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Welcome to Trading Tutors Weekly Review |
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This newsletter is written on a weekly
basis to help investors understand and learn the
principles of market analysis for themselves. We don’t
provide investment advice, but we do aim to provide a
straight talking review of the market action over the
previous days with a focus on how real life analysis
techniques could be applied.
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Issue #74: 10 September 2004
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Averaging Down is a No No |
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Tom Scollon
Chief Editor |
I have heard many investment advisers tell clients that if you buy a share (or take a futures or options position) and the price falls (and that is a familiar story) then if you buy more this will reduce your input costs. Averaging down input costs may well work in some businesses but it does not work in trading the markets.
The only time in my view that you add to a holding is if the stock is going up.
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After you buy a stock it is going in one of three directions - up, down or sideways. We are only interested in the first movement when we are going long. The other two cannot be rationalised in any way. When they happen, and they do, it is time to cut and run - without emotion.
Do not throw good money after bad and if a stock is not moving up then it is bad. Simple.
If you buy and the stock falls then you need to look briefly at why the decision went against you – without committing Hari Cari of course. And next you need to decide if you think it is going to fall further or in fact just drift sideways. If it fits into either category then you don’t want to know it. You are gone.
Even Brokers and Fund Managers find it hard to let go of a decision that moves against them. I know that there were many brokers that had SGW as a 'hold' up until the date it went into voluntary administration last week. Why a ‘hold’? It should have been a strong sell for at least several weeks before it was suspended.
Brokers and Fund Managers become attached to their views – to change them is to admit they were wrong and hence the advice to average down.
The rules of making money are simple. Cut loose from underperforming positions.
Enjoy the ride!
Tom Scollon
Editor
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Seeing the Writing on the Wall |
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Noel Campbell
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There are times when avoiding a loss can feel just as good as taking a profit. Now that might be somewhat of a stretch, but I’m sure some readers out there know just what I mean.
The ABC Trading rules in the Smarter Starter Pack are relatively hard and fast and therefore remove unnecessary subjectivity from your decision making process. That being said, the advantage we have over the larger players in the market is our ability to act quickly. Big players sometimes have to play out their hand over many weeks or months and don’t have the liberty of being able to liquidate whole positions in very short periods of time.
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At the recent Trading Tactics Seminar in Brisbane we came across a short trade on the weekly chart of St George Bank, SGB. This trade had seemingly everything going for it. At the Interactive Trading Workshop we go through a checklist in detail, to help discern the ABC trades to take from our scans. While this checklist can get our successful results up to around 75% to 80%, that still always leaves a 20 to 25% chance of being wrong!
Chart 1 is the weekly bar chart of SGB, showing the A, B and C points for this trade. With the set-up all looking good it was certainly a trade worth taking. The power of Point C was overwhelming. The retracement of less than 50% and a number of other things fell into line.
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Chart 1
click chart for more detail
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During the first few days of the trade the market took off just nicely, as you want to see. The key Danger Zone for the trade, as always, was the 50% Milestone, which came in at $20.77. The Reference Range for the trade was $1.50. The stock pulled up at $20.80 and started to find some strength. Now that was only 3 cents above of the Danger Zone, which is only 2% of the reference range.
I don’t like leaping in and out of trades on a whim. You need to wait for a genuine sign that it is time to exit the trade, rather than trading on emotion. Understanding the power of Pressure Points we were confident the stock would rally, as long as it was only going to retest the 25% milestone before continuing on its merry way down. Well that was the plan. With this in mind the stop was placed 10 cents above the 25% Milestone at $21.25. Even though the market had not quite reached 50%, it had come close enough for serious concern.
The end result for the trade was a small loss and given the chance again (without knowing the result) I’d take this trade anytime. The stock has since proceeded to rally strongly, breaking Point C, $21.52 and beyond, currently trade around $21.95. The fact the stock has managed to rally so far, also just goes to prove how valuable the stop at $21.53 would have been. Remember, protect your capital, it is your number one asset and use stops, always!
Until next week......
Noel Campbell
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WMR – Expecting Support |
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Aaron Lynch |
Establishing price support and resistance gives confidence for all styles of trading. Advocates of ABC trading, Elliott Waves or any other style, will enjoy greater success in their trades when support and resistance can be easily identified. Using Gann based analysis you can identify through a variety of different tools areas to watch.
