The three types of entries are a prerequisite of the third part of the Art of Tape Reading Series. There are three types of entries: Aggressive, Regular, and Conservative. For the sake of saving time, I'll just use a positive market in my examples.
The Aggressive method is most favorable when the general market is up, increasing the odds of a successful setup. This is when you enter before the confirmation of a breakout. A good recent example was my LXK play, where I got in about 30 seconds before the breakout. This is aggressive because if you are wrong, then you will book a loss. I don't think I've ever broken even on an aggressive entry trade when I was wrong. However, if you are right, then this method maximizes your gains more than the other entries. you get in when there is enough liquidity/activity in the price movements and there is a volume spike towards the high of the channel indicating that it may possibly have a chance to break out. Your stop, mental or hard, would be at the bottom of the channel.
The Regular method is favorable during positive to neutral market conditions. It is when you aren't as nearly sure, but there is still a high chance of a breakout. Ideally, you want to get in when a consolidation pattern forms at the top of the channel on the same price/volume characteristics listed for the Aggressive method -or- immediately on the actual breakout itself. This entry's weakness is on fakeouts where you will most likely book a loss and sometimes, breakeven. Your stop would be on the breakdown of the stock from the upper channel to the lower channel. Most of the times, I use this entry because I am able to get in either immediately before confirmation or on the confirming breakout.
The final entry is the Conservative method. This is when you get in after the breakout on the first pullback, usually at the upper channel resistance, which turns into support. The problem with this setup is that sometimes the stock does not pullback for a lengthy time. I use this setup if I am late and actually find it. This entry contains the most confirmation of the other entry methods. If support is tested, then the stock retains it's strength allowing you a "second chance" entry into the stock. This setup is safer because you are not guessing as to whether a stock will breakout or not.
Since everyone's risk tolerance is different, you may want to key in on which entry suits you the best. Experienced traders can perform on all three methods, however, I advise beginners to master one type of entry that best suits your personality before you try to do all three at once.
We left off of part one of the series by discussing the 'edge'. The edge is basically what works for you consistently and profitably. It is your system, and it's different for everyone. You don't necessarily need an indicator to see the trend because a chart is usually enough. A system doesn't have to be cumbersome, incomprehensible, or basically, complicated and otherwise a failure. There is a certain simplicity you arrive at after a series of complications.
This particular style of tape reading involves more with the reading of certain visual formations vs. analyzing numbers. In addition, these visual patterns work the very best with the intraday time frame. Since we want to utilize trending days for each individual stock, neutral range-bound days should be ignored. The probabilities significantly decrease on non-trending days.
The principles of tape reading basically match up price movement to crowd behavior as a 'rate of volume'. Through this, traders can see when the 'footprints' of a stock are made. These traders will be aware of when the majority moves into a stock that is presently dominated by the minority. Why tape reading is a lost art is beyond me. In fact, most trading systems don't even incorporate it, despite the fact that it stood the test of time for 400 years, give or take.
Trading wisdom states that the majority is usually wrong. Well, that depends. Tape reading is based on a handful of stock operators taking the money from the majority. We make money from the imbalance of buyers and sellers that is created. This is how trend reversals and explosive moves occur. The question is, "Are you the first one on the scene when the imbalance takes place"?
The important thing is to get there before the real breakout occurs, the path of least resistance. Consider this: not many people get in on the first sign of a major move. As more people become aware of the pending move, they accumulate shares. Then more people get in. Aggressive buying hits the stock and everyone wants to get in on the action. Keep in mind that that every buyer now is a potential seller. Finally, distribution takes place and the losers are left holding the bag. We all see it everyday.
How does the accumulation & distribution work with tape reading? The minority (you) watch how the other minority players are acting and then wait for the majority to create the mass movement. Typically, smart money can be identified by price movement when it is a slow, gradual movement with slow and steady volume. The general public's price movement can be viewed as euphoric with parabolic spikes in both price and volume to the point of exhaustion and instability.
