What Chart?

[Bloodhound]

Firstly can I apologise if I am about to ask a very stupid question or one that has been answered elsewhere on the site but I feel I am hitting a brick wall at the moment....

For background I started trying to trade about 7 weeks ago and am focusing on swing trading FTSE stocks. For want of anywhere better to start in terms of screening I have set prorealtime up to identify stocks that are trending (using ADX >25 <40), with an SMA10 either above or below an EMA30 to show direction of trend. (Please don't flame me immediately if my screening is rubbish - I had to start somewhere). I have recently introduced a new screen that I want to see increases and decreases in volume to back up what the candles are doing.

Anyway, I have probably gone down the same road as many others in reading every site on the web (and most posts on here), trying to learn as much as possible and ended up loading myself and my charts up with every indicator etc. under the sun. The net result being a string of losses (and a few successes), together with complete information overload and (what I hear termed as) analysis paralysis.

Due to some very kind advice along the way from a member of this forum (thanks - you know who you are) I am now trying to revert back to basics and look at 'naked' charts, focusing on price, volume and what the chart is simply telling me - i.e. ignoring indicators but trying to look at support and resistance and how they work with trends, reversals etc. In amongst all of this I have also started to read about triangles and some other chart patterns.

My question is a pretty simple one (I think). What sort of charts should I be looking at in order to best identify patterns, support, resistance, candles etc. Given my plan is to trade 1-5 days when I first look at a stock what time frame should I be looking at? Should it be weekly over the course of a year, followed by daily over the course of 3 months? Or should I be looking at shorter / longer timeframes? I understand that there is probably no 'right' answer but I'm hoping for some general guidance.

Should these charts be viewed on full screen on my PC or minimised - it always seems that the sample charts I see elsewhere just look so much easier to read than mine do? How come support and resistance leaps out at me when looking at someone else's chart but not mine? I can understand that practice makes perfect, and that I'm very new to all of this, but are there any ways of making my life easier?!!?

I know this may seem like a strange thing to say but, although I am reasonably maths savvy, I think that my leaning as a trader will always be towards the pictorial, evidenced by indicators, rather than vice versa.

If it is just a case of keeping chipping away at the coalface through experience then I can accept that. Just hoping there might be a few tips on offer that might help me on my way? To date I am loving the intellectual challenge of learning to trade and am putting in as many hours as I can every day to get better, but at the same time feel that I am not progressing. This week I have actually made some money back for once but am deflated because it is more though luck than judgement as 2/3rds of my set-ups didn't go the way I planned and I get the feeling that it is poor understanding of the basic principles of charts, price etc. which are letting me down.

Any help, tips, advice would be appreciated.

KJ

 

[PokerBrat]

A few points:

1) 7 weeks is no time at all, so don't be too hard on yourself. Perceived wisdom says that it can take 3 years to be any good at this game.
2) Everyone loses money at the start. Some people keep losing money, some people stop and some people go on to be profitable. Only time will tell which one you will be.
3) Remove evey indicator from your screen. All they do is tell you what the past price action was and you can see that on the chart. Concentrate on reading the chart.
4) Only trade on end of day charts. Until you understand how price moves, you will find it very difficult to trade lower time frames.
5) Start with the weekly chart, draw in your major support and resistance lines and then move to the daily chart and do the same. For now, just concentrate on the major support and resistance lines.
6) Remember that support and resistance lines don't have to be exact to the last penny. Think of them as zones or areas where previously there was a lot of buying and selling and you expect that to occur again.
7) Finally, take a step back and paper trade until the New Year. This is a horrible market to try and swing trade as it is far too volatile.

 

[Bloodhound]

Hi Pokerbrat,
Many thanks for the advice. I've followed your points and spent a whole day running through charts drawing in lines of S & R (anything to avoid Xmas shopping). Net result is a much clearer understanding of what the charts are saying and a huge confidence boost. Your point 6 is key (IMHO) as every book one ever reads always shows perfect lines on charts. Now I'm using a more relaxed approach it has become much easier and clearer. Not sure if I should be doing this but I am using Fibonacci retracements to check if I'm drawing in lines in the right place and they seem to correspond?
Bye for now
KJ

 

[PokerBrat]

Kite, happy to hear a more positive note from you.

Here's an exercise that I use to help me learn about price action:

Open up any chart of a stock that you have never looked at before, but preferably a stock that is very liquid so it has some good movement.

Open up a daily chart for as long as you can, so about 3-5 years but with only say 3 months in on the screen at any one time. Scroll to the very beginning, but try not to look at the chart as you do. You want a completely open mind for this exercise.

Now at the start of the chart, analyse the first three months that are open in front of you. Start drawing in the major support & resistance lines, and any trend lines that you observe.

When you have done that, scroll to the right one day at a time. Look at each day as if it were happening in real time and try to read what is happening and predict what will happen. As each candle appears, take time to analyse it and think about what it means in relation to your chart analysis: how does it fit into your support/resistance and trend lines, who is in control of this stock, what chart patterns are emerging, what candlestick patterns do you see, what do these mean for the future price action, where do you expect the price to be tomorrow?

Watch as the chart unfolds, watch how price moves, how it acts when it gets close to support and resistance, how it acts when it reverses or when it breaks through, watch for signs of increasing and decreasing momentum and what these mean for the future price. Think about where other traders are entering and exiting the stock and what they will be thinking as the price moves.

Paper trade the chart according to your trading plan. Where would you trade, where is your entry, where is your stop, how would you manage the trade once you are in it, what are you looking for to justify being in the trade each day, what are you looking for to tell you to move your stop or close the trade?

Keep a record of all the trades you would take as you watch the chart unfold. Record all the relevant information (entry price, stop, target, profit/loss etc) and keep a journal about each trade: why you took it, what happened and what it meant for your trade.

You are backtesting your trading plan this way, but doing it in a way that teaches you how to trade in real time.

Treat this exercise as a challenge: give yourself $10k, trade it as if it were real with proper money management and try to end the 5 years with an annual return of 10%. Analyse your stats at the end: what is your win/lose ratio, profit/loss ratio, maximum drawdown?

When you have lived and breathed a chart across a few years, you will really start to understand how things work and why certain things happen over and over again, and that is the key to identifying profitable situations. Instead of looking at a chart and trying to make it fit your system, you will start reading the chart and listening to what it is telling you.

Sound like a lot of effort?

It is a lot of effort. But there is no shortcut to learning how to trade, otherwise we all would be millionaires by now. But you can live 5 years of trading experience in a few weeks, over and over again. And you will find that when you sit at a real-time chart you will feel more confident in your ability to read it and to trade it.

 

[Bloodhound]

Hi Pokerbrat,
Thanks for getting back to me and also for the great exercise. I've had a brief go at it and it is fascinating. Luckily I'm off work until the New Year with not much else to do!!!
Cheers
KJ