The Basics of Technical Analysis

The primary strategy CAM Trading uses is Technical Analysis.  

What is Technical Analysis?  Essentially, it is chart reading.  Specifically, it is the science (or art, depending on your personal view) of recognizing chart patterns and interpreting them to make buying and selling timing decisions and implementing a trading plan.  Technical Analysis can help you not only make your decisions but make them more precisely, make them more disciplined, and can help you in managing your money more effectively.

Many Technical Analysis protagonists believe that everything you need to know about a security can be seen by looking at the charts.

Technical Analysis comes in two forms:

1. Price Patterns - these are simply visible patterns of what is happening to the price of the security.
2. Indicators - these are mathematical algorithms that take all aspect of the price movement, including volume, and are put together to form all kinds of ratios and analysis by which future price movements may be guesstimated.

The Problem with Relying Solely on Technical Analysis 

Fakes 


Be aware that Technical Analysis is not what you'd call an exact science.  In practice, this means don't get too hung up on precision.  As you gain more experience, you'll notice that no two historical price movement is ever exactly the same and believing so is an invitation for disaster.  


Behind the Scenes

What you see (real-time quotes) on your computer screen is only a half truth.  Fakes can occur where specialists and market makers identify extraordinary levels of interest around a support or resistance area and deliberately drive the price beyond that area to secure an advantageous position.  For example, a stock is falling down to a known support level where there are lots of sell stop orders.  Seeing this, the specialists work the price lower so that those stops are triggered.  In the mayhem of all this automated selling activity, the specialists are busy buying as much as they can, soon driving the stock price upward and securing a tidy profit for themselves. 

Eventually, the "specialists" and middle-men will go the way of the old phone and fax stock broker as financial systems and technology continue to evolve.

Trading and Investing Psychology Continued...

There are a number of behaviors that will almost guarantee losses in the markets.  These behaviors, the antithesis of the way successful traders operate, include:

• Lack of discipline:  It takes and accumulation of knowledge and sharp focus to trade successfully, and more importantly; with consistent results!  Many would rather listen to the advice of others than take the time to learn for themselves.  People are lazy when it comes to the education needed for trading.
• Impatience:  People have an insatiable need for action.  It may be the adrenaline rush they're after, their "gambler's high".  Trading is about patience and objective decision-making, with a long-term perspective on a desired outcome (profit), not action addiction.
• No objectivity:  We tend not to cut our losses fast enough.  It goes "against the grain" to sell.  At the same time, we often get out of winners too soon.  In both cases, we are unable to disengage emotionally from the market.  We marry our positions, and like marriage, we cut our losses when we're too deeply invested.
• Greed:  Traders (and let's face it, EVERYONE) try to pick tops or bottoms in hopes they'll be able to "time" their trades to maximize their profits.  A desire for quick profits can blind traders to the real hard work needed to win.
• Refusal to accept truth:  Traders do not want to believe the only truth is price action.  As a result, they act contrary to their trading plan, and set the stage for the losses that almost always arrive.
• Impulsive Behavior:  Traders often jump into a market based on a story in the morning paper.  And if you're a new brokerage account holder, it's likely that you bought your first stock on the day your funds cleared the account!  Markets discount news by the time it is publicized.  Thinking that if you act quickly, somehow you will beat everybody else in the great day-trading race is a grand recipe for failure. 
• Inability to stay in the present:  To be a successful trader, you can't spend your time thinking about how you're going to spend your profits.  Trading because you have to have money is not a wise state of mind in which to make decisions.  This was a hard lesson for us to learn (and I personally believe, this particular subject is ongoing).  
• Avoid false parallels:  Just because the market behaved one way in 1930, does not mean a similar pattern today will give the same result.

 If you try to bridge the gap between the present and the future with predictions about the market direction, you're guaranteed to be in a continual state of uncertainty whether you admit to it or not.    

Create Your Trading Plan or Investment Plan and Write it Down in Specific Precise Language Before You Trade

Don't confuse trading rules with a black-box system.  Your trading plan should be a set of Rules, which you follow implicitly time and again.  Sure, you can build in some flexibility, combinations and additions to these Rules, but write them down, understand them and implement them.  Also keep them handy, particularly when you're trading or making a trade decision.

A mind map is the best way to achieving this in a direct and visual way.  A mind map is simply an illustration, like if you imagine a series of branches off a central tree, where you're using different colors and symbols to depict the rules, as opposed to simply writing them down in a list.  Ideally, you should do both.

The Rules need to embrace when to enter, when to exit, when to use a specific options strategy (if options are in the plan) and when to activate your Stop Losses (which often change depending on the strategy you're trading).

Controlling Your Emotions When Trading

Once you've been trading for a while, you'll realize that turning a mediocre trading career into something brilliant has more to do with understanding what's happening inside ourselves than with what's happening on Wall Street.  We can know all the right things to do, but if our emotions run amok, we will never be able to really trade with a solid sense of purpose and passion.  Instead, we find ourselves trading from a point of irrational emotion.  Digging into the problematic emotions that can hinder our trading careers is the only way to move to the next level.


Here's an example of exactly what I mean: While in college, I had the opportunity to learn about the stock market and how things "moved" in Wall Street.  This was also the dawn of mainstream online brokerages with flat-rate commissions.  So, excitedly I opened up a Webstreet account and funded it with savings earned while working my summer jobs.  I had created a simple strategy that looked great on paper and couldn't wait to get to the 9:30 AM opening bell to place my buy orders.

I came out of the gates on FIRE with several trades that I was sure would be BIG winners!

Several hours later, those trades turned into devastating losses.  Who could have known that Internet Incubator stocks were not so hot anymore after only a moment's notice?  This was certainly one of the worst feelings anyone could go through.  Months of labor and mediocre pay, all washed away in the juggernaut of the Wall Street money machine!

I took an entire week off to think things through, I decided after those devastating losses that it would not stop me from what I'm really passionate about and that is, trading.  I realized too, that I had a LOT to learn internally (psychology) as well as externally (market and economic data, technical and fundamental style of trading, etc...).

In the end, I realized that by taking a week off, I was taking a moment to recognize how stressed out I had become.  As a result, I used everything I've learned in those days to continue my work with CAM Trading.