How Traders Get Wealthy Playing Apple, RIM, and Gold Stocks
The sum of the market's moves form an unquestionable cyclical pattern consistent within all time frames, which traders can learn to profit from.
Variety in Trading
Investment securities (stocks, ETFs, options, futures) can be described as being similar to different types of athletes, each with their own unique style and personality. Some can be characterized as sprinters, participating in quick bouts of movement but tiring quickly. Others are more similar to a marathoner, enduring prolonged courses in one direction without pause or interruption.
When I look to make a trade I look for sprinters as historically I have had the most success with them. Other investors like -- such as pension and mutual funds -- are more interested in the long-term marathoner that provides steady performance. There is no one way to trade; each method can be equally profitable or unprofitable. It ultimately comes down to what style works best for you, and the only way that can be determined is through trial and error.
Different Phases, Different Strategies
As noted above, the market alternates between periods of trending activity and periods of consolidation. In a trend (Stages 2 and 4) there will be an expansion of the price range in one direction. An uptrend will have a series of higher highs and higher lows (Stage 2) while a down trend will produce lower highs and lower lows (Stage 4). In a consolidation there will be a contraction of price range prior to a reversal in trend. This neutral stage is avoided by trend traders.
A stock in Stage 1 or 3 is typically correcting itself after having experienced a prolonged move in one direction. These corrections are found after periods of extreme movements that often conclude with emotional and undisciplined trading at peaks and troughs. Trading these two stages is quite different than trading 2 and 4.
A short-term consolidation within a primary trend is one area where we want to study the price action of a security for clues as to whether there will be a resumption in the trend, continued consolidation, or reversal. Sometimes, however, it is difficult to identify any order or consistency on any given time frame.
If you are a trend trader these periods should be avoided. Trading has enough inherent challenges already and at all times a successful trader will only be searching out those trades that have a high probability of being profitable.
Trading is all about finding an edge or an advantage and exploiting it for maximum profit. If there is no such edge than there is no reason to be involved. I will say this now and again many other times: Sometimes the best trade is no trade!
Naturally, regardless of the stage a stock is in or your conviction of its direction, risk of financial loss is always inherent in trading, and this is critical to keep in mind. The most successful traders are not immune to this, and they too will have unprofitable trades. The key is to minimize those loses by only trading those stocks that have the highest probability of being profitable. This is what separates the profitable and professional traders from those that lose money.
Emotions and Lifecycle Analysis
History has an uncanny ability to repeat itself. Whether it's the rise and fall of an empire or the rise and fall of a stock, there are clear cycles that are prevalent throughout history.
People may change, but human nature, and our ability to act, react and overreact, is simply an innate part of our being. This predictability is what forms the basis of technical analysis and provides a trader with an edge with which to trade upon. When we are analyzing cycles we really are analyzing emotions, trying to gain insight as to how market participants are behaving.
Upon conducting such analysis it can at times seem that markets are be behaving "irrationally" and out of order. Undisciplined traders often fall victim to their emotions and lose control of their objectivity. As people behave irrationally, so too does the market, and unfortunately these conditions can persist for long period of times.
John Maynard Keynes is often quoted for suggesting that "The markets can remain irrational longer than you can stay solvent." This is a harsh reality and puts great emphasis on the importance of discipline, risk management, and a keen eye for price action.
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