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Tuesday, March 07, 2006

Teresa Appleton, President of, March Guest Article

Roadmap to Trading…

Trading, like anything in life, requires some work. You find what works for you and stick to it. I like to say trading is like running a marathon, it is a very long road, but one you will finish if the preparation is done. A sprinter finishes quickly and gets instant gratification for their efforts. Trading doesn’t work that way. There are no short cuts or ways to get around defining a plan that works for you.

The days of stock brokers making all your financial decisions are gone with the dinosaurs. Technology has brought controlling your own financial destiny into any household with a PC and internet connection. However, that destiny will be disastrous if the proper learning curve isn’t followed. Like with a marathon, the race is a single day, but the training is the discipline and hard work leading up to that day that can take many months. Trading requires reading, studying, back testing, and focus for months before you actually understand the market; then probably many more months before you make a trade. The beauty of technology is you can simulate trading to find a tried and true system for yourself.I started trading in 1997 when everyone was talking about the stock market like the buzz around real estate now. I wanted to leave corporate America and be a Mom, but that was a little slow paced for me. I had an interest in the market so I started my research journey. I found very little information or help, online trading was still in its infancy with limited resources. I stayed up half the night reading trading books to my sleepless infant son and studied endlessly. My style of trading and knowledge has evolved over the years because you never stop learning. Each day with the market is new and a different puzzle to complete. What has changed the most is information available and that why I chose this topic. To provide a road map and narrow a trader’s focus, understanding what is basic and necessary is needed and not readily available.

Styles of trading
There is technical analysis, fundamentals, long term, short term, and much much more. Combining styles is also an option, but generally you are either an investor or a trader. From that point you are either a technical trader or a fundamentalist. Either style works and can fit your needs. But know which you are and what your plan is. I personally trade off technical analysis. The charts lead me and I follow. LISTEN to the market and never think you know more than the market, the market never lies and price never deceives. It is what it is, nothing more and nothing less.

I also like to trade off shorter time frames. Therefore I am not an investor and do not hold things for months let alone years. That fits my risk tolerances and financial goals. Each person has to define that for themselves. Once you define your style you have several alternatives of what to trade: stocks, options, stock index futures, commodities, forex, and single stock futures. Each exchange offers general descriptions and education materials on each. A good overview can help guide you to find your interest and what you will aspire to learn in depth. Then once you get one thing under your belt you can transfer your knowledge to other trading instruments.

Steps to learn
The hardest part of learning is knowing what can be worthwhile and what is not. Unfortunately this is not a cookie cutter world and what works for one person may not for you because of interpretation and use. But over the years I have defined what I feel are good steps that work as a road map of what to do and in what order. Now at this point in the article I have to tell you, I ignore the market fundamentals and rely on geopolitical events, news, economic data and the chart for my decision making. The chart is 90% and the rest is noise in the market I account for. I trade stocks, options and stock index futures with the information I have outlined in this article.

  1. Learn to read the chart and you do that by identifying different parts that make up the chart. PRICE is first and foremost, it leads and never lies. Indicators follow its lead. To see the price on the chart you may want to use candlesticks, bars, or a tick chart. I am not a fan of line charts or point and figure for this type of technical analysis. Also I find that candlesticks are easiest to read for a trader. At a glance you can define price action and patterns just off the color of the candle or the formation. So taking the time to become familiar with candlesticks is critical to learn the use of price.

  2. Volume should be present on your chart, knowing what volume is doing can be very helpful. Increasing or decreasing volume on moves up or down, consolidating markets all pieces you have to know for an educated decision. So watch volume regularly.

  3. Support and resistance, which is simply the floor and the ceiling of PRICE.

  4. Chart patterns, start basic with double top/bottom, head and shoulders, triangles, channels, cup and handles, continuation patterns (flags), wedges, and engulfing patterns. Then once you get that down and can identify them move onto more advanced setups such as ABC, butterfly, etc… ALL from PRICE and Volume.

  5. Indicators are a dime a dozen so pick your poison. You need an oscillator…that can be MACD, CCI, RSI, MFI. They all measure momentum. They can tell you overbought/oversold conditions or point out divergences and can give buy/sell signals. Very valuable tool on the chart. I use some of each of these and for different reasons. MACD gives me signals for buy and selling, CCI and RSI for overbought/sold conditions along with divergences. MFI tells me the participation in the move with volume involved. Of all the indicators I think CCI is the easiest to use on a histogram placed on the chart.

  6. Moving averages, again another one where the sky is the limit. Institutions use the 50dma and the 200dma. Even non technical traders are aware of those and where the stock is in relation to them. In addition to those I use a 20 day exponential moving average (ema) for intraday and daily time frames. Along with those three I add the 34ema and 5ma. Remember EMA is exponential moving average and MA is simple moving average. Exponential gives more weight to the current price versus simple that is equally weighted. Moving averages are a form of support or resistance. They can also be used as buy/sell signals with crossovers or breaks of that support/resistance of them.

