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Trade Patterns
By Jobo Smith
Paying Attention Can Pay Off There are thousands of books a websites dedicated to technical analysis and trading patterns. What most don't discuss is that there is no 'holy grail' pattern that always works. Traders are always hunting for it, and many seminars and books say they have it. Unfortunately, they have it for the time being (or not at all and its a ploy). The market has a funny way of going in and out of phase with almost anything you try to apply to get an edge. However, if you notice, I said IN and OUT of phase. What I mean by this is a pattern or indicator will work really well for going long, then that will stop, and it works really well for going short. All this is predicated on investor sentiment and overall trading activity. While it is not possible to pinpoint the turns, if you watch and pay attention to many, many names (this does not even have to be in real time, this can be done after the market closes) you can see what is working overall (its never perfect) and what is not working. There will also be times where stuff just plain does not work. The basic premise is you want to see something that has a broad enough appeal to work on many names, not just one. One thing to keep in mind when trying to find ideas is to have a fixed set of rules or indicators you watch. Don't constantly change them, or chase the next newest thing. You will be unable to notice patterns of behavior if you do this. That is like a dog chasing its tail that it can never catch. Every day you should have a basket of key stocks (20-40 names is enough) you watch with 5 or 10 indicators or patterns you are watching. All you need to do is see X happened, then Y followed. See it on enough names and you probably have a pattern of localized behavior. Once you notice it for a few days, the pattern will probably last awhile and can then start to be applied to find ideas to make money. This mainly helps to narrow the field of stock picks to the most likely winners, but in now way can assure of winning. Also, and this is most important -- DO NOT HAVE PRECONCEIVED IDEAS OF WHAT IS SUPPOSED TO HAPPEN. Meaning look at each with a clean slate. You should not care if the result is buying or selling overall, or mixed where there is no consistent pattern. For example, if you have indicator X you are watching on a chart, do not associate anything it does with buying or selling expectations. Play what the market is showing you. Too many times people WANT something to happen, or EXPECT something to happen, and then ignore the data staring them in the face that the exact opposite is the true play. I myself am guilty of that, its very hard to do but to be successful as a trader you must be able to do it. In addition these are simply tools to help find ideas, the exact timing of when to use them is still up to user discretion and skill. |
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May, 2012
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