To Build Your Confidence And Knowledge Fast, Try This
The
market sold off today as volume came in a higher. Although volume
was still below average, this isn’t what you’d like to see (if you’re a bull).Â
Recent breakouts had a mixed performance, although all four I mentioned in
Monday’s column have either continued higher, or pulled back in lighter volume.Â
What’s it all mean? Market conviction is still lacking, and so is mine. A
strong trend will emerge someday. I just don’t know what day that is.Â
(Email me if you do. I’d like to know.) For now caution still seems prudent.Â
(As opposed to recklessness being prudent.) Today I thought I’d talk about a
technique that beginning traders can use to steepen their learning curve.
One difficulty in learning
technical analysis is that beginning traders first exposure to charts is
normally in books or other written materials. Examples are shown of successful
patterns. (They almost never show you the ones that crapped out. Guess
what…they’re just as common.) Sometimes these charts are shown just prior to
entry. Sometimes they are shown through the completion of the trade. Either
way, they are shown as a snapshot. The problem is that the market is not
static. It’s dynamic. Trying to determine proper entry and exit points is much
more difficult when you’re living on the right side of a constantly changing
chart than it is when looking at a historical snapshot.Â
While historical charts are
excellent tools for explaining concepts, they are not nearly as useful in teaching
real-time trade management. In order to simulate that you need to create a
simulated trading environment. This is not as difficult as it seems. It can be
done with nearly any charting program, as long as that program allows you to
scroll through your charts. Then it is just a matter of scrolling through the
charts bar by bar, and paper trading them. This can be done for any time frame
or type of trading.
For example, if you are an
intermediate-term growth investor, pick a few stocks that were big winners last
year (TASR, NTE, ERES, JBSS, AVID, etc.) and scroll through their charts,
starting with 1/1/2003 on the right side of your screen. When you see a pattern
forming, note your entry point and stop level. Continue to scroll bar by bar
after entry and move your stops up as appropriate until you are stopped out of
the trade or decide to sell (perhaps into an exhaustion run). You may also look
at some big losers from last year for short opportunities the same way. This
isn’t quite like actual trading. (You know the winners ahead of time. That’s
why you picked to look at them in the first place.)Â It does allow you to refine
your entry and exit techniques and watch a chart in a more dynamic manner.
^next^
This is also a great technique
for short-term traders. For instance, if you are studying Kevin Haggerty’s
methods, you can use 5-minute index charts and scroll through them looking for
proper entry and exit points. By combining this with reading his column
archives, you could actually 1) pick a day, 2) read his morning commentary from
that day, 3) paper trade your 5-minute index charts (always from the right
side), and then 4) read the following morning’s commentary to see how Kevin
interpreted the previous day’s action as compared to you. Anyone new to his
techniques could probably steepen their leaning curve dramatically just by going
through this simple exercise for a few hours.
Even when looking at short-term
techniques like this, it is important to understand that real trading will be
different than simulated. Still, by simulating new techniques this way you can
increase both your confidence and knowledge faster. (And hopefully begin
profiting sooner.)
Best of luck with your trading
(simulated or real),
Rob