Stock Trading Predictions & Technical Analysis: The Trader's Evolution - 1

Wednesday, January 5, 2011

The Trader's Evolution - 1 - The Future is Unpredictable

Over the last few months for which I've stopped writing on my blog, I have been working on improving my "Y-Swing" trading strategy that I have developed over the years. I have also been writing a few texts where I share my perceptions about the stock market, and how you have to learn to evolve as a trader. I will be sharing one part with you every couple of days, starting today with part 1 of 11.

The Trader’s Evolution

1 – The Future is Unpredictable

People who decide to start trading in the stock market can come from all sorts of different backgrounds but they all have one common objective: making more money out of their hard earned income. The problem is that at the beginning many new investors have unrealistic expectations and end up taking too much risk by investing much more than they can afford to finally ending up in losses and away from the stock market forever. The reason this happens to so many people is because they are victims of their own greed.

“No matter how much you think you know; you never know enough.”

You have to accept the fact that no matter what strategy you use you will never be able to buy a stock at the bottom and sell at the high. Whether you do fundamental analysis, technical analysis or use a trading system, you will never be able to predict the future. When you start out trading you have very little knowledge and no matter how much you read about the market, the bottom line is that you have no actual trading experience. Also, no matter how much you know about a company, you never know enough. Even if you do know everything, you’ll quickly see that the market often reacts in ways no one would have expected. The market is irrational because people are irrational. What causes people to be irrational? Being uninformed. Surprises happen in the market when an unforeseen event occurred and this mostly when you’ll see the market or a stock trade in a hectic manner. When surprising news is given, whether good or bad, many individuals will often overreact. Being uninformed causes surprises which lead to irrationality, which finally causes individuals to overreact. The market is not about predicting how companies will perform financially but how will people react based on their expectations of those results.

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TECHNICAL INDICATORS

BUY SIGNAL: Indicates the possibility of the start of a new up trend or the continuation of the current up trend. This signal may be often given in the early stages of a potential new up trend that was preceded by a down or sideways trend. Such signals do not always succeed and may fail at time.

BUY: Indicates that the current up trend is already in motion and a BUY SIGNAL was already given earlier. A BUY does not necessarily indicate that the stock will continue higher from here, but simply that the stock is trending up. The further into the trend you decide to take a long position, the more risk you have of seeing it reverse back down sooner rather than later.

STRONG BUY SIGNAL: Indicates a stronger, more significant and reliable signal than a BUY SIGNAL which usually has less chance of failing. Such signals do not always succeed and may fail at time.

STRONG BUY: Indicates that the current up trend is already in motion and that STRONG BUY SIGNAL was already given.

SELL SIGNAL: Indicates the possibility of the start of a new down trend or the continuation of the current down trend. This signal may be often given in the early stages of a potential new down trend that was preceded by an up or sideways trend. Such signals do not always succeed and may fail at time.

SELL: Indicates that the current down trend is already in motion and a SELL SIGNAL was already given earlier. A SELL does not necessarily indicate that the stock will continue lower from here, but simply that the stock is trending down. The further into the trend you decide to sell a position, the more risk you have of seeing it reverse back up.

STRONG SELL SIGNAL: Indicates a stronger, more significant and reliable signal than a SELL SIGNAL which usually has less chance of failing. Such signals do not always succeed and may fail at time.

STRONG SELL: Indicates that the current down trend is already in motion and that STRONG SELL SIGNAL was already given.

HOLD: Indicates that traders who already hold this stock, should hold on as long as the trend persists. This signal is usually given during an up trend for which it would be considered too risky to take a long position at this point.

STRONG HOLD: Indicates that the current trend has been in motion for a while and rarely deviated away from the trend. Although the stock may continue higher, there may not be enough potential up side to trigger a BUY SIGNAL. This type of indicator usually means that the stock has very strong support levels which may have been tested but not broken.

WAIT: Usually given during a sideways trend for which we are waiting for a move that would trigger a BUY SIGNAL or SELL SIGNAL. This could also indicate uncertainty and the risk that would be taken if you were to take a long position at the current level. Taking a long position after giving a WAIT indicator is considered a gamble.