Trading the financial markets is very much like a experiment undertaken by a scientist. You first make a case for how the object studied has behaved in the past under various conditions. You work out a theory that can make predictions for the future – and hey presto! You observe the results. Some markets go the way predicted and others do not. It’s all about Trial and Error ( just like Mr Edison did to find a working light bulb).
The key point is that the failures can often reveal where you have strayed from theory, not that the theory is wrong. And in real-life trading, the failures can be kicked out by using stop loss orders. The winners can then point the way forward.
Many traders identify with a particular market. They feel an affinity with it. Perhaps they have a life-long interest in it and have studied it avidly. The stock market is a case in point. Many of us own shares. There is so much material to read on the thousands of shares! And when a relative unknown market appears on the scene (say, Natural Gas), they reject trading it since they are not at all familiar with its workings. They feel they must ‘understand’ a market to have the confidence to get involved.
I can tell you now that pros do not think that way. In fact, a good pro will not want to ‘understand’ it by reading hundreds of books, articles, studies on it. They feel that would adversely affect their judgment about the profit potential. Personally, I will not spend a lot of time researching a new market.
All I need is a general background understanding and the charts (and a reading of current sentiment). And the indefinable sense of how all associated markets are moving against each other.
For instance, in last week’s coverage of the Japan 225 index, I noted that it had lost 13% off its February ATH while the major US indexes had gained 20%. That 33% spread stuck out like a sore thumb! I easily concluded that Japan was out of whack with the US – a situation that was probably unsustainable. Either Japan was too cheap or the US too expensive.
And because the world-leading US indexes were still advancing in major bull trends, I reckoned the odds placed Japan as the one to move up and close the gap. And that is what is happening. So that bet is paying off. But I have plenty that did not, despite the favourable odds. And that is why I use the age-old Rule: Cut Losses Short and Let The Profits Ride.
So did I do masses of reading on Japanese companies to bone up on their operations, their economic data and their P/E ratios, etc? Believe me, plenty of people actually do that! There are tons of books and learned articles on that subject. But does that give them the edge for making money? More likely they missed the great Trade of the Year in mid-August just before the 12% advance as they were too busy bending over their spreadsheets.
If there is one thing I could impart to all traders it is this: Open your eyes to all viable opportunities in many markets – especially if they are unfamiliar. And don’t read (or think!) too much! Train your eyes to recognise a low risk/high prob chart setup – and be patient but be decisive! Great trades should be pretty obvious from just a glance at the chart. And always use stops.
A lesson in chart reading in Gold
I had been bullish on Gold – until the Flash Crash of 8 August (but exited just prior). Since then the market has been regaining ground. I was unsure of the wave labels after the Crash and so I just kept watching. But I did have a 15-month solid trendline working and this is the recent action
The Flash Crash has severely penetrated the trendline and I wondered if that line was still valid as a line of support/resistance. In fact, I did not have to wait long to answer that question very much in the affirmative. Here is my analysis.
From the Flash Crash, Gold recovered and moved back above the trendline on 13 August. It then traded always above it with all attempts at breaking below it failing. That occurred three times – and told me that very likely, any further attempt to break below it would also result in failure. That line was solid support.
So what do we have? We have a definite 15-month line on the chart that can guide your trading and also guide your stop loss placements. That is an extremely valuable tool to have in your tool-chest. Instead of floundering around wondering where to place stop losses and even where to enter trades, you have a firm guide. It is not based on a hunch, or on the latest pundit, but is a reliable guide that is independent of anyone’s opinion.
And yesterday, the market did move to test the line again in the $1788 area. So was that a good low risk/high prob opportunity? Of course it was, providing a long trade with a close stop just in case. Naturally, the market may decide to move below the line again, in which case a small loss would be taken. But a small price to pay for the potential for a much larger gain.
Of course, many traders identify with their positions and some effectively ‘marry’ their positions. Divorce seems unthinkable. But markets are not the marrying kind. Pros take a ‘love them and/or leave them’ approach. And day-traders have one-night stands!
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Is Tesla defying odds again?
The endlessly-fascinating action of Tesla shares is a wonder to behold! Now that’s a share that is climbing a Mountain of Worry! But even the steady stream of fatalities from its autonomous cars doesn’t dent their performance. And the chart indeed is a textbook example of bullish sentiment and pattern formation at work. In this case, a magnificent wedge:
This darling of the EV sector made its ATH in February and since then has traced out a beautiful five-wave wedge. In this period, trading it was an exercise in frustration. That is what wedges do – they provide ample scope for whipsaws galore. Trading them is best left to the short term traders.
Note that the lower wedge line is almost horizontal, which is unusual. Then, with the market having punched above the upper wedge line, it dipped to plant a Goodbye Kiss on it, it is moving up in a typical Scalded Cat Bounce. My targets are marked.
Of course, the ideal low risk/high prob entry was when the upper wedge line was penetrated. The second best entry was at the kiss. At both places, a tight stop could have been entered. Now with the market advancing, wider stops must be employed.
I have waves 1 and 2 on the chart, but an equally valid count would be waves 3 and 5. If the latter, this current wave 5 would be the final wave of the entire bull run. That means any move above the old high at $890 would get me searching for a reversal. But in the meantime (latest $756), I expect the advance to continue.