There are six principles,k and I utilize all of them for my various day trading strategies:
1) Capitulation/parabolic exhaustion (long/short) 2) Beginning of a trend (accumulation-aggressive) 3) Confirmation of a trend (accumulation-aggressive) 4) Continuation of a trend (retracement-shallow) 5) Reversal (decreasing volume) 6) Accumulation and distribution (passive, non-aggressive)
1. Capitulation/parabolic exhaustion (long/short)
There is a pure acceleration in price movement with a massive surge in volume. Price usually advances/declines the most in the shortest period of time here. However, this move is usually unsustainable and can produce devastating sell offs or sharp bounces. This applies to both up and down price spikes. These moves usually last for only a few minutes, or even seconds, and they are the hardest to master. The key is identifying the price and volume and the accompanying imbalance in the accumulation/distribution through observing price and volume.
Usually, you see what I call "volume mountains". Yes, I call them that because they look like mountains. How do you know when to get out entirely or scale out and piecemeal your exit? We'll get in more detail on these 'mountains' in the future perhaps, but we've all see them.
2. Beginning of a trend (accumulation-aggressive)
This is a completely different idea than the one above. It is the steady, upward movement of a stock with consistent volume that usually precedes more serious momentum. There is consistent buying going on, with 'consistent' being the key word. There is not enough to attract everyone else, thus giving the stock an appearance of 'floating'. The key here is to scale in on each intraday breakout until you see signs of distribution. More on this on the future.
3. Confirmation of a trend (accumulation-aggressive)
This is a slow advance in the price movement with increasing volume, which makes it another momentum signal to pay attention to. The trend is beginning to draw the attention of the majority but is not yet ready to experience a full-scale momentum move. This precedes a powerful price move. What follows is the euphoric, sometimes idiotic, action of the majority. We'll discuss how to catch these in a future article with examples.
4. Continuation of a trend (retracement-shallow)
This is marked by a huge price increase, but with low volume. This is a classic pullback or short consolidation. You already know what these are and I don't have to explain them.
5. Reversal (decreasing volume)
Buying has slowed down and distribution is imminent = GTFO. The buying is drying up and this is your last chance to get out before you turn into a bagholder. Volume is especially important here. I will cover examples and models of how volume acts here in the future. Bottomline, volume indications help us determine our actions since price action is not as relevant or important as volume here.
6. Accumulation and distribution (passive, non-aggressive)
Large volume of buying with no price change typically tells me that there could be a shadow resistance level with a quite a bit of overhead supply. Most of the time though, the resistance is defined by identifiable resistance lines and even better, moving averages. I sure love those moving averages. This principle identifies 'stand offs' on both sides and I would be extremely cautious here. Of course, more on this and the others later on in the series.
Trading is not about knowing. Trading is about acting on situations, patterns, and signals that you are familiar with. This all comes from experience, proper training, and something that you and I call intuition. Intuition is required for reading the tape.
Reading the tape is basically studying pure and magnified price action. Long ago, traders used to study the ticker tape to assess price action, the volume, momentum, and other signals long before the internet was born. You must have this skill to refine and perfect your entries and exits. Since most people already know a lot about technical analysis, I wanted to cover the next evolution in your development.
Most of you know that I keep things simple and focus exclusively on price action, volume, moving averages, trends, and other simple signals. If you master price action, then you will be able to tell whether a stock is strong or weak prior to breakouts, one of my most favorite and practiced strategies. You'll be ahead of the pack of technical traders that don't know how to read the tape. Instead of going into Level 2 or the bid/ask, I will integrate the tape with charts as I am most proficient in this area.
Learning to trade requires two things. The first was mention in the second sentence of this article. The other is creating the perfect mindset that can handle unusual and uncertain liquid trading environments. This isn't something that can be taught from a textbook or in a school. It must be practiced over and over again. A teacher must demonstrate what has to be done and I will be that teacher. In addition, I expect you as the student to work on the personal experience that's necessary. Luckily, that's developed over time.
I chose "art" for tape reading because that's what it is. It's not a science. The physicist Yakov Zeldovich once said, "Science has one answer where art has many." Tape reading requires an open mind. It is also interpreted differently among traders, therefore I consider it an art. You are the artist and the trade is your artwork. A big side of trading where art plays a big role is when you adapt when the market changes it's tune. You must adjust or face indefinite loss.
