| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
Avoid trading the most liquid short-term stocksDOW THEORY Y2K Update and apply Dow Theory for modern American markets. Those experts who still use the Dow Transportation and Utility Averages to predict broad intermediate trends don’t deserve our attention. Market interplay now revolves around the Dow Industrials, S&P 500, and Nasdaq Composite. Swing traders can evaluate the character of most major rallies and corrections by using these three indices. Also consider the growing dominance of the Nasdaq market as the world shifts from the industrial into the information age. In a few years even the Dow Industrials may no longer capture anyone’s interest. Leader-laggard relationships among the big indices define most current market conditions. When Nasdaq leads the blue chips, it signals a retail-driven, speculative technology phase with sharp price change and increased volatility. The ascent of the S&P 500 or Dow points to a flight to safety, with big institutional money moving the markets. Their leadership signals a period of lower volatility and a high probability for a quieter sideways pattern. Nasdaq has several quirks very unfriendly to traders, although it attracts most retail attention. Three separate subsectors comprise this dominant market: behemoth mega-techs, middle technology/service, and a large universe of small caps. Evaluate Nasdaq price action only after inspecting the current performance of each sub sector. Frequently, the four largest Nasdaq stocks will account for most price change in the index. Other times, lethargy in these same mega-stocks masks small cap rallies or selloffs. Verify that actual market conditions support the chosen swing strategies. Mega-caps trade like small indices and often require little external analysis. But positions in thinner issues can depend on the right index subsector acting in a supportive manner. Most swing traders should follow the broad Nasdaq Composite and a small cap index to filter out distortions. Add the Nasdaq 100 or individual mega-stocks to track the impact of these behemoths. Always take a peek at their movement just before entering an intraday position whenever possible. A tendency toward rally or correction drives the major market averages at almost all times. The emotional pull between bullishness and bearishness practically ensures that prices will swing too far toward whatever directional bias exists at the moment. This broad market inefficiency invokes a profound mechanism that underlies all swing trading profit: when directional force places an object in motion, it tends to remain in motion until another force intercedes. Capitalize on directional bias by watching for follow-through days. After wide range index bars, markets tend to surge in that same direction the next morning. This may occur as a large gap move or a just a slow grind. In either case, overnight positions use this tendency to increase profits. One popular strategy takes a closing position in a trending stock that prints a wide range bar and ends the day near its high or low. The swing trader then grabs a quick exit in the pre-morning action or early in the first hour before price discovery steals the profit. Positions held after this first morning surge face increased risk. An opening gap often marks a short-term trend climax. Since markets require very strong trends to print two wide directional bars in a row, indices often reverse sharply right after wide range movement. Swing traders recognize this tendency and watch the volatile morning action very closely. They search their watch lists in advance for new setups that may benefit if a sudden reversal appears. Then they confidently time their execution to the broad indices when the market turns. FINDING WINNERS Work hard to find fresh opportunities in the equity markets. Start by throwing out most stocks as unsuitable for trading. These include REITs (Real Estate Investment Trusts), closed-end funds, ADRs (American Depository Receipts), and utilities. Then eliminate the bottom half to two-thirds of all stocks sorted by average daily volume. Seek liquid stocks that allow low slippage entry and exit. This narrows down choices to about 2,000 issues. At any given time, 90% of these higher volume stocks lack the required characteristics to pocket a reasonable profit. So a daily scanning strategy must search for the 10% that hide decent setups and opportunities. And most times yesterday’s stocks won’t match tomorrow’s promising plays. So new scans must refresh an active list as old choices are discarded. NEEDLE IN THE HAYSTACK Swing traders have two ways to locate good setups: find the stocks themselves or have someone else do it for them. Chat room picks and website scans offer great opportunities when they match individual trading styles and pose serious dangers when they don’t. Always perform a personal analysis and never rely solely on someone else’s opinion for any stock pick. Long-term success will not come from setups identified by someone else. That website operator, newsletter guru, or stock board promoter has a different holding strategy and execution method than any individual market participant. A daily planning routine should identify promising Pattern Cycle setups, measure reward:risk and locate appropriate execution levels in advance. Build an automatic filtering process that evaluates every stock pick or scan objectively for these characteristics. The right workflow will uncover setups that support all three considerations. Realize that a single major flaw that doesn’t fit into the trading plan will negate an opportunity. For example, avoid a well-formed triangle breakout if potential reward doesn’t offer good profit or the pattern conflicts with other landscape features. Watch out for the tendency to see something that isn’t there. Detailed review through scanning