action has the appearance of a triple top or bottom breakout. The popular cup and handle pattern offers a clear illustration of this dynamic process. Also watch closely where the first test fails. If price cannot reach the horizontal barrier before rolling over, a second test becomes unlikely until the pattern breaks sharply in the other direction. Swing traders must evaluate many price restraints beyond simple floors and ceilings. These lesserknown pivots provide superb entry and exit when located. The crowd often misinterprets price action at these levels and triggers opportunity on the other side of the trade. As noted earlier, common knowledge tends to undermine the dependability of technical setups. Alternatively, the markets reward original vision and strategy. Consider the substantial benefits when classic S/R mechanics combine with contrary entry. Trending markets emit their own S/R fingerprint. Rising or falling moving averages routinely mark significant boundaries. Popular settings for these versatile indicators have found their way into the financial press, technical analysis manuals and charting programs. The most common calculations draw lines at the 20-day, 50-day, and 200-day moving averages. These three derivative plots have wide acceptance as natural boundaries for price pullbacks. Two important forces empower these classic averages. First, they define levels where profit and loss taking will ebb following strong price movement. Second, their common recognition draws a crowd that perpetrates a self-fulfilling event whenever price approaches. The S/R character of moving averages changes as they flatten and roll over. The turn of a specific average toward horizontal signifies a loss of momentum for that time frame. This increases the odds of a major line break. But don’t confuse this condition with an extended sideways market in which several averages flatline and draw close to each other. In this dead market, price will most likely swivel back and forth repeatedly across their axis in a noisy pattern. Swing traders find few opportunities in this type of environment. Trendlines and channels signal major S/R in active markets. A useful charting line prints from any vector drawn across two relative highs or lows. But these simple features have little staying power. Look for three or more points to intersect in a straight line. Then extend out that trendline to locate important boundaries for price development. As with other landscape features, long-term lines have greater persistence than shorter ones. Strong trendlines may even last for decades without violation. Draw valid lines above three or more highs and below three or more lows, regardless of whether the market prints an uptrend or downtrend. Two or more sets of trendlines that lie parallel to each other form price channels. Their construction requires at least four points: two at support and two at resistance. Aggressive participants can build price channel projections with only three points and extend out estimated lines for the missing plots. But use these extensions only to predict turning points and be very reluctant to wager the account solely on their results. Many swing traders assume that violation of a trendline or channel signifies the start of a new trend. This is not true and leads to inappropriate strategies. Trendline breaks signal the end of a prior trend and beginning of a sideways (range-bound) phase. A market can easily resume a former trend after it returns to stability. Shock events that combine with line breaks can start immediate trends in the opposite direction, but these happen infrequently. Hole-in-the-wall gaps (see Chapter 11) provide a powerful example of this phenomenon. Trendline and channel breaks should induce immediate price expansion toward the next barrier. When this thrust does not occur, it can signal a false breakout that forces price to jump back across the line and trap the crowd. Whipsaws and pattern failures characterize modern markets. As common knowledge of technical analysis grows, insiders routinely push price past S/R just to trigger stops and volume. These gunning exercises end only after the fuel runs out and induces price to drop quietly back into its former location. Mathematical statistics of central tendency study the esoteric realm of divergence from a central price axis. Analysts use these calculations every day as they explore standard deviation of market price from an expected value and its eventual regression back to the mean. Broad concepts of overbought and oversold conditions rely on proper measurement of these complex variables. Swing traders depend on this arcane science to identify powerful standard deviation resistance through Bollinger Bands and other central tendency tools. Each market leaves a fingerprint of its historical volatility as it swings back and forth. Central tendency defines how far price action should carry before an elastic effect draws it back toward the evolving center. Like a rubber band that stretches to its limit, price should spring back sharply when expanding force releases. These unique tools also measure flat markets better than any other method. As price change contracts to the low end of its expected range, values often converge toward a single point that triggers a violent move, which raises volatility back toward its expected mean. Central tendency provides excellent trading opportunities but take the time to understand its mechanics. Extreme conditions often last well beyond expectations and shake out contrary positions. They may trigger trend relativity errors when elastic extremes don’t line up through different time frames. This powerful tool supplements other classic pattern and S/R measurements but doesn’t replace them. Use central tendency to uncover ripe trading conditions but then shift to other indicators to identify low-risk entry levels and proper timing. Volume establishes important S/R boundaries. When markets print very high volume, they undergo significant ownership change that exerts lasting influence on price development. The frantic event may occur in a single bar or last for several sessions. The volume action must rise well above that issue’s historical average in either case. These power spikes invoke special characteristics that may yield frequent trading opportunities. But the event will leave a long-lasting mark on the charting landscape whether or not it produces an immediate profit. Crowd accumulation and distribution (acc-dis) define hidden volume boundaries. Buying or selling pressure often leads price development. When acc-dis diverges sharply in either direction, price will routinely thrust forward to resolve the conflict. Divergence itself induces the S/R mechanics. For example, a stock may drop sharply but remain under strong accumulation as it falls. The buying behavior not only slows the decline but also signals that the issue will likely print major support and bounce quickly. Few swing traders understood Fibonacci retracement S/R before modern charting programs offered simple tools for this fascinating study. Fib math calculates how far a rally or decline will likely pull back before reversing. Retracement analysis intimidates many participants. Some even believe that it represents a form of market voodoo rather than science. And others just can’t understand why stocks stop falling for no reason at apparently random levels. Fibonacci math works through crowd behavior. A rally builds a common structure of participation. When it finally ends and starts to unwind, shareholders try to predict how far price might fall before the underlying trend resumes. The unconscious mind first sees the proportional one-third retracement as a good reversal point. New buyers do emerge here, but the subsequent bounce often fails and the issue falls through the prior intermediate low. This terminates the crowd’s greed phase and begins a period of reason. The concerned eye now sees the halfway retracement as support and the issue again bounces on schedule. Pullbacks can strike diverse S/R boundaries at any time and shift direction. But corrections routinely retrace at least one-third to one-half before support begins a new rally phase. Many active trends pull back all the way to two-thirds before the primary direction reasserts itself. These deep dips have a strong effect on the crowd. The break of halfway support terminates reason and awakens fear. The threat that the prior trend will completely reverse triggers sharp selling through this last level until a final shakeout ends the decline. Downtrends work through emotional mechanics similar to those of rallies. The math and proportional elements remain identical. However, pullbacks from selloffs begin with fear that evolves into a period of reason at the same retracement levels. This gives way to hope if the retracement pushes toward the two-thirds barrier. Gravity also influences how these bear rallies turn back toward the primary down-trend. Rollovers often occur violently here after price reaches an important resistance target. Modern markets hide boundaries more esoteric in nature than retracement science. Round numbers affect trend development through all time frames. S/R intensity increases as zeros add onto price. For example, stocks that approach 100 face more significant resistance than those that reach under 10. Whole number S/R tends to peak according to multiples of 10. In other words, 10, 20, 30, etc. represent natural barriers. And look for further S/R at divisors of 10 such as 5, 15, and 25. Market participants deal with whole number phenomena every day. Investors spent months watching the Dow battle 10,000 for the first time. Many position traders take profits as stocks approach 50 or 100. Day traders exercise scalping strategies as the Level II screen bids teenies back and forth across a single number. This fascinating S/R builds from the buy and sell orders that congregate at round numbers. Both investors and traders tend to focus execution targets and stop orders at these lazy levels. |
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