The biggest benefit of tape reading for me is how it defines my entries and exits. Most of you have been following me for months, perhaps even a year and a half when I first started blogging. You already know what I do, and you know my trades already. My job is to read stock price action correctly and then viciously attack each trade. You may have witnessed me attacking the same stock over and over again in a single day. This is possible because of the synergy that technicals, charts, and reading the tape produce.
All of this leads to the "edge". Do you have it? I can tell you that my personally trained army of traders do and demonstrate it on a daily basis. They are confident in their actions. They are consistent with their results and their emotions. Our plays are easily distinguishable and we have our own style. We know exactly what to do with each setup. There is no hesitation to attack. How do they do it? It's their edge and reading the tape is a huge component of it. There's only one way to develop an edge and reading the tape and it's through experience.
The highest possible level a trader can reach is intuitive trading. As we continue to trade, we reach critical mass that profoundly results in second nature reactions. This is your ultimate goal in developing as a trader.
The next article in this series will explain the tape in detail. We'll talk about various emotional attributes to the tape such as capitulation or euphoria, as well as accumulation and distribution,trend continuations, select high-probability setups, and many other things in future articles.
If you haven't done so already, vote for me in the ShortyAwards in Finance. It only takes a minute and I'll appreciate it greatly. For those that already voted, thank you so much.
Thomas Edison was asked how he was able to accomplish so much with his time. He said, "It's simple. You and I both have eighteen hours a day in which to do as we choose. You spend the eighteen hours doing a number of unrelated things. I spend it doing just one thing, and some of my work is bound to amount to something."
If you want to be successful in any field, there is one rule to observe: concentrate your efforts. Get one thing in your mind. Learn to ignore all the distractions and temptations along the way. Then, put all the power you have into forward motion.
If you've read Ralph Waldo Emerson, you'll know that he wrote two essays that apply to success, one titled "Power" and the other titled "Wealth". The main theme in each is concentration. Emerson said, "Stop all miscellaneous activities. Do away with distractions, other duties, property cares, chores, errands, diverting talents and flatteries-all are impossible." And he said elsewhere, "The one prudence in life is concentration. The one evil is dissipation."
Can you concentrate on one goal when you aren't quite sure what that goal is? Can you move forward firmly and decisively on one road without constantly looking elsewhere to see what's going on? People who know how to concentrate put all their effort into their projects, continually improving their ability to succeed.
Dissipation is the opposite. A person who dissipates is like an archer who tries to shoot several arrows at once: the arrows move with dissipated force and rarely ever hit the target (unless you're Robin Hood, maybe). People who dissipate jump from one thing to another, neither improving their abilities nor moving forward toward success.
How does this apply to trading? This can apply several ways. The most obvious is if you quit your job to trade, then find that trading might not be for you, so then you move onto something else and beyond. Perhaps your efforts in trading were not concentrated. How about continually trying to find the "holy grail"? We heard this term used so often, but surprisingly, many traders are still looking for it! Stop moving from one thing to another and concentrate your efforts in improving your core skills.
Let's take the case of two brain surgeons with equal prospects of success. One puts all his efforts into his work and all of his money into a relatively safe investment to ensure longer-term financial success. The other doctor tries to play the stock market and practice medicine on the side (or vice versa). Ultimately, the second doctor's practice suffers when the market goes up and his money when it's going down (provided that he's just another retail loser). How would you like to have brain surgery performed on you by a doctor who had just lost $100,000 in the stock market?
The point is, trying to diversify too widely will always detract from your success."Where you believe the treasure is, there will your heart be also." That is an immutable law. Can you then be a success if your heart is in three different places - or five or a dozen? No, of course not. I am having this struggle right now as I am juggling so many things at once such as my course work, fund, real estate, internet stuff like iBC and Stocktwits, and much more.
Whatever you choose to spend your time on, spend it well. Whatever your goals are, make sure they are unified. Only a person who specializes becomes truly successful these days. Word?