WMR (WMC Resources) listed on the ASX has had a recent sideways pattern, after a period of lower tops and lower bottoms. Using the Gann retracement tool over the major bull range July/Jan in orange we see the price action found support as it crossed the 50% milestone circle 1. Then measuring the bear range in blue from Jan/May this year with the same tool we see the price action found resistance just past the 50% highlighted by circle 2.
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WMR Daily Chart
click chart for more detail
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These are two areas that we should watch for support and resistance as the price action moves forward. This alone is good background information; however, we need to get more specific if this is to be of assistance in the current set up.
The weekly chart of WMR below allows us a bigger perspective and this is the best way to analyse areas of significance. Using the ABC pressure points tool allows us to measure the first range out of the July top. Gann discussed in many of his texts that the first range out of a top or bottom is very important for price projection. The orange circle highlights the 100% milestone at $4.80 this represents where the range has exactly repeated. We can see on the weekly chart that the action has actually double bottomed on this price.
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WMR Weekly Chart
click chart for more detail
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Extending from this concept we can also measure using the manual ABC tool the full extent of the bearish range from the July top to the first weekly low in August. The chart below measures that range and extends out to 50% to signal a target of $4.82. This links in with our double bottom pricing and the repeating ranges that were signalled at $4.80.
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click chart for more detail
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Finally using a basic technical pattern reading approach displays a contracting upside movement, combined with a base of support around the $4.80 area. I think of this like a spring being compressed, eventually it will have to “spring back” generally we would expect in the case of WMR an upside break out. This view is supported in the chart below looking at some geometric angles from the major turning points.
We can see a classic flag pattern forming; it is interesting to note that these are not normal trendlines linking points on the chart. They are areas where price and time are in balance, WMR has certainly responded to these areas.
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WMR Daily Chart
click chart for more detail
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Combining all these points together, we could look for strong support around the $4.80 price point and a potential break out on the upside. A good sign on the swing chart will be expanding upside ranges and contracting or consistent downside ranges.
Good Trading
Aaron Lynch
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You are Responsible |
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Sinan Koray |
Market goes up, some people get happy, some get sad, some don't care. Faced with a trading loss, some get depressed and stop trading, some get more determined and push on with greater vigour. Faced with a trading profit some throw a party, some worry if they ever will be able to replicate the win. We all respond differently.
Think about the word responsibility for a second. It means: to respond with ability. If you are not responding with ability then you do not have responsibility. When you blame other people, situations or circumstances in your life, you do not have the option of responding with ability.
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Anything that goes inside of you that keeps you from functioning (or trading) the way you would like, stops you from reaching your goals. You choose everything you think or feel; you own it all. You are the sum total of the choices you are making in your life. If you do not like anything about yourself or your circumstances, you can change. You can respond with ability. Taking responsibility for anything that is going on within you is a crucial step for you changing it. This is not because you want to blame yourself, because the blame part is just meaningless. If you lost money, you lost money, if you were hesitant and did not take a trade, you did not take a trade. Whether you blame yourself or somebody else does not change any of that.
Let’s look at some ways of responding when something goes wrong in your life (or trading). You examine the past, focusing on the problem. You ask: What happened? When did it happen? Why did it happen? Who was involved? Who is to blame? Why did I …..? Why did the market …? Why did he tell me to take that trade? Why did I listen?
This may not be the best approach to achieve your life or trading goals. How you process an event determines your level of happiness, fulfillment and success. You have the capacity to process the world in any way that you want to.
What if you tried another way? What if you became present or future focused. What if you asked: What can I do about this? How may I benefit from this? What lesson is there for me? How may I turn this to a positive? What are the facts? Is my response appropriate? How can I avoid this in the future? How else may I respond? How can I respond to this situation with confidence? What is good in this?
You then leave behind responding with dis-ability and start responding with ability. Next time you notice you are faced with a negative situation or stimulus:
Believe, achieve.
Sinan Koray
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- Become aware of what is happening inside you. What are you saying to yourself and others?
- Stop, literally stop, especially if you are asking a lot of “Why?” questions.
- Try on the “I am able to respond with ability” approach. Turn around and face your future. Become solution oriented. Use the “How and what” questions and notice the results.
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More About Trading Tutors
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