Monthly Archives: August 2008

Your Trading Problems are Your Path to Success

I get many emails from people frustrated with the challenges they face in learning to trade. Maybe you can relate to some of these problems:

  • “…I’ve done it again. Another loss held past where I should have exited, hoping for it to come back…”
  • “…It just seems too hard, juggling work, family and trading education. This things just not working for me.”
  • “I’m sure my broker is taking out my stops. This just happens too often to be a coincidence.”
  • “I make money one day. And then I give more back the next.”

 

Yeah, trading is hard! There’s no doubt about that. But let’s see if I can provide you with a different perspective from which to view these challenges.

What is causing you problems in your trading is part of the process of becoming a trader.

The problems you faced in the past, and overcame, were the part of the process that led you to where you are right now. The problems you face today – that you will overcome today or tomorrow – are the part of the process that leads to your trading future.

And that trading future, if forged through a process of self-improvement and overcoming trading challenges, can ultimately lead to only one possible outcome – trading success. The quicker you can identify the challenges and find the path to overcoming them, the quicker you will progress towards success. So embrace the challenges.

The only way you can ultimately fail is through failing to progress along the path to success, leading you to quit out of frustration. Failing to progress comes for most people through failing to accept the problems. Instead of identifying and facing the challenges, most people keep themselves busy surfing trader forums or testing indicator after indicator. Keeping busy creates the illusion of progress, when in fact the trader’s progress has stalled.

So, what can you do to continue to make progress on your trading journey?

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Support and Resistance 3 – Areas of Congestion

Welcome back to the third article in the current support and resistance series. In the last article we discovered how swing highs and lows lead to the development of support and resistance areas, through the actions of traders – either through an expectation of these areas holding, or through traders being psychologically forced to exit a losing trade at breakeven.

If you missed the first two articles in the series, or didn’t quite get the concept on the first reading, please review part one and two here: (S&R part 1, S&R part 2).

The good news is that if you understood the concept from the swing highs and lows article, this one will be easy.

Areas of congestion are the second price formation that I look for in identifying possible areas of support or resistance.

What is congestion? A simple definition is that it’s any sideways price action. Look for price that is contained within a narrow range, often with alternating price bars up and down, and no trending action. Once again though, as with the swing highs and lows, I don’t get too worried about definitions. If it looks like congestion, it is congestion.

They say a picture is worth a thousand words, so let’s look at some charts which should make the concept fairly clear.

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A Common Indicator Mistake

I love it when I read forum entries from people suggesting trading strategies along the lines of:

  • Enter long when the RSI(14) is above 50, the stochastic (14,5,3) has crossed positive, and the Williams %R(14) is rising from the oversold area
  • Enter short when the RSI(14) is below 50, the stochastic (14,5,3) has crossed negative, and the Williams %R(14) is falling from the overbought area

 

(Disclaimer: I just made up that strategy, so don’t trade it without testing it first – the fact is though – I seriously doubt it works)

Look, there are many problems with calling something like this a strategy, but the one I want to discuss today is simply that each of these indicators belongs to the same class of indicator. The RSI, the stochastic and the Williams %R are all oscillators.

An oscillator is a momentum based indicator that moves above and below a horizontal axis representing a position of neutral momentum.

Now each of these three oscillators measures momentum slightly differently. RSI measures it through comparing the magnitude of higher closes to lower closes over a set period of price bars. The stochastic measures it showing where the current close fits relative to a high/low range over a set period of price bars. The Williams %R works on the same concept as the stochastic, showing the relationship between the current close and the high/low range set over a period of price bars, however it does so through a different formula.

Basically, all are measuring the same thing. Quite likely, you’ve added some extra complexity to your strategy that serves no useful purpose at all.

Is there ever a need for more than one oscillator? Possibly, yes. It depends on what you’re trying to achieve. You might use one for indicating oversold or overbought price areas, and a different one for indicating increasing or decreasing momentum. You might even use one indicator twice, with different parameters, to represent momentum over both a shorter and longer time period. In this case, it’s fine.

However, I suspect many traders when developing their trading approach don’t really think about it to this degree. I suspect most just slap an indicator on their chart for no other reason than their platform provides it, and then look through the price history to see whether it shows potential for profits.

In this case, they can probably benefit from removing any redundancy.

So, what indicator classes are there? With some exceptions, the majority will fit within one of these four classes:

  • Trend indicators, such as moving averages, directional movement or trendlines.
  • Volatility indicators, such as bollinger bands, average true range or standard deviation.
  • Oscillators such as RSI, stochastics and Williams %R.
  • Volume / Market Strength indicators, such as volume, on balance volume or money flow index.

 

Generally you shouldn’t need more than one indicator to determine trend, one to determine volatility, one to determine momentum, and one to measure volume. In many cases, through a study of price action, you can even eliminate those single indicators and determine trend, momentum and volatility through price alone. Of course, that’s not for all people.

What I encourage you to do is to look carefully at the indicators you’re using. Do you have more than one indicator from any of the indicator classes? If so, is there a valid reason for it, or is it simply redundancy that has slipped unnoticed into your trading strategy? More often than not, I’d suggest your strategy could benefit from removal of that extra redundancy. Trading is one business where ‘simple really is best’.

Happy trading,

Lance Beggs

 

Support and Resistance 2 – Swing Highs and Lows

In the last article I stated that support and resistance (for me) is based on previous swing highs and lows, areas of congestion, round numbers and gaps. We’ll now review these types of support and resistance, discussing how to identify them, and how they formed. In this article we’ll start with my favorite support and resistance – swing highs and lows. Why are they my favorite – in my opinion they can form some of the strongest signals.

A swing high is simply a turn point at the top of price action. Price rallies, reaches a top, and then falls. We’ll see a number of examples in the following charts.

How about the swing low? Well, it’s just the opposite. A swing low is simply a turn point at the bottom of price action. Price fell, paused at a low point, and then rallied. Once again we’ll see a number of examples in the following charts.

How exactly do we define a swing high or low? Well, some people like to get very specific. For a swing high they like to see a price bar high, with lower highs on both sides.  Others like to see at least two lower highs to the left and two to the right. And of course the swing low is just the opposite – a low with one or two higher lows on each side.

There’s nothing wrong with this approach, but personally I’m not so restrictive. If it looks like a swing high, it is a swing high. If it looks like a swing low, it is a swing low.

As you look at the swing highs and lows in the following charts, you’ll observe that each is very clearly a turn point. There’s no doubt. Don’t try to make trading any more complicated than it is.

Ok, the most common use of support or resistance is simply as shown in the following two charts.

Firstly, a group of swing highs at an equal (or approximately equal) price area forms an area of resistance. This is the ceiling that restricts further price rise.

support and resistance

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