Ticker Tape Trader: March 2009

Monday, March 30, 2009

Sunday, March 29, 2009

Sunday, March 22, 2009

Alexander Elder, Come Into My Trading Room - As Dr. Elder explains, manual backtesting is very slow, and can be boring. But the experience you gain from it is well worth the time spent. You not only learn what it is like to experience the ups and downs of your trading system, but you also can learn the importance of keeping good records, which helps the budding trader in his quest to treat trading as a business.

This type of backtesting is limited only by the amount of data that the charting software can hold in the chart. Tradestation, Intellicharts and Metatrader both can hold enough data to make manual backtesting possible.

Sunday, March 15, 2009

THE OPPOSITE OF FEAR

Saturday, March 14, 2009

Drawdowns

Re-Evaluate

Be willing to stop trading and re-evaluate the markets and your methodology when you encounter a string of losses. The markets will always be there. Gann said it best in his book, How to Make Profits in Commodities, published over 50 years ago: "When you make one to three trades that show losses, whether they be large or small, something is wrong with you and not the market. Your trend may have changed. My rule is to get out and wait. Study the reason for your losses. Remember, you will never lose any money by being out of the market."

The Most Powerful Candlestick Signal

The Kicker Signal

The bearish Kicker is formed when the open is at or below the previous day's bullish candle formation open price and immediately proceeds to go lower. These formations are known as Kicker signals, a very high-powered candlestick signal. This signal should never be ignored. It can create huge easy profits.

The Kicker Signal is the most powerful signal of all. It works equally well in both directions. Its relevance is magnified when occurring in the overbought or oversold area, but is effective no matter where it appears in a price trend. Consider the investment sentiment that formed this pattern. It is formed by two candles. The first candle opens and moves in the direction of the current trend. Investors are continuing with the established trend, closing the price further in the existing direction. Then, some occurrence violently changes the direction of the price.

Usually a surprise news item is the cause of this type of move. The signal illustrates such a dramatic change from the current price direction that the new direction will persist with strength for a good while. The second candle opens at the same open as the previous day, or gaps open, and heads in the opposite direction of the previous day's candle. The bodies of the candles are opposite colors. This formation is indicative of a dramatic change in investor sentiment.

The candlesticks visually depict the magnitude of the change. (There is one caveat to this signal. If in the next time frame prices gap back the other way, liquidate the trade immediately. This does not happen very often, but when it does, get out immediately.)

Of the 50 or 60 candlestick signals, there are only about 12 signals that will occur a vast majority of the time: The Doji, the Bullish and Bearish Engulfing signal, the Hanging Man, Shooting Star, Hammer, Inverted Hammer, the Bullish and Bearish Harami, the Dark Cloud, the Piercing Pattern, and the Kicker Signal.

Replaying History

Real-time virtual trading is an incredibly valuable place to begin practicing emotionless trading but it does have one drawback - it has a fairly long feedback loop for your learning curve. That is, you can only learn as fast as the market itself moves, so sometimes you have to wait for weeks or months before you can evaluate if your trade was profitable or not. For traders who use stock charts and technical analysis but want to speed up this learning curve, one alternative is to replay historical data as if it was really happening.

For example, using your favorite charting software you could:

1. Pull up an old chart of a stock that you are not familiar with.

2. Cover up the last half of it and then slowly reveal it one bar at a time.

3. Pretend that you have sizeable position in the stock.

4. Be introspective and monitor your emotions as you reveal each bar.

5. Analyze the market by focusing on the present moment instead of trying to guess what's what up ahead.

6. Continually reevaluate the situation and ask yourself: Should I trail my stop to lock in gains? Should place a limit order to exit with a profit.

Should exit now and take a loss? What is the price action and my indicators telling me now?

7. In this way you can do analysis and make virtual trading decisions, and then tell almost immediately if you made the right calls.

Of course there are also several software packages on the market that automate this process by hiding the "future" part of the chart, asking you to make virtual trades and then tracking your results. Using tools like these you can potentially simulate a whole years worth of trading in minutes.

Black Belt Trading

Just like you shouldn't practice your basic martial-arts forms in the ring where your mind is more focused on pain avoidance then executing the tactic correctly, a novice shouldn't begin trading with real money and real consequences. Only once you've amassed significant practice in a safe environment where you can conduct your technical and fundamental analysis without being emotionally distracted should you begin to trade with real money. And when you finally start, don't jump straight into the ring with Bruce Lee. Begin tentatively, gradually, slowly increasing your trading exposure over time as you become accustomed to the increasing levels of risk. How do you know you've moved too far, too fast? If you are finding it's becoming harder to sleep at night, either because you are worrying about your trades or you are excited about your gains, then you have moved into the realm where your emotions are going to have too strong an effect. You are going to start making poor, emotionally-clouded decisions and so it is time to scale back.