or chart study often uncovers the basic elements of a successful setup but offers no attractive entry. Unfortunately, this analysis process can induce a form of secondary reinforcement. It relaxes, puts the brain into game theory mode, and soothes the ego that sees all those past setups that could have been entered with perfect hindsight. This unconscious enjoyment encourages the mind to fill in the missing pieces on questionable new patterns. Always exercise rigid self-discipline when asking the eyes to look for opportunity. The most urgent preparatory task throws out almost everything that looked great the first time around. Know when a setup has no potential and be willing to move on to the next opportunity. Nightly preparation must uncover stocks that show so much promise that the swing trader just can’t wait for the next session. But before the new day finally begins, take a second look at every setup that rang the dinner bell just the night before. Good prospects should not lose their luster in the morning glare. Remember this golden rule for finding consistent winners: If you have to look, it isn’t there. Forget your college degree and trust your instincts. OPPORTUNITY COSTS Consider an offline charting package and take the leap away from canned indicators. Use the package to find fresh opportunities that match the personal trading style. Software allows far more customization than the most sophisticated websites. It also offers the ability to modify the machine language behind popular calculations and bend numbers to individual needs. Don’t confuse chart analysis packages with database programs. Software that focuses on intensive market scanning often provides a basic set of indicators that can easily be duplicated online. Charting programs will scan markets, but their strength lies in heavy numbers crunching. The Net still provides a great place to find fresh scans, picks, and opportunities. Build a filtered list of stocks in promising setup positions. Then examine their charts in detail through multiple time frames at the best online services available. Construct a second stock watch list to review each day regardless of short-term opportunity. Become highly familiar with how their prices change, how their spreads move, and how they react to general market conditions. While some active markets will offer a few good setups over time, search for those issues that generate bread-and-butter trades week after week. Avoid trading the most liquid short-term stocks. Seasoned professionals actively compete against each other in Dell Computer (DELL), Intel Corp (INTC), Cisco Systems (CSCO), and Microsoft Corp. (MSFT). These stocks will crush most participants who lack extensive skill or experience. Note that the current trading style may not support their volatile price action. These high-volume stocks often move in price channels rather than simple lines. Any strategy that includes these behemoths must also address the drawdowns associated with this type of chart behavior. Every broker and execution system provides fast fills for some issues and slow ones for others. Make sure to trade only what responds quickly and avoid what doesn’t. Direct-access issues must have deep representation through ECNs or they will trigger heavy slippage. Discount brokers have order flow arrangements with wholesale market makers that favor certain stocks over others. Some may even fill as fast as ECN matching orders. Use this general rule for trade entry and exit: the longer the holding period, the less urgent that instant execution becomes. For example, big Nasdaq market makers spend so much time shaking out scalpers that 1-3 day swing traders can easily fill low-risk positions below this radar and turn consistent profits. Opportunity relates directly to the amount of time set aside for market analysis. Pick only one or two issues and follow them exclusively if trading time is limited to a couple of hours per week. Several hours per day presents the minimum commitment to successfully swing trade a variety of stocks. Increase the watch list size as dedicated time expands. Success comes more quickly trading 2 or 3 well-analyzed stocks than chasing 20 or 30 poorly understand ones. The ability to watch the markets in real-time determines the appropriate trading strategy. Lengthen the holding period to multiple days when positions can’t be followed tick by tick. Use both physical stops and limit orders to control risk. Real-time systems work best for the intraday swing trader and scalper. The vast majority of market participants have a wide range of unrelated interests that take substantial attention during each session. Don’t rely on snapshot quotes or Net utilities hiding under the primary work window to manage trades. The boss will be standing right at the terminal just when the market really starts to move. Stock boards offer great places to chat with friends but do terrible damage to a trading account. Almost everyone on the Net has a hidden agenda, and all information must be treated with suspicion. Successful swing trading requires little knowledge about a company’s underlying fundamentals. Chances are that participation on a board will only reinforce underlying bias. Be prepared to understand the truth regardless of whether it helps or hurts an active position. Technical traders don’t believe in companies. They believe in the numbers. Only price, time, and risk should trigger trading actions. Know the charts inside and out without looking at them. Pinpoint the exact location of price within each chart’s Pattern Cycle. Search for that S/R level where the crowd will jump in or where a falling knife can be caught with safety. Finding winners requires a level of emotional detachment that most individuals find very uncomfortable. Discomfort and profit often stand side by side. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |