Free Technical Analysis Handbook

Today more and more investors are warming to the fact that psychology moves markets and therefore fundamental analysis, which fails to properly measure mass investor psychology, must be flawed.

Who can blame them? After all, fundamental analysis — based on past company earnings, rating agency projections and the like — proved to be of little value during the bust.

There is a better way.

Many investors who monitor investor sentiment readings, study Elliott wave patterns and employ other powerful technical indicators were — at very least — able to position themselves to survive the recent decline. Still others were able to turn crisis into opportunity and profit from the volatility.

How’d they do it?

Technical analysis.

You see, technical indicators remove the cloudy, bias-driven assumptions from your analysis and focus on the one thing that moves markets: investor psychology.

Past performance is not indicative of future results — and that’s where fundamental analysis goes wrong. It fails to factor in the psychology that not only moves markets up and down but also leads analysts to extrapolate the current or past trend into the future. That’s why fundamental analysts almost always miss major tops and bottoms.

Folks over at Elliott Wave International employ the largest team of technical analysts in the world. They recognize that optimism peaks before market tops and pessimism troughs before market bottoms. They use powerful and sometimes unconventional tools to help identify psychological extremes that signal high-probability turning points.

EWI’s brand-new 50-page eBook, The Ultimate Technical Analysis Handbook, will show you the various methods of technical analysis they use every day and teach you how to use these powerful tools for yourself.

If you’re a technician, this eBook is perfect for you. If you’re a fundamentals follower, it’s more important than ever that you give technical analysis a closer look. Even if you never completely abandoned your fundamental indicators, you WILL benefit from drawing on these valuable technical tools.

Learn more about this free eBook, and download your copy here.

Some facts about day trading I

truth.jpgI have been day trading for quite a while. I am not a pro. But I guess, I can share a little bit about day trading. Since my friend , Faith Lu, a young gentleman from China, is keen to learn all about trading, I guess this might be a little helpful to him. Remember, these are not the rules, just some observation from experience.

  1. You are a day trader, not analyst. All you need to know is basic Technical Analysis, be cool, and trust your instinct. Bull shit? I don’t think so. You don’t have to be a master technical analyst to day trade. All you need to know is just drawing trend lines, understand what is Moving average, reading market volume, that’s it! What else do you need? Detailed market analysis are for gentlemen who get paid by writing reports, but not trading. Your job is to start the day with cash and end the day with more cash. Thinking too much is not helpful.
  2. Know a little bit about mathematics. Hold on, don’t be panic. I know you hate this. All you need to know is the meaning of Probability. You will never know what is going to happen at the right side of your chart. We are playing with probability. Most of time, it is 50:50. So, bear in mind that, we want to earn $1, but with only potential loss of $0.5. When market is moving in our favor, let it run, otherwise, leave, please. You don’t need a degree in Mathematics from Standford university to know, risk $1 to earn $0.5 doesn’t work in long run.
  3. Day trader does not need to trade every day. Got it? If you’ve just pocket $1000 today, do not expect to earn another $1000 tomorrow. Everyday is a new day. There are days that you just can’t trade. If you are not into trading news, then do not try to trade during big announcements like Non Farm payroll, or Interest rate statement. These are the days that we enjoy fishing or jogging in the park. Day trading is just like doing your own business. We do not need to sit in the office everyday.
  4. Day trading is a mind game, and a decision making task. Make sure you are in good condition mentally before start trading. It is a damn bad idea to trade right after fighting with your spouse. You’ve to make decisions when trading, you need a clear mind for this task. So if you are not ready for the task today, then come back tomorrow.

Day trading is a business that allows you to earn a living. But if you are planning to start day trading and earn a million-dollar bungalow next year, you need to see a psychiatrist. 😆

Do you still have something to add on? Shoot me a comment.

Why do I do monthly review, and only monthly?

thinkthought1.jpgI don’t have to write another post to tell you why do you need to keep a trading journal. I assume you should know if you are taking trading seriously. But, I guess, most of traders might have the same problem which I used to have, ‘over review’ your trading result.

No doubt, we have to review our trading result, or the accounting book of your business. Do not try to hide the losses and mistakes to yourself. After all, this is our own business, isn’t it? But just how frequent should we do that?

After trading for a little while, I figure out , doing a monthly review is pretty much enough for day trader, like myself. Why monthly and not weekly? Well, this is not a rule, but an observation. I used to do weekly review of my trading. It is useful. But, it does not really tell me my overall performance. In other words, weekly review is kinda ‘short-sighted’. Why is it so? Let’s take a example, during the FOMC meeting week, market might be a little bit choppy, most likely traders are waiting for the interest rate decision. I might be trading extremely well during this kinda week, or I might be chopped to pieces. Does the result of the week itself tell me a little about my over performance as a trader? Nah, I don’t think so.

So, why do we spend time to analyse the result of the week, and feel ‘happy’ or even ‘devastated’ about it? And subsequently thinking about ‘maybe I should not trail my stops’, ‘maybe I should wait when the candle closes above yesterday’s high’ , blah, blah , blah. Maybe I should change the system rules! again?!? I don’t see a point. In fact, it is similar to trading. Do not trap yourself in the 5-minute charts and forget about hourly chart or even daily chart. Why? Over the long run, the big picture tells you more about the ‘truth’.

