I have the unique opportunity to teach Traders with a wide range of knowledge. Some individuals are just beginning, while others have been around the market for 20+ years. There are some "laws of life" that seem unchangeable. For example, I know that some people will earn more than me in this market and, unfortunately, others will never have success in their trading efforts. It's sad to think that some people will not see their aspirations for financial success materialize. It is comforting to know what makes the difference between the winners and the non-winners (I choose not to use the "L" word).
If I know that some people will never have success trading, why do I still teach them? Should I not be honest and tell some people to save their money because they have no chance? The answer is simple, I have no idea who will be the big winners and who will end up a frustrated shadow - until it happens. However, I do know what makes the difference between winning and not when it comes to successful trading behavior. I also know what it takes for individuals to transform from frustrated investors into top earning professionals. What is the secret? Is it really that simple? Can anyone make it work? What do I have to know to finally start being successful? Who do I have to bribe so I can borrow the Magical stock market Genie? Sorry to be the bearer of sad news, the answer is not as easy as making a wish and waiting for money to fall out of the heavens. It takes patience, self control, the correct information, and practicing until perfect.
Being a consistently successful trader is a lot like climbing Mt McKinley in Alaska. Sure mountain climbing is difficult, and Mt. McKinley is the highest mountain in the entire North American Continent, rising 16,000 feet from ground to highest peak. It may seem like an impossible task, but climbing that amazing mountain is actually considered, by the professionals, "easy" when compared to other record setting structures. The climb might be considered "easy" (by experienced climbers) yet during the average season if 1,000 people make the attempt statistics indicate that 500 will succeed, 497 will be disappointed and 3 will die.
Why am I comparing investing to mountain climbing? Because successfully attacking the mountain and coming back alive from the trading floor, requires exactly the same basic elements. You must have the right knowledge, advance preparation, the correct tools and equipment, and plenty of perfect practice. You can increase your odds of success even more if you associate with other experienced climbers and you have a team member that has already made it to the top. While on the mountain (in a trade) you need to be ready for unexpected changes in your environment. You must be mentally ready for the challenge, you need to develop the right instincts and you need to have total self control. Even more important, you must be able to admit defeat quickly, so that you can live to climb another day, with as much of your equipment as possible. You do not need to be super human and you are not required to walk on water, read minds, or have a perfect sense of direction.
"OK, what will it take for ME to be one of those people that make to the top?" Are you sure that you are ready for the answer? I mean, really, do you want to know the truth? I warn you, the answer is not going to be what you want to hear! Here goes, so if you choose to read on, you do so at your own peril. I warn you once you have the answer, there will be no turning back. If you read on, you are agreeing to leave the world of the confused and to enter the secret chamber of the few who know the magic powers of applied knowledge. What is the real secret? When you become a master of the basics you can conquer the top of anything - mountain or the stock market. "That's it? That's your BIG secret? I don't get it. Know the basics, give me a break, there has got to be something more, what did you leave out?" I warned you! Didn't I tell you that you might not want to hear the truth?
Many years ago, when Miles and I were beginning our trading education we were privileged to have access to a few of the best traders in the world. We asked them what we would have to learn or do to reach our dreams. Each person shared personal preferences and valuable suggestions but all of them were in agreement that making big money in the market is a process of patience, self control, and focus on basic rules. They also said that we should choose one or two investment techniques, and then practice until we were masters of those techniques. We were also told to pick a handful of companies and get to know them so well that we knew "the heartbeat of the stock."
I am sorry if my answer was a disappointment to you, becoming a master of the basics is not glorious and it seems too simple. Yet, being able to consistently apply the knowledge of the basics is what makes the difference between winning big money or not. It seems so easy that most people keep searching for some hidden secret or trick that will earn millions of dollars, and the answer is right in front of them all the time. What I think is that people want to take a short cut so they can bypass the struggle, they do not want to practice, they want to get to earning the big money right away (without any effort).
Teaching classes lately I have been astonished at how many traders, who consider themselves seasoned traders, are not fine tuned on basic skills like reading charts and identifying Support & Resistance. These "traders" act like they know the basics - but when I take a few minutes to review some important points with them, such as how to pick support and resistance or even using moving averages they don't know how to properly do so. It amazes me how they have traded so long (many with 5, 10, 15 years experience) without mastering this essential skill.
I believe that we get stagnant in our trading skills over time and we just forget how to use the basic and simple things that worked when we first started. We get excited about more advanced methods and in the excitement we overlook the things that are so simple and always critical like support and resistance
When we discover a new technique we jump too fast to trade using that new, not fully learned concept. With our excitement on overdrive we run with this new technique without taking the time to make sure we have the whole process learned. I know, for me, it is really easy to assume I know something new, I jump to the using step immediately but I have not learned the concept in sufficient depth. I end up forgetting the "practice perfectly before using real money" step, with terrible consequences.
It is so easy to slip into new techniques that it is very important to, at least once a year, review the basics of charting. I remember one time when I had been trading for a few years, and it was time to do my review. After taking a review class on technical analysis (which only means "how to read the charts" they use big words to scare us away) it hit me like a rock that I had completely forgotten to use support and resistance and I was only trading from other technical indicators. I find that identifying support and resistance enhanced with candlesticks is my most important and number one consideration before trading any stock. It's a basic concept that is the foundation for successful trading.
I want to encourage you to do a solid review of the basics. There is a great review on THE DEDICATED TRADER, and we have a great class taught by Markay Latimer that I am going to take in Toronto this year, for my annual review. Markay is an awesome trader and technicals are her big thing. I don't have time to share with you the details of these sources but if you are interested just call 1-800-290-7020 for details, be sure to mention this article so you can get the best price.
What follows is a review of only a few of the basics. Because space is small, I will have to simplify and be brief.
FINDING SUPPORT AND RESISTANCE
Most of the time, I look for support and resistance by putting my one day timeframe chart into a line chart. The line chart shows the market closing price, which is generally assumed to be the most accurate for the day, because amateurs open the market with market orders and professionals are considered to close the market resulting in prices that are more reasonable.
After I put my chart into a line chart setting, I am searching for possible trends - up, down or sideways. When I begin to draw my lines, if there are less than three exact hits I delete the line and try again. I try horizontal and diagonal lines. I need three or more hits for it to be significant enough of a line to call it support or resistance. Three or more hits mean investors will remember that price and react to it causing a stock to stall there and perhaps change directions.
As a more advanced look, if I don't seem to find a perfect line that gets three hits I will then put my chart into candlestick mode (I am not fond of bar charts) and then I will look to see if there are any wicks (also known as shadows or tails) that touch a line enough times to make it an important stopping point. If I get three or more hits then it is good enough to call it "soft" support or resistance.
I prefer the line chart, but sometimes you need to revert to candlesticks to figure it out. Both are fine. Remember anything less than three hits is not strong enough to hold the price level.
VOLUME
Volume is important; it shows the amount of interest in a stock or market. I prefer to look at average daily volume, but intraday we can get a feel for what is going to happen, on the short term. I also set my