In the 1880s, the psychologist William James developed and began teaching his "As If" principle of life. This might not make any sense to some of you, but it works. For example, if you want to be courageous, try to act courageously. If you want to be a nice guy, start putting a smile on your face and be friendly. If you want to be a great trader, then think like the great traders before us. You cannot be a great trader without first thinking that you are one. You get it?
A person that constantly thinks that he or she will fail in trading, cannot learn how to trade, or just simply has feelings that he or she will "never make it", will inevitably fail. Think, act, and be like Jesse Livermore, Bernard Baruch, Nicolas Darvas, Gerald Loeb, Richard Wyckoff, William O'Neil, Jim Roppel, Steve Cohen, and many, many others. They play (played) to win and that's how you should play: play to win.
Soon, you'll find that your mental and spiritual faculties are like damn fine bartenders. They always give you exactly what you ask for and never ask questions. If you act as though you expect to be a bad trader, your mind and spirit assumes the demeanor of a nobody with little prospect of success. After all, being a nobody doesn't require much skill at all. None, in fact.
In As You Like It, Shakespeare wrote, "All the word's a stage, and all the men and women merely players...And one man in his time plays many parts". William James would tell you to pick out any part in life that you want to play and then play it with all your heart. If you are good at it, that is what you will become. If you pick trading as one of your life's primary goals, then play it with all your heart. It's as simple as that, because the "As If" concept works.
Suppose a play has been written for you in which you portray a person who is in the process of making a fortune in trading. The part requires a person of great psychological control, have a burning desire to learn, be able to make quick and informed decisions, possess strong self-discipline, develop and master a winning strategy, be willing to take risks and accept losses, adapt to the ever-changing conditions in the market, have tremendous confidence in his or her's own abilities.
Could you play that role? You could if you practiced enough, that is, if you worked on your abilities enough. You can do this successfully when you get the focus of your mind to support you and reinforce your efforts.
However, suppose you were assigned a part like this and you chose to play it by dressing up as a bum, slouchy, shiftless, and irresponsible. How about in a lazy, irresolute manner, acting as if you had no ambition, no determination, no confidence, no plan, and no faith in yourself that you could ever accomplish being who you want to be. Combine this with telling yourself, "I can't do this" or "I'm too afraid" or "I wasn't cut out to do this", then you're really in trouble. This would make a terrible performance and no one would attend!
Consider something: How long would it take a person to become a successful trader if he or she continually depreciated themselves, thinking and talking failure, dressing like failures, and always in an environment that breeds failure? The answer to this question is all too obvious, yet millions of people are trying to achieve a level that never dreamed of ever achieving but still play the part of failures. They do nothing about it, or if they are, they aren't trying hard enough.
Have you heard of the "poorhouse atmosphere"? Sometimes, you can gauge the quality of a person's outlook on life by simply looking at them. You can tell how big the streaks of pessimism are in their lives and how much they have been soured by bad experiences. That's how powerful the effects of their negative thinking have become -- it manifests itself in their outwardly appearance. This is truly a powerful force. When people believe the worst about everyone and everything, this is called the "poorhouse atmosphere". Avoid it at all costs.
The "As If" principle is a tool to get you from where you are right now to where you want to be. So how do you bring about such an extraordinary change? The laws are many, but none are difficult. One of the more important ones is to put yourself apart, letting your energy, determination, eagerness, and faith take you in one direction and one direction only. Focus your efforts through the power of this principle. Whatever you want can be yours. The end result will amaze you.
A great thing about my blog is that traders from all over the world can come here and perform. I view my comments section (and my twitter replies) as a stage. You are the actor/trader. There are many that are giving all that they have and demonstrating that they want to be great traders. I am not blind and I know who all of you are. Your efforts will be greatly rewarded as you all strive to become some of the greatest traders in the world. In fact, that's one of my goals in life and I have a long ways to go. See you on the other side.
Scientists have estimated that the average human makes 50 to 60 thousand decisions everyday, whether they realize it or not. This includes conscious as well as subconscious thoughts. That makes decision making one of the most important things you do in life (obviously). Everyday, you decide between happiness and misery, work and fun, success and failure. You make your own determiniation as to direction, speed, and destination. And, you decide for yourself how you're going to get where you want to go.
