The following is taken from a private response I gave to somebody on this thread. Thought posting it might help others here also. I've purposely left out who asked the question and the stock we were talking about
<<I don't think you did anything wrong in predicting real short term direction. But you
need to be able to predict more than just direction to make money short term using
TA.
You have to get the timing right for your trading timeframe, whatever that is. Some
people are comfortable with only holding a position a few minutes, others a day, others
3 to 5 days, others two weeks, one month, six months, a year, 5 years, a lifetime. It all
depends on the individual. A buy or sell signal to the guy holding only a few minutes
has to get his timing the most precise and the further you go out to the lifetime
holder--timing has almost nothing to do with the overall outcome.
You have to be able to predict what the future amount of volatility is going to be. Have
you ever bought a stock that just simply did not move for days, weeks or maybe even
months? That should emphasize the importance of being able to predict the amount of
future volatility. That is essential for profits. You may have the direction and timing
right--but you'll be pretty unhappy when if you don't make any money or only collect a
small amount of money on the trade after holding the position open for 2 to 5 times the
lenghth of your timeframe. How would you only like to make a $0.25 on a $50 stock
after holding it for 10 solid weeks. I bet you would be pretty unhappy. I know I would
be.
In your analysis of XXXX, you used a 14 day stochastics. This tells me your goal is to
enter and exit a trade within 7 to 14 days. That is your timeframe. I'm going from
memory on XXXX. A much longer term trend on XXXX is down--meaning that a 50
day or maybe higher simple moving average on XXXX is sloping downward. This trend
is probably the most important thing to help predict future price direction over the next
25 to 50 days. If you randomly buy into a position in XXXX and hold it for the next 25
to 50 days, the probability is relatively high that you will lose money on the trade. It
would take an extraordinairy and prolonged price move to keep you from losing
money. You absolutely must trade with the trend. The more severe or pronounced the
trend is--the more important it is to future direction.
In your case with a 7 to 14 day timeframe--you should be looking at a 14 day simple
moving average on price and make sure you only trade in the direction of the 14 day
simple moving average. If the 14 day moving average is getting lower each day--you
should only be looking for a short position. If the 14 day moving average is getting
higher each day-you should be looking for a long position. There are no sure things in
the stock market. You are simply trying to maximize your odds of winning just like you
would in the casino. Luckily for us, peoples trading patterns are very much predictable.
Dice throws and cards are not predictable events based on past events. They're
mutually exclusive events.
So to get the direction right you have to use a combination of the moving average and
oscillators like stochastics or RSI. Make sure that the moving average agrees with your
oscillator. If stochastics gives you a buy signal AND the moving average is neutral or
trending up--the odds are you have the direction of the move called perfectly. If the
stochastics gives you a buy signal but the moving average is sloping downward--then I
would say that you haven't maximized your odds. Instead you are taking extra risks for
no reason. The downward sloping moving average is working against upward price
moves--thus reducing your profit potential. Why do that?
To get the timing right, the oscillator's signal is a big part of that. I mean its giving you a
signal today. You got the stochastic crossover right. That's half the answer. Did you
check the 14 day moving average though? The last factor on timing is getting the
volatility right.
The last item I don't think you checked on XXXX was the future price volatility. If you
can chart bollinger bands on price at CBS Market Watch then you can answer that
question. Looking at the whole price chart with the bands drawn on price--are the
bands real narrow, real wide or somewhere in between. I look for bands that used to
be narrow-but which have started to widen up a bit. That's the exact situation XXXX is
in now after it broke upward today. Now you
can ride it up until the momentum starts to wane. The 14 day moving average is starting
to go up--you aren't fighting the trend. Stochastics isn't giving a sell signal, so its still a
buy--timing is okay. Bollinger bands are getting wider after being narrow--forward
looking volatility is okay. That's all I need to see to know that I would buy XXXX
tomorrow. Hope all of this helps. |
