What is that special insight we look for when we use a chart for analysis and is that all we need to make money or are there other tools we should equip ourselves with to succeed as traders?  Me, I’d start with an awareness program that highlights the need to manage expectations of what you can realistically achieve, then impress upon you the need for strict money management rules with the ability to execute them, and then tell you that the (chart) analysis is really only about 10% of what is required.

Make sense or frightening?

For those it makes sense to you have probably been around the stock market block a few times you know what’s required but have you got it? By “got it” I mean have you built all these necessary ingredients into a workable trade plan that you can, and have, successfully executed? If yes, bravo you have “got it”. If not there may be (hidden) reasons why it is just not happening for you.

We can all build a terrific analysis routine and trade plan but the execution of it in the face of a tirade of information, news, and rumour makes it tough (if you listen!). It is those that can execute to the letter, don’t become reckless in times of boom nor shrinking violets in times of bust, but maintain poise in the face of all types of market conditions that succeed. Correct execution is one of the single biggest reasons for trading failure and like the psychiatrist who takes us back to our childhood to unearth the problems we have buried for years so to for many traders it is the beliefs we learn from our initial childhood experiences that have a lot to do with success and failure in engaging the stock market. So many people fail, why? 

For most of us the first word we learn is “no” and that is possibly not the most positive start to our lives however we must learn what is acceptable in the community and what the rules are that govern your acceptance and participation. For those that don’t well that’s why we have jails and fines.  

Experiences and beliefs. How do they affect our behaviour? Take the simple example of meeting a dog for the first time as a child. A warm cuddly experience instills a positive connection with a dog with usually accompanies us throughout our lives but on the other hand the dog that may growl, nip, of even bite which makes us eternally wary of dogs until we change that belief. Hmm how many experiences are there that develop our beliefs. There are many and so if we are having trouble getting to grips with the stock market there are inevitable experiences and beliefs that hold back successful trading. We all have potentially inbuilt failure triggers and for example why is it we fear the market so much. For some it is simply not a scary place but one of opportunity and that’s the belief we need to develop as traders.  

Let’s take the paradox that in fact stock market trading attracts us because of its freedom from all those rules we had to learn like no, but in fact to succeed we must be equipped with the presence of mind to acknowledge that stringent rules are required and must be followed and that alone will be the biggest dictator of our level of success on the stock market. If this is bewildering then contact me at Stockradar and I can help direct you to find some answers but below I outline some clues to put you in the right direction. 

It isn’t an easy task generating consistent profits from the stock market so to get the complete picture of what is required is a great start. Most aren’t lucky enough! I have just touched the surface of the many potential impediments to trading success and in fact Stockradar allows a uses a complete one day work shop to address these issues that will help you maximise your trading success and opportunities.  

There are five fundamental truths about trading that Mark Douglas from the book Trading in the Zone outlines that we must all be able to accept to maximise our trading results.

1.       Anything can happen
2.       You don’t need to know what is going to happen next to make money
3.       There is a random distribution between wins and losses for any given set of variables that define an edge
4.       An edge is nothing more than an indication of a higher probability of one thing happening over another
5.       Every moment in the market is unique

Then he sets out some objectives to help. 

1.       Better analysis is not the solution
2.       Your state of mind is what determines results
3.       Learn how to think in probabilities
4.       Address conflicts that prevent us from thinking in those probabilities
5.       Integrate a thinking strategy into a mental system at a functional level

For those of you that find this perhaps surprising insight frightening you are probably newcomers or have taken an ill fated educational tour down the wrong path. Probably the one that sells the big dream at the end and tells you a chart will get you home. Some traders have the ability (and the right beliefs) to sail right through this quagmire of potential conflict, but some if they want to succeed must deal with it as a part of their trading education. To succeed we must understand and more importantly accept this concept is an important part of our development as a successful trader.  

So success benchmarks are required to manage your expectations and keep you in check, money or budget rules are vital, correct execution is essential, and analysis, well with absolute respect to myself and the many price analysts out there it is simply not that hard to build a money making chart routine and that’s where many budding traders fall at the first hurdle by believing analysis will get you there – it won’t. So let’s examine that little 10% bit – the analysis and why we do it.

A chart is a graphical representation of the buyer / seller relationship. Often “us in the know” always try and bamboozle readers with our jargon to reflect our smartness and boost our egos. But if we really want to succeed as commentators then we need to be exceedingly simplistic in communicating our message and unfortunately chart analysis like any other profession is littered with mumbo jumbo to confuse us like Head and Shoulders, one of the worst, and to the layman it will mean little.  

Take a step back and think about what are we actually looking at? A chart simply shows the demand and supply of a share price and a name such as head and shoulders is simply a coded name for a distribution price structure if it occurs at the highs or an inverted Head and Shoulders represents accumulation if it occurs at the lows. It reflects a slow shift in the balance of demand and supply for us all to see and that ultimately is what we are here to assess.     It is also how we identify that point in time when our market edge presents us with the high odds opportunity of the probability of one thing happening over another. Stockradars first premise is that the stock market trades higher over time (thus we only ever buy) and our full Trade Plan and How We Work is available on our website under the free information menu on the home page. Suffice to say as long only traders we engage heavily during times of up trends and contract activity into cash during the bear.

We use two simple market edge entry strategies to capitalise on the long term up trend of the stock market and that’s where the analysis part comes in. The Trend Reversing price structures from down to up and the New High, which for a market that spends most of its time travelling higher is a remarkably high odds trade. Go back to 2003 – 2007 and check the result of new highs most end up in substantial rallies and that is the market edge we play repetitively to let the profitability of that edge to play out. So the analysis is really only a means for us to identify this entry point and then the trade becomes purely a function of money management to bring about an optimum result.

So in fact it is only the entry point we glean from our analysis and that analysis routine has already been set in stone. At a certain point in the development of certain trading action which reflects the demand supply of a stock we can say yes at this point there is more chance of the price going up from here than down. We then play our edge within money management boundaries because we know that in fact anything can happen from here. As a trader the steps of analysis you develop as a part of the Trade Plan that lead to the entry are effectively automated. You know, take the subjectivity out and keep it objective. That’s how you do it and the analysis well sorry to disappoint but there is so much more to successful trading than the analysis. For you to improve your trading capabilities you may wish to expand on your educational horizon. 

The Monadelphous chart depicts a simple pattern of trend, accumulation, and trend and what is of interest to us is when the accumulation structure will come to an end and release the pent up buying into a demand controlled up trend. That’s it. Once we have that buy trigger which in the case of MND was at $7.00 our analysis is over and the trade is managed purely by our money management program of lifting stop losses. Our Stop loss for MND was at last Fridays close set at $8.25 protecting an entry at $7.77. A further price rally this week and we simply raise the stop loss until eventually it will be hit.

If you haven’t yet reviewed Stockradar failsafe trading strategy for trading and outperforming the stock market please visit our website at Stockradar.com.au and click on How We Work to view our Trade Plan.

As a follow up from last issue BSL has swung comfortably higher off the high volume low at $2.00 as the stronger market and better market sentiment drag it higher. Although we have some price appreciation our current reversal level is not reached until we get up to $4.20 and thus there appears much more work to be done here to convince us a sustainable demand controlled up trend is about to unfold. It’s all about the odds of one thing being more likely than another by ticking our analysis boxes and there are better evidenced offers across our covered stocks. Support doesn’t necessarily lead to a rally and with a heavy selling band above at $4.00 we’d rather wait until the odds are right in our corner! Wouldn’t you?