– dc21
PREFACE
As a child I was enthralled by the abandoned rusting hulk of the Eldorado gold dredge stranded on Reedy Creek near Yackandandah and captivated by small clear vials filled with gold dust laboriously panned by an old prospector from mountain creeks in Australia’s north-eastern Victoria. Despite broken nails, aching muscles, erratic returns, the dirt, dust and heat, I have always found the lure of prospecting for metals and minerals irresistible. Now my prospecting tools are the computer, the Internet, the stock market database and charting software – and the lure is still irresistible. The dust is banished by air-conditioning and only fingers ache from keyboarding. Yet the exploration principles remain the same.
The El Dorado sought by the Spanish conquistadors and described by Diaz in The Conquest of New Spain did not exist. Ours does. Every day the market surrenders a rich line of lode to the best traders. We have a choice between a pot of gold and a working gold mine. In this book I explore some ways of finding the lode and bringing it on-stream to build a working gold mine. I am not a market wizard so the techniques in this book require no specialist skills. The bulk of my income comes from trading the market and like many traders who have moved from working for a wage to trading for a living, just duplicating my wages is enough to keep me happy. There are fortunes to be made – and lost – in the market. Better prospectors make, and keep, these fortunes.
This book is written for those who want to survive, and for those who, while not aspiring to market wizard status, would like to more aggressively manage market risk by finding, exploiting and managing trading opportunities. These are skills needed for survival as a position trader. They are the basic skills on which day trading success is built. If you are prepared to pit your prospecting skill against those who have traditionally held the keys to the market, then this book will help equip you for the expedition.
Bull market conditions encourage novice traders. In a bull market the market pays for your mistakes as the general rise in stock prices allows for quick recovery of losses. In a bear market you pay for them. Some of what is written in the following chapters may appear to be unnecessarily complex or detailed, but when the bear bites, these are the basic disciplines that separate the survivors from market victims.
The processes described in this book are easy in principle but some are very time-demanding if applied indiscriminately. We start with broad selection procedures and as the list of trading candidates narrows, apply more specialized trading tactics.
Trading is frustrating because, despite all the groundwork required before clicking the mouse button or picking up the phone to enter, or exit a trade, the market may still slip between your fingers.
Understanding the analysis, being in tune with the market, initiating and completing scanning processes and fine-tuning the financial aspects does not mean a trading opportunity will be revealed. The market does not owe us a living. Despite the hours of research, there is no guarantee that the stock will be available at the price we think is appropriate. There is no guarantee of any real trading opportunities identified by our painstaking analysis. There may be none that match all our criteria.
This is annoying, but it is only fatal if we settle for second best. As a private trader we do not have to trade. We can afford to wait until the best opportunities arise. This protects us from a market indifferent to our existence and survival.
There are always some market situations where the tools of technical analysis appear useless. This does not diminish the effectiveness of the tools. In the same way that a carpenter does not use a screwdriver to build a house, so a trader does not attempt to use technical tools in trading situations where they offer little help.
As traders we look for those opportunities compatible with the tools we are most skilled in using. To pretend that our particular tool kit will expose the secrets of all markets, or of any market segments is foolish. As traders we want to identify our strengths and weaknesses. By trading on our strengths, matching our trading style, and using the appropriate array of tools, we become better traders.
Success does count. Virtuosity is a theoretical skill if it does not wring financial rewards from trading. Trading approaches that mimic the apparent complexity of the markets are not always the best at understanding the markets. More difficult does not mean more accurate. Simple trading strategies score direct profits in complex systems so we aim in this book to dismember complexity into its simplest components. Here is the foundation for trading tactics.
Systems and systematic behavior are at the core of complexity. Complexity is a dynamical system positioned on the edge of chaos where a single event – the butterfly effect – could tip it into dangerous instability and collapse. Survival depends on the way the systems adapt to behavioral changes, moving forward along the cliff rather than to one side and over it.
Trading is on the very edge of chaos, riding alongside the market. Our survival depends on our ability to define our task and its components to select the right tools and deliver appropriate solutions.
The core of every complex system has a dominant characteristic. The cyclone is defined by wind, the turbulence of a waterfall by water, the clash of market activity by numerical data. We measure the cyclone with an anemometer, the flow of water with a Dethridge wheel and the market with a price chart. No matter how you make your trading selection – fundamental, technical, accounting, financial or news analysis – your trading improves when you know how to read a price chart with its message of probability.
Trading with the Balance of Probability Chapter 1, goes to the core of every trading approach, matching the message of the chart with its implied information about probability. When some price combinations occur more frequently than others they signal a change in probability. The market throws up voluminous data, concealing this vital information. The cipher of understanding is the bar chart. The price bar, or candlestick display, is built on clear market emotions pointing to areas of increased probability. These Messages from the Jungle Drums, Chapter 2, track progress at the market battle front and save financial lives.
Chapter 3, Lasseter’s Reef, brings the balance of probability to life in a sample trade, showing how basic understanding is matched with market reality. This is a model of the trading nuggets we hope to find and our search begins when we select the best time frame. Time Bites Character, Chapter 4, shows how we focus short, immediate and long-term pictures into a single snapshot. The detail blurs as the structure emerges. Different time bites are used to confirm analysis across multiple time frames and so further stack the balance in our favor.
Armed with an idea of how our trading opportunity might look and how we might recognize it we are ready to start Searching for Love at First Profit. Some traders choose to follow an accounting path. We give them guide information in No Accounting for All Tastes and explain how their path joins with ours when it comes to assessing and managing the trade.
We plunge into the jungle of technical indicators. This style of trading is a complex activity built on foundations of layered simplicity. We deconstruct some of these complex processes so you can rebuild them in a way that uniquely suits your trading style and financial requirements.
This is database mining at its finest. We consider the value of Eyeball Searches, which provide an essential reference point for every trading decision. We place it near the beginning of our search and also return to it towards the end. Some choose to use this bar chart analysis only at the end of their search but the techniques do not change. Other chartists look for Technical True Love – Searching For Relationships between price patterns and daily price bars. Other technical traders prefer Performance Searches as the best way of quickly finding trading opportunities. All these techniques use common concepts to bind complex groups together. Working with simplicity provides the keys to complexity.
This understanding lets us build effective criteria for speedy searches that quickly find the best trading candidates. These techniques are used by day traders, position traders and investors. Some search criteria are spelled out for you to copy into your charting or market software package. Those who want to fiddle and fine-tune further will find specialist