[Harry: A good reminder that it is good to return to basics every now and then and now get too caught up in fancy indicators. Remember what go you here in the first place.]
The Worden Report (Friday, August 15, 2003)
Sir Gringoleiro with Advice for Michele
Sir Gringoleiro was seated at the Roundtable of Knights Who Think for Themselves on June 4, 2002. He resides in Brazil. We appreciate this thoughtful contribution. He has requested that we not send him the customary bottle of Veuve Clicquot Ponsardin (reason given below). –DW
Hi Don,
Michelle's questions remind me of a recent discussion in TCNet. A novice trader simply asked, "How do you make money with TCNet"?
I wish it were that simple...maybe it is.
I've been active in the market since 1995, using TC2000 since 1998. I remember how I was amazed with TC2000 and all its bells and whistles. I tried to use it in every way possible to make money. All those lines going up and down, great colors, cool indicators, easy scans, thousands of Worden Notes to read and digest...
I won and lost two small fortunes between 1995 and 2001, but it wasn't because of my expertise. I got rich twice on luck and got poor twice on ignorance. Then in May 2001, I began "trading" stocks full time...actually, it was more like giving my money away.
In October 2001, after some very stupid and disastrous trades, I began to get serious about trading stocks. The first thing I did was quit. Then I went to work. It was about one year later, in October 2002, after viewing 50,000 charts and more than 2000 hours of research, paper trading, experimenting...learning...that it all fell into place. Now I'm consistently making money and I can consider myself a successful trader.
I assume Michelle P. is a novice. That's just fine. We all have to start some time. But I want to emphasize to her that an estimated 90% of traders, supposedly learned, skilled, and experienced, lose money in the market. Even when we think we are ready, the odds are 10:1 against us. So I offer some simple advice to her so she won't suffer the same disastrous and humiliating losses I once did.
1) Don't put one thin dime in the market...not yet.
2) Money management and risk control are the most important aspects of trading. Don't look at one single chart until you understand this topic thoroughly. Start with "Special Report on Money Management" by Van K. Tharp. Then do a web search and read all you can.
3) Proper trading psychology is a must. Read "The Investor's Quotient: The Psychology of Successful Investing in Commodities and Stocks" by Jake Bernstein for starters. A web search will add more perspective. Soak it all up.
4) If you understand 2 and 3, then you must decide if you have the personality to become a trader. If not, don't trade. If so, go to step 5.
5) Understand the definition of an uptrend, downtrend, and consolidation. An uptrend is a series of higher highs and higher lows. A downtrend is a series of lower highs and lower lows. A consolidation is any other series of highs and lows.
6) Understand Teresa Lo's Forrest Gump strategy (www.trendvue.com):
"Buy every pullback in an uptrend and you will be right every time...except the last time...when price will fail to make a higher high. Close your long positions and go short."
"Sell every retracement in a downtrend, and you will be right every time...except the last time...when price will fail to make a lower low. Close your short position and go long."
Though Forrest didn't say it, it's implied that if price is not in an uptrend or downtrend, i.e. consolidating, one should stand aside.
7) Learn the basics of technical analysis. Don't get too fancy. Understand thoroughly how price moves in trends and consolidations, know the price/volume relationships, and understand trendlines and moving averages. There are several sources on the web. Once you understand these basics, you may add stochastics, MACD, TSV, and Moneystream. I also highly recommend "The Elliott Wave Principle" by Frost and Prechter as a must for better understanding trends/consolidations, the fractal nature of markets, Fibonacci relationships, and the 2/8/34/144 relationship.
8) In TC2000, set up one single template with the following indicators:
Upper window: Price, 2ema, 8ma, 34ema, 144ema
Middle window: Stochastics 8.2.1 simple, stochastics 34.8.1 simple, MACD 2.8.1 exponential, MACD 8.34.1 exponential
Lower window: Volume. TSV8 with 2, 8, and 34 emas. Moneystream with 2, 8, and 34 emas.
9) Here's the drill.
When you look at a chart, you should always focus on price first. Is it making a series of higher highs and higher lows (uptend)? Lower highs and lower lows (downtrend)? Some other combination (consolidation)?
Second, what's happening with volume? Is it rising with rising price (bullish), falling with falling price (bullish), rising with falling price (bearish), falling with rising price (bearish)?
Third, check out the indicators. You want to use the 8, 34, 144 relationship to help identify trends or consolidations. This varies based on the indicator, but here are the basics:
- For moving averages, an uptrend will be indicated when 8 > 34 > 144. A downtrend is indicated when 8 < 34 < 144.
- For stochastics, an uptrend is indicated when both stoch8.2.1 and stoch34.8.1 are above 50. Both below 50 indicates a downtrend.
- For TSV8, when the 8 and 34 emas are both above zero and rising, you have an uptrend. Both falling and below zero indicates a downtrend.
- For MACD, when both 2.8.1 and 8.34.1 are rising and above zero, it's an uptrend. All falling and below zero indicates a downtrend.
- For MS, 8ema > 34ema indicates an uptrend. 8ema < 34ema indicates a downtrend.
Any behavior other than those listed above suggests a consolidation. Beware.
10) Look at this one and only template on several different timeframes and thousands of different charts until it becomes second nature to recognize whether the chart is trending up, trending down, or consolidating.
11) For now, develop one single PCF's and quick scan to identify when a trend may be developing or ending. The simplest is for stochastics 34.8 passing above or below 50.
Uptrend: STOC34.8 > 50 AND STOC34.8.1 < 50
Downtrend: STOC34.8 < 50 AND STOC34.8.1 > 50
These will give you your candidates, but the majority of them will probably be consolidating, not trending. Flag only the ones that appear to be trending and save them in a watchlist. Later, you can develop more elaborate PCF's for price ema crossovers, MACD, TSV, or MS.
12) Trade only in the direction of the trend, never against it.
13) Paper trade until you have proven to yourself that you can make a profit. It may take years. Be patient and keep a positive attitude.
14) Get yourself a mentor. This is absolutely essential for developing and sharpening your skills.
15) After all of this, now you're ready. Good luck and enjoy!!
Don, if you decide to publish this, please don't send me a bottle of bubbly. Last time, I had to pay about $100 to get it out of customs. Keep it on ice for me, and I'll come drink it with you in the US some day.
Very respectfully, Bo (Sir Gringoleiro) |