As far as we know, humans are the only creatures on Earth that have the ability to make conscious decisions. Dogs behave as dogs have always behaved, by their nature. A dog does not have the capacity to decide to do otherwise, even though it may have its own quirks. The hive built by bees today is the same design as hives built by bees a thousand years ago. Nature conforms to a definite pattern, within each species, through birth, growth, reproduction, and death. There is little variation.
However, humans are different. They can change. They have the power to reason and think and to use information. It has been said that there is only one point at which all humans are alike and that is that they are all different. The reason is because each person can act independently. The biggest business of any life, then, is deciding what to do next. This is also the hardest thing to do. Why? Because it's the place where success or failure is ultimately determined.
So what is a decision? By definition, you make a decision by making one side of an argument the victor over the other. To decide is to "bring an end to vacillation." It is the "termination of doubt or controversy." To decide means to "conclude" after careful investigation or reasoning. And a real decision implies a degree of firmness that enables you to carry your plans through a conclusion.
How does all of this apply to trading? Trading is all about making decisions. I make split second decisions all day long, some of which do not have the time for "thinking". If you hesitate, you will lose or lose out on some ridiculous gains. We are not creatures without the ability to make decisions and only you can make them for yourselves. I know it's difficult for most of you to "pull the trigger", but trading is all about taking risks. You cannot get ahead without taking them. You must take chances and not be afraid. Are you just going to sit there all day and not make a move?
A lot of people confuse intention with a decision. That's like confusing a blueprint with a finished house. Almost everyone wants (intends) to do successful things in their lives, but most never get around to it. You've heard that the road to hell is paved with good intentions. If that's true, then the road to failure is lined with billboards of good intentions. A decision is a mental state that is far more advanced and has far greater power than any mere intention. We all intend to make trades, but if you don't actually make them, then what's the point?
Make up your mind. Emerson said that "the world belongs to the energetic." Very few things are as mentally and physically invigorating as a successful day at work (ex: winning like a mofo on your trades). Emerson also said, "Work every hour, paid or unpaid. See only that you work, and you cannot escape your reward. Whether your work be fine or coarse, plating corn or writing epics, honest work, done to your own approbation, shall earn for you the greatest rewards known to the senses." Honest work earns the greatest rewards of success, but even industry must be preceded by decision.
Emerson might just as easily have said that "the world belongs to those who can make up their minds."
The most dangerous enemies of success are those that hide somewhere deep in your own heart and mind. Those who say that the want success and yet hang onto the attitude of failure are deceiving themselves. Almost all failure is generated within a person's inner self, through their thoughts and attitudes. Looking through some history, Aristotle warned Alexander the Great that the most immediate dangers confronting his success were enemies within his own ranks. As you may know, the Macedonian army was rife with disloyalty, drunkenness, carelessness, etc. On an individual level, these actions could have been prevented by having a proper attitude.
Let's fast forward to now. A few years ago, a survey was conducted by a life insurance company to determine why unsuccessful salespeople failed. Here were the results:
37% failed because of discouragement 37% failed because of lack of industry 12% failed because they didn't follow instructions 8% failed because of a lack of knowledge
This should come up to 94%, and all four areas are directly related to individual attitude problems. Discouragement is caused by poor mental posture. Lack of industry is cause by a general bad attitude. Failure to follow instructions means you're just lazy and have a lazy attitude. Finally, a lack of knowledge comes from a mix of everything above. Most of the salespeople failed because their attitudes broke down well before they even displayed their failures through their actions. It's all about attitude.
In war, morale is the first defeat in any war. One side always loses heart before they are actually beaten on the battlefield. The side that believes in their ultimate failure will fail, no matter what other circumstances exist. A negative attitude almost always starts small and as you cling to it and believe it, it grows like a virus. When this virus gets to become so strong, it will overwhelm you until you break down. Sometimes, the psychological effect is so great that it can actually breakdown the central nervous system.
