Think Outside Your Toolbox

• July 31, 2000
• Eddie Kwong

One of the hazards of trading
is that you can become complacent and just fixate on a few patterns and
indicators that seem to work well.

This flies in the face of a philosophy that I
adopted after studying Mark
Boucher’s 10-Week Short-Term Trading Course. Nobody says it better than
Mark, so I’ll quote him here:

I would, without hesitation, say that
anybody in search of an enduringly profitable trading system that makes all
your trading decisions for you is in search of the Holy Grail. In other words,
such a money-making machine simply does not exist.

But wait, you may say–“aren’t all the
highly successful traders in the world using some kind of unique methodology
or system? Why can’t I simply use the same exact approach they are and become
just as successful?”

The answer is this: The markets are
always changing. All trading strategies go through seasons of winning and
losing. The key to long-term success is to understand the markets
well enough so that you know how to adjust or switch strategies or even
develop new ones in response to changing market conditions. Focus on systems
and you may make money for a while, but eventually you’ll give it all back
(and more). Focus on true understanding and you will be well on the
way to consistent trading success.

This is particularly relevant to today’s chart of
the day. As many of your who follow my little feature may have realized, much of
my work revolves around chart patterns. As traders’ arsenals over the years have
evolved to incorporate many high-tech tools, the reliability of simple tools
like trendlines, triangles, flags, head & shoulders, and retracement levels
remains pretty consistent.

Yet, my desire to understand the markets better
has led me to think outside of my own little toolbox.

Silicon Storage Technology
(
SSTI |
Quote |
Chart |
News |
PowerRating)
was bouncing off its 200-day moving average, the lows of its five-month trading
range, and a four-week downsloping trendline. Based purely on patterns this was
potentially robust triple-support, suggesting that follow-through off the bounce
was in the works. 

I looked beyond my own pet tools and
spotted two problems. 

• SSTI had not yet broken above
  its three-day trading range. SSTI had a strong open but I watched it stall
  out and fail to break above the highs of its three-day range for several
  hours on Monday. This price action was talking to me. Listening to what the
  market has to say is something I learned from Jeff Cooper.

• Current price action was
  preceded by heavy distribution. The plunge of SSTI into its current lows was
  accompanied by heavy volume, indicating that many traders and institutions
  were dumping their shares. Distribution
  is a concept that my friend Kevin Marder taught me about.

While I’m not certain that this
bounce attempt will fail, it does appear to be on shaky ground.

Good night and have a pleasant
tomorrow,

Eddie