I would think a monthly, quaterly , and a yearly review of the overall trading performance are pretty adequate. Tracking monthly cost of trading, reviewing mistakes, analysing the system performance over difference weeks, or even seasons. That’s more effective, well, to me.

So you want to learn trading, part I?

I have a couple of friends asking me how to start trading or do I have any tips for them to start trading. Well, I am not a pro, nor a trading coach. But, I can share some great resources that are available online, in the blogsphere.

First of all, my trades are based on technical analysis, which means I am reading charts and looking for trading opportunities and setups mostly from price charts. I am not a big fan of fundamental analysis, it is too tough for a slow man like me to understand.

So, here we go.

First, armed yourself with skills to involve in the market. Making phone calls to your broker, or getting ‘tips’ from your colleagues or uncles are not skill. Learn how to read a price chart, how to analyze the market technically or learn how to read financial reports and analyze the market fundamentally. Some nice blog posts are available on the web freely on this area.

  1. Toni Hansen’s Trading lessons
  2. Drawing Trend lines from Trader Mike
  3. More on Trend lines from Trader Mike

Once the price charts are no stranger to you, it is time to move on. So we read charts, but how are we going to deal with market? To start trading, we need to have a setup. A setup is a specific condition/situation that market presents to you and gives you the chance to enter the market. As you might know I am a big dummy fan, all my trades are based on dummy setups. Some people live and breath with indicators for trading setups, nothing wrong, as long as it works for him. Here are some good resources:

  1. How I trade, and analyzing charts from Trader-X . (The respected and mysterious trader’s site. He’d left blogsphere, but catch his blog before it is gone)
  2. Finding the right set-up(s) from Trader-X
  3. Chairman Maoxian’s trading for dummies (This is the best trading secret on the web, I really hate to share with anyone :-p)
  4. Trade setups ( a library of technical setups from Trading-naked.com)
  5. Strategies from Corey at Afraidtotrade.com
  6. OONR7’s trading setup

Alright, we have setups, looks like we are ready to make million now. Nah. The next big thing in trading is about risk and money management. You can’t trade without money. The bottom line is to protect yourself (your capital I mean!) when having bad days. Trading is a probability game, you only have high probability trade but not sure-fire trade. No setup will give you 100% success rate. Face the fact! So, how much can you afford to lose? how many contracts or shares should you trade? Money management is essential for trading.

  1. Accuracy Vs Risk/reward ratio from myself, Trader Gav 😉
  2. How to be consistently profitable in stock market from Movethmarkets.com
  3. Position sizing from Trader Mike
  4. Starting out with basic from Dr.Van K Tharp
  5. Expectancy is the next key from Dr. Van K Tharp
  6. Expectancy from Trader Mike

Enough? No. … Now you should have known that trading is a serious subject, serious business. Ok, I will continue in part II, this post is just too long.. 🙂

Current Reading: An American Hedge Fund

I have one new arrival in my trading library. Timothy Sykes‘s An American Hedge Fund. I was surprised to see a ‘Uncorrected Proof’ copy of the book lying in my mailbox. It is my pleasure to have a chance to read Tim’s upcoming book. I will try to finish the book as soon as possible and write a review here.

bookcover2.JPG

 

Accuracy Vs risk/reward ratio

I have been thinking about writing something on money management, I just didn’t know where to start. Of course, I am an amateur on this topic, I am just sharing materials I have learned.

There are times I read traders’ blog who revealed their risk reward ratio when making certain trade. Some traders are trading with 1 R in order to earn 0.3R (basically, risking $100 to earn $30, that’s the idea). Since there is nothing right or wrong in trading business, I am not arguing if the trader is doing the right thing. I am interested in looking at some simple mathematical details of this risk plan.

Just how much accuracy is required from your system in order for you to be profitable after certain number of trades when you are risking , say, $100 to earn $30 each trade? I found an excellent spreadsheet from Kreslik.com (An excellent forum, with some great traders sharing strategies, programming etc). The spreadsheet can be found here. moneymanagementchartupload.xls

Let’s take an example, risk amount $100, profit target $30.
rr1to3

 

As you can see, with this risk/reward ratio, you will need a system/methodology that gives 80% accuracy in order for you to be profitable.
A system with over 80% accuracy? Well, I believe it does exit, but I have no luck to see it so often. Most of time, I will be happy if my system gives me over 60% accuracy or sometimes, just around 55% accuracy.

This time, I am risking 1 R in order to earn just 1.5 R (risk $10, to earn $15).
Here is the result.

rr1to15

Basically, it is just like a coin tossing game, I need 50% accuracy in order to be profitable.

How about risking 1 R to earn 1 R? No. Remember, commission kills. For example, we assume each trade , $2 is required for commission. With 1:1 risk reward ratio, over 100 trades, we are still at the losing end if our system is unable to produce 70% accuracy. You can try out different Risk/Reward combinations in the spreadsheet.

Some simple calculations do help traders to understand the nature of trading. If you think it is ok to risk a bigger dollars to earn a small profits, make sure you have a high accuracy system that really pays you.

A great article on this topic can be found here. (Link from Kreslik.com)