A good attitude doesn't come instantly though. It does not come from solving one big problem in your life. It comes from solving a lot of little problems, proving to your mind and others that you can overcome anything. For example, if you are consistently losing on your trades, take it day-by-day and isolate each problem and solve it. You have to train yourself to believe in yourself that you can overcome the difficulty of losing. You will most likely lose if you think that you will lose on a trade before you even place the order.
The quickest way to go from a bad attitude to a good one is through taking positive actions. Theodore Roosevelt once told a crowd of politicians before a major vote in Congress, "If you want to be brave, then start acting brave." He didn't say, "have brave thoughts." He clearly wanted action. You've heard that action speaks louder than words. Well, that applies equally to thoughts that lead to success.
You must take action to become better. You can't make successful attempts without first beginning with a successful attitude, and only you can make that choice. Suppose that nothing goes right for you, still. Do you quit? Hell no. No matter what happens to you, you can turn the "bad" experiences to your good.
Some people wish they could always have things exactly the way they want. However, suppose you could always have your own way - you would never make a mistake, never be opposed, never know trouble or failure. And...you would never develop the strength that comes from opposition, for the feeling of exhilaration that comes from success. Problems can become your best teachers. Remember Edison? He tried over 5,000 times to make a light bulb that wouldn't burn out without success. He learned something from each failure until he eventually succeeded. Even Shakespeare knew about failure when he said, "The best men are often molded from their own faults."
Listen, whether something is a problem or not, it's all in your head anyway. You have to realize that your life (and trading career) can be whatever you let it be. You don't have to let every little failure be a total wreck. Instead, tell yourself, "If there's to be trouble, let it begin here, and let me be the one to handle it."
First, I am up over 200% YTD. This is not my all-time high. My 2008 return was 256%. My goal is to hit 300% YTD for 2009.
I have nothing to add, except that we are still consolidating. There seems to be a lot of folks that are confused as to why the market is moving the way it is. If you used technical analysis and not some useless fundamentals, you may have realized that there are 3 key short-term MA's that are boxing in the SPX (15-, 20-, 30-day MA's). These MA's are creating the narrow range that we are in right now. Stop wondering why the market is doing what it's doing by doing some simple homework.
Let's talk about why I post my trades. They are NOT for you to follow. They are for public documentation purposes. If you join me, you do so at your own risk with the assumption that you know what the fuck you are doing. I get really annoyed when people ask me if I am "still in" or "when I will sell". Shut up. You should already know when to exit prior to entering. If you enter blindly, you are sheep waiting to get slaughtered.
Here is a sector breakdown of the SPRD Select Sector ETFs:
---
Since I don't have much to talk about, let's mix in a little education in here. Today's topic is on FEAR.
Fear, and it's powerful ally - worry, ruin more ideas, intentions, business transactions, and the vitality and energy of more people in the world than any other single thing. The USA has become a nation of worriers. If you intend to build a strong, successful trading future for yourself, you must learn to eliminate unhealthy fear from your thought processes.
Besides the ruinous forces of fear, it can also be one of the greatest motivating forces in the world. Shakespeare said, "To fear the worst, oft cures the worst", meaning that sometimes a good scare accomplishes more than good intentions.
Why do we learn? We get an education because we are afraid of being ignorant. I mean, come on, you don't want to be following my trades forever, right? Most people obey the law because they fear punishment (Unless you're Bernie Madoff). You take a shower and brush your teeth everyday, hopefully, because you have a healthy fear of disease. The point it, some types of fear have value. Fear forces you to think about things you might not otherwise worry about.
However, the negative kind of fear will cripple and debilitate you mentally and then destroy you and your dreams, if you let it.This unhealthy fear will inhibit you and prevent your progress towards success in whatever you do, in this case, trading. It holds you back, prevents you from 'pulling the trigger', restricts you from taking advantage of the ideas you create, and in the end, stops you from taking action, until it's too late to act.
In essence, you become your own worst enemy. There is no one or nothing you can blame but yourself if you let fear take over your life. As yourself, "what are you afraid of"? Are you afraid of losing? Stopping out? Taking profits too early? Deviating from your system? Events outside of your control? What in the world can be so scary that it prevents you from winning in the trading game?
