Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
This chart pattern is the most frequent pattern of behaviour in the market.
Running technical searches and scans is an important part of trade identification. It has an important drawback.
The scans you select and use limit your search for opportunities and they prevent you from making a strategic assessment of the current market conditions.
Many traders use the performance of the market index to provide some type of strategic background but this analysis does not easily transfer to all stocks.
Every few months traders do an extensive visual scan of the market, looking at every chart. This gives a feel for the market behaviour. It helps to identify the most common patterns of behaviour, and this in turn helps to select new explorations. The chart pattern above is the most frequent pattern of behaviour in the market.
The next most frequent behaviour is the sideways pattern. These patterns offer very limited trading opportunities.
However it should be noted that the sideways pattern may become more dominant in market activity. If this is the case then traders will need to adjust trading methods to take advantage of the short term rally and retreat behaviour.
It is important know what type of chart behaviour to avoid. It is also important to identify the chart behaviour which provides potential opportunities. The classic is a GMMA trend rebound pattern.
Stocks with this pattern are added to a stock pool for assessment with other trading indicators such as Count Back Line (CBL) and Average True Range (ATR). Once the behaviour is identified, a new search parameters can be established which makes it quicker to find these broad conditions in the future.
Based on observations in other markets, this rebound pattern offers good trading opportunities in current market conditions.
Momentum trading opportunities continue to develop, but they are more difficult to catch.This example gives a 100% return in 3 weeks of trading. The key search component is based on returns of more than 10% over a 2 to 3 day period. This may be teamed with a volume filter.
Chart pattern behaviour is also observed. Chart patterns are assessed in several ways. The first is to determine the frequency of the patterns. In some market conditions, some chart patterns occur frequently and are very reliable. In other conditions they occur less frequently and offer poorer opportunities.
A visual search allows the trader to decide the frequency of the patterns. In making a decision about trading, the trader will asses the consistency of price activity and volume liquidity. The up sloping triangle in this example is a good pattern, but a poor trading opportunity because of the number of no trade days.
Other opportunities include the classic GMMA trend trade with a mid-trend entry. These types of trades were successful in 2009, but in 2010 there is an increasing incidence of sudden trend collapse. Now the preferred entry point is when price moves near to the Trend Volatility Line (TVL line). This allows for a rapid stop loss exit to protect profits.
The purpose of this scan is to identify the changes in the distribution of patterns. What are the dominant patterns of behaviour in the market?
The prevalence of downtrend and sideways patterns in the current market tells traders that caution is required in trading counter to these trends. Downtrends can be traded using CFDs to trade short but the preference here is to trade only the top 100 stocks with high liquidity.
The next step is to develop technical scans which will quickly extract stocks that are consistent with the dominant pattern behaviour. The third step is to apply trading analysis to the stocks in the stock pool to select the best trading candidates.
Daryl Guppy, well-known international financial technical analysis expert. He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. His weekly analysis newsletters are followed in Asia and Australia.
Information provided is in the nature of general comment only and neither purports nor intends to be, specific trading advice.