  7. Trendlines just require some practice and very easy to pick up on using. The rule is simple for a trendline. Connect three swing highs or lows to draw the line. Price stays within or breaks outside the trendline, they are a form of support and resistance.

Once you are feeling comfortable with the above tools for trading. You will want to continue learning and adding to your arsenal for becoming an advanced trader. With tools like Fibonacci analysis, price projection, pivot points, ADX, Bollinger bands and stochastics. Keeping the basics in line and under your belt allows you to add other things as you see a need and ready for that. A chart should be easy for you to interpret and getting to that level is the objective. So do not over clutter yourself with indicators. There are many traders that are incredibly successful with nothing other than candlesticks and basic support and resistance. Bare bone charts work and maybe for you. I like a few indicators and Fibonacci analysis is very key part of my trading. But I did not use that my first year or two of trading, I added it along the way.

Beyond an individual chart to time the market you will eventually want to learn to look at the particular sector and broader market for overall direction. But keep it simple in the beginning and start with a few charts to learn from. Market breadth and other timing tools come with time. Do not think you have to know all of that to get started. The basics I outline are more than enough and more than I knew for the first two years of trading. Finally by my third and fourth year I was very serious and was non-stop with adding things to understand the broader market.

A chart can be read in any time frame you wish to use. If you are a scalper, a 1 and 3 minute chart is probably your best choice. An intraday trader can rely heavily on 5 minute or 13 minute. Yes, I said 13 minute instead of 15 minute. Personal preference and it is a Fibonacci number so allows all my analysis to mesh so to speak. If you are a trader that is out for a one to five days on setups then a 65 minute (yes 65 minute instead of 60 minute…because the market is open for 6 ½ hours so if you use 60 minute the chart is skewed, use a 65 min. for an even look) and daily chart is your friend. Longer term outlook would be weekly or even monthly view.

As you can see there is a lot of decision making involved with getting started. But the upside is, this is possibly the only thing in life you will EVER do that for every minute you commit to learning this you will be repaid. You can work hard at your job and maybe get a raise or a bonus. BUT if you work hard at trading you will reap rewards. This is your money, take it very seriously and do not rush things. Remember you are in training to be a fine athlete. Everyone wants to push buttons and that is the one thing you should not be doing until you have a tried and true plan in hand.

Defining your risk tolerance
The biggest part of trading is when to get in and out. I talked about learning to read the chart. Well the entry and exit come from that very thing. Timing the market is not easy. But timing a piece of the market is doable. The main objective should be measuring the risk and reward that you are comfortable with because you will NOT win every trade. You may only win ever 1 of 3. But with proper management you will come out ahead. It is said that you can lose 60% of the time and still make money if you manage things properly. I am not a fan of that thinking and do not play into that. If you are only right 40% of the time you need to study more and refine the process. Get use to not picking tops and bottoms and learn to take your piece. Pieces add up to the homerun and require less risk. Overall you will win and never take the big draw downs on your portfolio.

Using stop losses on every trade is the way to define risk. Know before you enter a trade what you are willing to risk. But more importantly what does the setup you are about to take require you risk. If it is not within your comfort zone you pass on the trade. The great thing about the market is there are plenty of setups. I love to say…I would rather be OUT of a trade wishing I was in, than IN a trade wishing I was out. Been there and done that! “Hope” is not a style of trading or in the money management part of trading. So don’t rely on it to make money.

Knowing when to sit and when to trade is a key to success. Knowing that some days are not your day and there is no playing catch up and taking huge risks to try to recover the losses. Knowing when to just walk away is the sign of a real trader. Come back fresh and ready to pull the trigger on the right setups. Panic sets in when you are losing or a trade goes against you. Don’t let it and remember you have a plan and that plan is set in place BEFORE you enter. Take the emotion out of it. No cheating because you will cheat yourself out of success if you do. Keep a log if you need the discipline. Write down the trade and the stop you will use PRIOR to entering. It will help you long term to develop good trading habits.

Over coming fear
The final thing about learning I will talk about is FEAR. This is real money and the unknown is scary. Worse yet you may have heard horror stories or been a horror story yourself. The ONLY way to overcome that fear is to have confidence in your ability to succeed. This will come from proper knowledge and finding that tried and true system that works for you. Set your rules and do not deviate from them. Practice by paper trading or simulator trading until you see that you are capable of trading successfully. Do not let anxiety to “go make money” and “get this started” take over your brain. If you were not a runner and did no exercise at all would you go sign up to run a marathon? Would you skip med school and become a doctor? NO you would not. So why would you not take the proper time to get yourself educated to trade? With educating yourself you get the fear under control and then just have fun with the market and let the rest go.

Trading should be fun and that does not need to be interpreted as easy. Trading is not easy but if you take the proper steps to prepare it is achievable. I wish you all the best of luck in preparing for your marathon! I would also like to thank the Falkin Investing Organization for the opportunity to write for them this month.

Teresa Appleton


  • This was a great read Teresa. I am not a technical trader and found it easy to follow. I look forward to reading more form you in the future.
    Joe Styles

    By Anonymous Anonymous, at March 07, 2006 3:48 AM  

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