The Basics of Trading

Mark (FTSEB).

Thanks a lot,I got 3 out of 5 correct and learnt a lot from this exercise.

Mark,

I found this very useful. As a result rather than just skipping through charts until I see something interesting I'm making notes on them as I go. At the least time now indicates when, if any, I should have pulled the trigger - although so far in more cases than not staying away is the right thing to do. I think it too easy when looking at historical information, with 20/20 hindsight, to fool oneself into doing just the right thing while pretending that chart doesn't actually do what you anticipate after the brilliant (retrospective) entry!

Cheers,

Andrew

Mark,

I agree with Fluke and Andrew. Very useful. Your critiques were also on the spot for me - pointing out where I might be wrong, and right!.

Made me look closely at the charts instead of an overall view which I usually did.

Hi all

Thank you for your kind comments, it means a lot to me that your getting something out of this.

Thanks goes to iSquared for his last post and giving me a better idea of what to talk about this week.

So far we’ve covered, the basics of Technical Analysis, Money Management and the concepts behind risk and reward. That is pretty much the basics behind trading, so the next step is to start putting this knowledge to use.

If your looking at end of day charts, then the process of trading can be a slow one, after all you have to wait a complete day for a new piece of data.

The best way to practise is to go back over old charts and try to analyse it from there. I was once told “Practice doesn’t make perfect" – but perfect practise, now that’s perfect. So I would like to spend some time going over how I’ve analysed data in the past. This should really help the learning process:

Take a stock or a chart that you don’t know anything about, and pick a time 2 or 3 years ago. This way you have no idea of what has happened in the past, and therefore can not cheat. You then analyse the chart you have, and then forward the data one day at a time. This will create a new bar and from that you will have another bit of data to decide whether to trade or act on.

If your using the Sierra Chart package then you can use the right arrow key to jump one day at a time.
There is a function on ADVFN to view a set date range. From that what you have to do, is change the “To date”

Lets have a look at this example: Barclays 5th May to 5th November 1997 http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3=



At this point I can’t see anything in the BARC chart that I like, so I’ll jump a day at a time until I see a set-up I like.




Ok, this has bounced between the downtrend and the uptrend, so there could be something to watch here




A couple of days later the downtrend has gone, so at this point I looking to buy and use the uptrend as support. – I’ll wait another day though to see if I can get a better entry.




Now the chart has tested the uptrend, I’m happy to go long. So I’m long at 362 with a stop below the trendline at 355 and a target of 400 (which is the support in October). This gives a risk / reward of 5.43:1




One bar later and the trendline is still holding price, so I need to go one bar at a time until, I see something of interest.




Oh dear. The trendline got broken and I was stopped out for –7 less any commission.
Now I’ve got to look back at the chart again and see if there is anything I should have seen or done differently.
In this case, I should have waited to see a solid bounce off the trendline before entering. I should have also seen the short-term downtrend which if broken would have been an indication that the price would be moving up.


And that’s how to practise trading. Simple really, but if you do it properly, you can really benefit from real data without having to wait days for the next bit of data.


I can’t think of anyway to put this into practise, so it’s the same exercise as last week, with different companies though. – imagine you are in the following trades, where you think the stop-loss will be and a rough target. For all of the charts, we’ll be looking at the EOD chart, over the last 6 months.

<table border="1"> <tr><td>No.</td><td>Ticker</td><td>Name</td><td>Long/Short</td><td>www.ADVFN.com Link</td></tr> <tr><td>1</td><td>ABF</td><td>A.B. Food</td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3=</td></tr> <tr><td>2</td><td>AL.</td><td>Alliance and Leicester </td><td>Short</td><td> http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3=</td></tr> <tr><td>3</td><td>DGE</td><td>Diageo</td><td>Short</td><td>http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3= </td></tr> <tr><td>4</td><td>JMAT</td><td>Johnson Matthey</td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3=</td></tr> <tr><td>5</td><td>MKS</td><td>Marks & Spencer</td><td>Short</td><td>http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3=</td></tr> </table>

As always there is no right or wrong answers and I would love to hear from you.

If you would like me cover anything else next week, then I’ll see what I can do. Just let me know by private message.

Take care

Can I just add a point here.... It's a well documented feature of the DOW, but may not be relevant to a specific stock, but worth noting anyway. The chart shows a typical triangle action. OK so you can't really be sure which way it's going to go. Patience will be rewarded. Afer the breakout, there is almost always a pullback the the old resistance/support, which, after the breakout reverses. So Support becomes resistance and vice verca.There will be a small loss of R/R, but with a higher probability of a winning trade......

And as luck would have it, today sees an exact example for real on the dow........The action today was not on the price, but in RSI. Sometimes it is seen in CCI and sometimes you will see it in the price.Either way, that is your buy signal.Good hunting.
Excellent series,FTSE.

Hi Mark.
I have looked at your 5 stocks and have set out my thoughts for the stops and targets.If we imagine we are in these trades.
ABF Long. Stop at 502,Target 545.
AL Short. Stop at 792,Target 648
DGE Short. Stop at 650,Target 565.
JMAT Long. Stop at 725,Target 795.
MKS Short. Stop at 318,Target 280.

I would like to see what you think Mark.

Mark,

Here are my attempts. My learning from this is that there are several trades here where I'd have to wait for the price to come to me. Even then there are several I would not take due to the RR issue.

I'm still undecided about the balance of anticipating a reversal from that point or waiting for some evidence. Personally I'm much more prone to wait for the latter (i.e. for a long either a higher high or a close above the previous days high (in these conditions I'll wait for the close above the previous days high for longs)).

ABF Long 530 Stop 499 Target 546 RR 0.5
AL. Short 784 Stop 801 Target 649 RR 7.9
DGE Short 569 Stop 650 Target 500 RR 0.9
Short 630 Stop 650 Target 500 RR 6.5
JMAT Long No way (no space to down trend line, no new highs/lows).
MKS Short 299 Stop 320 Target 285 RR 0.7

So of them all only AL. and the 'wait for it' DGE appeals. In both cases I'd sacrifice the RR for some movement in the direction I subsequently anticipate. the targets I've used have in the main been based on the previous high/low in the direction of the dominant trend. Target setting from a trading perspective is certainly a topic worth exploring IMO.

Cheers,

Andrew