Whatever it is, this fear will prevent someone with great potential from going as far as they might have otherwise. This type of fear usually becomes a self-fulfilling prophesy if it is allowed to grow (being fed by you, of course). Basically, you will lose before you are even given the opportunity to consider any victory.
Where does this fear come from? When you were a kid, did you ever burn your hand on the stove? I bet you didn't touch the stove ever again. Or, if you're a rare case, you kept touching the stove and it took you a while to figure it out. The point is, these fears are usually well-grounded by events that took place in the past. Perhaps you suffered a huge loss, or a string of losses. Your confidence got sapped. I tell my students all the time, "don't dwell in the past in order to see the future". This is an obstacle that only you must defeat on a personal level.
How do you deal with this? It must be done in a straightforward manner. Most likely, each fear developed from a bad experience. We all fail, and we all lose, and this can be extremely demoralizing. When you fail, it is likely that you will start believing that you will fail again. Here are some solutions for some of the more common psychological issues related to trading:
Anger over a losing trade - Close out your positions, take a breather, move away from your computer and come back when you calmed down.
Trading too much - Pace a limit on your trading activity or even take one or several days off.
Wishing, hoping, praying - Base your decisions on technicals.
Adding to a losing position - Instead of averaging down, average up on a winning position. (You have never seen me adding to a losing position, ever)
Afraid of 'pulling the trigger' - Again, base your decisions on the technicals
Fear of being stopped out - If you use stops, let them to their job.
In conclusion, I want to share with you an old fable that I'm sure you already know. It is about the mouse that roared.
Once up on a time, there lived a little mouse. He lived in constant fear of a cat that lived in the village. One day, a powerful space alien magician came to town. "M'lord," the mouse begged of him, "thou art wise and powerful, and my life is most miserable because of a cat. Woudst thou return joy into my life by making me into a cat? Then I would no longer live in fear."
The magician smiled, raised his wand, said some magical words, drew some lines on a chart, and the mouse found himself a cat as he wished. But, he was the most frightened cat in the land. A dog that had been of no concern to him before, now made his life unbearable with fear. Every time he ventured out of his out, the dog chased him.
The cat, desperate with fear, went back to the magician. "M'lord," he said, "being a cat is most miserable because of a dog. Wouldst thou return joy to my life by making me into a dog? Then I would no longer live in fear."
The magician obliged, and the cat became a dog. But he became a dog that lived in constant fear for there was a huge tiger that lived in the forest and made his life...miserable.
Again, this poor creature set out for the magician. This time he asked to be made into a tiger, and it was done. Suddenly, the tiger now found himself in the most terrifying circumstances he had ever known. Hunters came into the forest with rifles and dogs. They even set out traps for him. He had never known more fear than he did now.
Finally, the magician was asked by the tiger to be made into a man, that he would fear nothing from that day on. For the first time, the magician spoke. "As a mouse you knew nothing of cats. As a cat, you knew nothing of dogs. As a dog, you knew nothing of tigers. You know nothing of sickness, old age, or failure. You know nothing about finding and losing a job. No, I will not make you a man, I will again make you a mouse, for in your heart, you are a mouse anyway."
Ultramarines Space Marine Chapter preparing for the First Battle of Armageddon
---
This article will attempt to explain what I look for, the best setups to short, how to short using MAs and other technical basics dealing with short selling. Short selling is for intermediate and expert traders and I do not encourage beginners to jump into shorting stocks, especially if you are the type that likes to hold onto losing positions. Treat this only as an educational article since I am not providing any legal or financial advice.
There are numerous patterns that one can search, however, I focus on 7 primary setups for shorts (If you read my article on long patterns, there were also 7 patterns). The patterns are as follows:
---Patterns---
1) Double Top:
The double top formation takes several weeks or months to develop. It's a reversal pattern that stops an extended uptrend. The 2nd top is unable to make a new high and threatens to breakdown from the neckline, which is the nearest support for both peaks. The idea short entry is either early on the breakdown or on the flag (if develops at the neckline). There are several secondary entry points in case you miss the first.
2) Descending Triangle:
The descending triangle is an easy pattern to find. This triangle holds horizontal support, but continues to make lower lows, creating a downtrend. The ideal entry is to enter before the triangle breaks since the breakdown is usually a gap down or a powerful intraday breakdown. I always take the risk to short as the triangle develops.
3) Initial Breakdown + Flag Combo:
The initial breakdown + flag combination is 2-part. Part I consists of a major breakdown (usually the largest red candle present in the entire uptrend) on massive above average volume (typically the largest volume present on the chart). Part II consists of a flag that indicates that the stock is in a reactionary rally and the volume must be low. The ideal time to short is not on the initial breakdown, but on the flag.
4) Head and Shoulders:
The H&S is a popular pattern. The most important part of the pattern is the right shoulder since a lower high is necessary to confirm that the uptrend is ending. Like the double top, you have the option to short on the breakdown or on any flag that develops on or near the neckline. Typically, there are several short entry points following the initial move lower.
5) Rising Wedges:
Rising wedges would be difficult patterns to determine if it weren't for volume. The wedge is a uptrending trading range that will become more and more narrow as it reaches the apex. Volume must get lighter and lighter as the pattern progresses. You may enter the wedge before a breakdown, but I like to short in the breakdown (which should be accompanied by volume expansion) for confirmation.
6) Parabolic Moves Up:
These are stocks that jump 100%, 200% or more in a span of several days. The top of the pattern is marked by buying exhaustion and the best way to determine the exact top is to look out for the following candlestick patterns: doji, gravestone doji, long-legged doji, shooting stars, dark could covers, and bearish engulfings. All patterns are typically accompanied by the highest volume bar on the entire chart. Entering on the topping day may provide more profit, but it is riskier. The next day is considered the confirmation day in which the stock breaks down. The 2nd option for entry (less risk) is to enter at the very beginning of the breakdown.
7) Bear Flags/Pennants:
Bear flags/pennants are the most common short patterns. They mark continuations in a downtrend and are highly reliable (similar to bull flags). The idea time is to obviously get in before the breakdown, and you may only have 1-2 days to do so. The volume must be light on the flag, and the volume should increase singificantly on the breakdown. Think of this pattern as an inverted flagpole /w flag.
---Moving Averages---
In addition to the patterns themselves, moving averages play an important role. I use the 20-, 50-, 100-, and 200-day MA's for long and short setups, but I also incorporate the 10- and 15-day MAs because a stock declines much faster, thus you will need a much shorter-term MA. Find the right MA that guides the stock because not all stocks follow the same MA.
I categorize moving averages in two ways: MA's acting as resistance and MA's for churning. Moving averages act as magnets and they are just as reliable as the setups they guide. When we went long, we used the various MA's as support which acted as springboards to propel the stock higher. Think opposite of that now. MA's for churning simple means that a stock flags either immediately above, on, or under a stock. Usually, the stock cannot make a higher higher and/or a 2nd MA is looking to catch up to the stock.
---Books---
Recommended books on short-selling:
1) How to Make Money Selling Stocks Short by William O'Neil (Wiley, 2005) - [Technical, Swing & Position Trading] 2) Sell & Sell Short by Dr. Alexander Elder (Wiley, 2008) - [Technical, Day Trading] 3) The Art of Short Selling by Kathryn Staley (Wiley, 1997) - [Fundamental] 4) Sold Short by Manuel Asensio (Wiley, 2001) - [Fundamental] 5) Sell Short: A Simpler, Safer Way to Profit When Stocks Go Down by Michael Shulman (Wiley 2009) - [Macro]
---
The best way to become an effective short seller is by making it a habit of studying hundreds and even thousands of charts every week. Train your eye to see the setups, the accompanying volume, how the MA's line up, etc. The only way to do this is with practice. Short-selling can become very profitable due to the simple fact that stocks drop faster than they rise (in most cases) and for me, it typically only takes about 1-3 days to make a decent profit of 10% or more.
Trade only the best setups to increase your odds. I do recommend the use of stop losses above key resistance areas due to the fact that losing short positions can cause serious damage if left unattended.
---Short Setups---
Here are some POTENTIAL short setup that I found over the weekend:
