書摘 - Techniques of tap reading

 

            Trading mottos – Techniques of tap reading.

 

1. Do not lose our House in Kanata Lake, apply a tight stop loss religiously.

 

2. Do not catch the falling knife. (hnu.to, esol). Do not to average down, not to justify a loss, not to chase the market. Averaging down, justifications, and turning intraday trading strategies into long-term investing strategies are just another way to rationalize a losing position.

3. The more significance that is placed on each separate trade, the more difficult it is to admit defeat. This leads to "blown stop". No single trade is so important that it would be worth tying all my thoughts, time and money to.

4. Trade what you see, not what your think.

5. PROS ASSESS RISK; AMATEURS ASSESS POTENTIAL: Professionals take the trade when they are comfortable with the risk, while amateurs do it when they like the potential profit. For professionals, risk evaluation always comes first. If you are uncomfortable with the risk on any particular stock or trade, just stay away from it. The skill of staying away is one of the most important one could learn. Furthermore, if the market presents movements that are not readable by the system we use, any trade would be just gambling.

6. News has no absolute value. People's perception of the news is what affects the stock price.

7. I never relate the outcome of a single trade to who I am. I do not feel foolish when I take a predetermined loss. This trade is not who I am. What is it we really want? To be right or to be profitable?

8. I always have my risk defined, and trade according to it. ( If risk is defined as $250, and I can keep a 50 cent stop with confidence, then my share size on this stock is 500 shares.)

9. Each trade can turn out to be a loser. It is normal because of the uncertain nature of the market – it works on probabilities, not on certainties.

10. Discomfort and profit go hand in hand ( for initial stage only.) If the trade went against me, then I have to cut off my loss to prevent it from getting bigger. The other’s opinion will bring me relief, anger, secret hope and eventually big money loss.

11. Trading with no solid system is like trying to build a house without a foundation. The most successful students are those who find their own slant on the approach they are being taught. They apply their personality to the system they study and produce their own version of the system. That’s their edge and a comfort zone for them.

12. If I don’t learn from my losses, it’s money wasted, and I am doomed to repeat the same mistakes. Do not pay more than we can afford! It is not a loss if we revise the criteria and avoid the same mistake the next time.

13. Be a contrarian. The stock market apparently works in a way that would allow the minority to take the money from the majority. News does not govern price, and fundamentals do not either. It is supply and demand that impacts the stock price.

14. The subject of our job is market movement. The market doesn’t care if we loss or how much we lose. Focusing on the money just takes us farther from emotional balance while clouding our judgement.

15. We don’t feel like a fool/loser when the market goes against us. The ego has no place here.

16. The market is an ocean. When we find that the current is taking us in an undesirable direction, we swim out of it and look for another current, instead of waiting for it to reverse.

17. Slowing down and decreasing activity when I was experiencing a setback and pushing harder when I was hot.

18. What doesn’t kill you make you stronger!

19. Pure followers of stock pickers will never be around long. Traders have to be their own leaders in order to survive. Be aware: “If I can’t make money using it, I can make money selling it”.

 

20. I decide my own fate; the market doesn’t. Emotional trading is a killer of traders. (wnr, oncy, aig). Please distance my trading decisions from my emotions. I can use my emotions as a mirror to reveal what the majority thinks and feels, thus effectively allowing me to exploit the fear and greed of others.

21. If we make a choice in entering a trade, knowing that the market cannot hurt us outside of our predefined risks, then we shouldn’t let an outside (others) opinion change our minds so fast.

22. Trading is NOT a need-to-know business, because there is no way to know it. Trading is not about knowing, figuring things out, and so forth. Trading is about acting in familiar situations on familiar signals.

23. Every time we put on a trade, we accept that this trade and any other can be a loser no matter how good it looks. If the loss is assumed and accepted in advance, it comes as no  surprise. Instead of thinking that the market is definitely going to do this or that, think in terms of IF the market does this, THEN I will do that. No prediction – no surprise – no frustration. For me, this is the only way to approach trading.   Never think, “I know what the market is going to do.” You don’t. Nobody does. Think, “I know what I am going to do in any scenario the market presents.”

24. Trading is not pure mechanical, it is also an ART. The goal of the trader is to develop an unemotional, egoless, and clear perception of stock market reality. One of the things that contributes to the success of members of the minority is that they don’t think like the majority.

25. There are four stages – newer traders, developing trader, striving trader, and reality trader – that take you from majority thought to minority success.

26. Newer traders falsely thinks:

l         Day traders ran that stock past our stop

l         When you think a stock is too high, then it’s time to short (HNU.to)

l         Market makers are a conspiracy group existing to take a stand against my position

l         If you want to make money, just do the opposite of what I do.

l         Do not stop out. A loss is a loss only if you take it. (HNU.to)

 

27. Developing trader: I become that detached observer, and that detachment is essential to a trader’s state of mind. Since then, emotion and ego have ceased to be part of my trading plan.

28. Striving trader: To think the way the minority thinks, to profit off the majority and to position myself on the side of smart money.

29. Reality trader: My unemotional and egoless self allowed me a true and clear perception of market events and created the edge needed to trade profitably.

30. This trading circle should never be closed and we should never stop learning. If we do this, then we are right back at the new trader stage. This often leads to drawdown periods as our ego becomes more pronounced and our reality becomes distorted again. If we ever close the circle, we go right back to ego, misperceptions, and mistakes that new traders make.

31. First, traders have to form realistic expectations about their gains. Established traders know that their primary purpose is to preserve their trading capital. In order to do so, they have to limit risk. However, limiting risk also limits profit potential.

32. All stocks move. But you don’t have to trade them all, especially ones that trade in dollars a minute. It is hard to imagine anything more risky than this monster with a huge spread and almost no volume. Of course there was opportunity to profit, but this is what amateurs go after. As a trader, I know to manage my risk first, and there was no way to do it on that stock at that time.

33. YOU DON’T HAVE TO BE IN THE MIDDLE OF EVERY BATTLE: It’s not necessary for traders to trade everything. In fact, stocks that grab the most attention are often the most dangerous. An urge to trade just for trading’s sake can lead to big losses in the worst case or to slow bleeding with many stops in the best case.

34. The hottest market action is where the biggest risk is. Don’t trade for action; trade for profit. But keep in mind that profit always goes with the possibility of loss. Evaluate the loss you might take if things turn nasty and decide whether you can afford the risk and whether you want this risk and/or reward.

35. Whatever we do and however strongly we feel about a trade, we must never risk our entire capital on one trade. This doesn’t mean that we should ignore any opportunity in which the risk is too big, even if the reward/risk ratio is great. We do have the ability to decrease the risk by decreasing our share size. By decreasing our share size, we limit our profit potential. That’s the price of risk control. Limiting risk and capital preservation go first. I never feel that I have to trade.

36. The market wants to show me one thing and hammer me with the opposite. What many fail to realize is that what seems really obvious usually is a trap.

37.  “buy high, sell higher” and “sell low, buy back lower” is a style that matches trading to the trend. An uptrend is a series of higher highs and higher lows. As long as the trend is intact, you are safe buying every high, and you will be wrong only once at the very top. Even when you buy the pullback bottom on an uptrending stock, it’s not really buying the low—it’s just a particular detail of your timing, your micro-strategy of entry.

38. Buy high and sell higher in an uptrend. Sell low and cover lower in a downtrend. Buy low, sell high in a range.

39. Traders try every next top to short or every next bottom to buy. In doing so, they try to identify the point of a trend reversal. There is only one of these reversal points. By doing this, traders try to find that one reversal point that is going against the prevailing trend. It just doesn’t make sense.

40. Find my own edge. There is one and only one way to find my edge: experience.

41. You can always reenter a position, but you can never get back your loss. Each loss carries a lesson, and it’s up to you to assign the price to that lesson.

42. Trading is the ultimate exercise in self-control.

43. Tape readers see price movement in relation to the rate of volume and can determine when the footprints of stock action are made. Tape reading allows one to understand the actions of the minority and eventually the majority when it climbs in. These principles are applied to an individual security’s behavior and to the broader market trend’s behavior.

44. At some point the correlation between those who want to take a position and those who have already taken it creates an imbalance to such a degree that potential sellers outweigh potential buyers at any given price. That’s where expectations of the buyers are no longer valid and trend reversal occurs. The same mechanics work with setups that become too popular. They cease to work when they are followed too widely.

45. Evidence of accumulation and distribution in the market at levels where the minority (smart money) is participating to a greater degree is often masked to the public until the time is right. Then positions are unloaded as the majority catches on. This can be seen in numerous examples in any given week or month. The market is a discounting mechanism by which the majority usually enters and exits at the wrong time. The major idea is that the public is the last to participate, so when the public comes to buy, there is no one left to buy from them. Thus, majority participation creates the final stage of the movement, which is followed by a reversal.

46. As a rule, smart money action can be seen as a slow, gradual price movement with steady or slowly increasing volume. The public’s action is characterized by hysterical and parabolic price spikes, almost vertical movement with a sharp volume increase.

47. 1. Trend Beginning (Aggressive Accumulation): a slow, steady movement upward with consistent volume that indicates so-called good buying and means the start of upward momentum. Those who are accumulating need to be very careful in such situations. They are buying enough shares to support the stock’s direction, but they aren’t buying so much that it attracts the majority. This is often a tough game to play because any hint that the footprints are being seen by the majority will initiate a price and volume spike, thereby ruining the intention of the smart money to establish a position at better prices. This is why we often laugh about upgrades and downgrades of stock picks. The movement of stock being quietly accumulated is slow and often accompanied by nasty pullbacks. Those pullbacks are caused by smart money desire to keep the upward movement in check.  Switching the sides, using ECNs (Electronic Communications Networks) to hide the buyers’ identity, showing sizes that are intended to scare traders into taking certain action rather than getting that size filled, and many other tricks were and still are being used to mask real intentions.

 

48. 2. Trend Confirmation (Aggressive Accumulation):  a slow price advance with steady increasing volume that indicates continuing upward momentum. During this stage of the move, the position may be held as the majority has yet to catch onto the trend. When you see the majority begin to participate, the rate of volume will increase coupled with a steeper angle of the price movement. This is the point at which it is time to observe carefully as price movement can easily accelerate, switching to the euphoria mode. This stage comes naturally after the trend beginning and serves as a preliminary phase before euphoria.

 

49. 3. Euphoria/Capitulation (Trend reversal). An acceleration in the price advance, almost vertical movement accompanied by a volume surge, is usually not sustained and indicates the end of this stage of the move (euphoria stage). The acceleration in the price drop, almost vertical movement accompanied by volume surge, is usually not sustained and indicates the end of this stage of the move (capitulation stage). In our practical, intraday trading this principle serves two purposes. First, we use vertical spikes with a volume surge to liquidate our positions, selling our shares into a buying frenzy or covering our shorts into a sharp sell-off. Second, we start hunting for a trend reversal when we see hysterical movement.

 

50. 4. Shallow Retracement Trend Continuation:  a relatively big volume increase on the price advance with shallow volume on the pullback, indicating a continuing uptrend. This shows that there is reasonable support for the stock and no real willingness to sell at the current price by either smart money or the majority. There are often one or two identifiable market participants who show solid support for the stock as they absorb any meaningful wave of selling. In this case, we look for a break of the previous high to provide confirmation that the trend is still intact. This situation can be seen in both the trend beginning and trend confirmation stages. It is natural pullback caused either by some profit-taking or by desire of those who accumulate the shares to limit the movement until the right time. Other factors can be part of the mix as well, such as a low level of confidence during the uncertainty of the first phases of the move or stubborn attempts by the opposite side to resist the move.

 

51. 5. Decreasing Volume Reversal: a slowing pace of buying with decreasing volume that indicates that the top of this stage of movement is near. Most traders refer to this as “Buying is drying up.” As the price advances to this area, it fails to attract attention and it slowly slides lower off that high. As the price rises, buyers do not consider this area attractive; they want to accumulate their shares at lower levels. They evaluate the upside as minimal from here, or they are not confident that buying pressure is going to be strong enough to overcome resistance. At the same time they are not yet motivated enough to start liquidating their positions. This creates a temporary standoff where neither side is aggressive enough to move the price. The volume decreases significantly, and most often this situation leads to a price retreat.

 

52. 6. Passive Accumulation/Distribution: Big buying volume without the price changing indicates distribution and means there is a resistance level (passive distribution). This is often the case when a stock moves into resistance defined by technical indicators such as a chart or moving average resistance. This creates a temporary standoff in which both sides are fairly aggressive. Unlike the previous case, volume is big at this level. It’s important to distinguish these two principles from aggressive action. Passive accumulation is bidding, buying only from active sellers. Often it’s accompanied by a willingness to drop the bidding price if sellers become too strong. Passive accumulation by itself does not lead to a price advance. Rather, it lays the foundation for a future price increase if and when the sellers get exhausted. Aggressive accumulation is characterized by buying at the offered price, chasing the price, and bidding the stock up. Aggressive accumulation does move the price up as described in principles 1 and 2

 

 

53. Tape reading is the root, whereas technical studies and indicators are derivatives. And they are not mutually exclusive. Technical analysis (TA) has no predicting value. By this we mean that one or another setup or pattern does not tell us in advance which way the price will go. TA doesn’t tell you which side is going to be broken. But it does provide structure and favorable odds. It provides indications of the most probable direction of the trend. This is one more way in which “Trade what you see, not what you think” works.

54. DIFFERENT METHODS OF ENTRY (box [$19.75, $20])

aggressive method of entry: (Entry $19.90, Stop $19.75) If you have a really strong trending market moving in the direction of your breakout, buy just before the actual breakout. It gives you a better price, an easier fill of your order and a tighter stop. However, the trade-off is that this inspires less confidence in the breakout itself. The market strength favoring the direction of your trade is what increases your odds for a successful trade and allows you to enter before the actual confirmation of the breakout.

regular method of entry: (Entry $20, Stop $19.75) If you are not sure of the follow-through because of the weaker trend, you should wait for the actual breakout to occur, thereby giving you greater confidence in your trade. Again, the trade-off would be the worse price and a wider stop because you buy farther from the support level.

Conservative method of entry: (Entry $20.25, Stop $19.90)If there is no trend and your confidence in the breakout trade is low, which means that you skip the breakout level itself and wait for the stock to pull back. If it tests new support (the former resistance level) and keeps above it with confidence, then you’ve got your confirmation of the strength and you can buy the stock anticipating further movement. The trade-off here is going to be the risk of missing the trade altogether if the stock runs on you with no pullback.

My set of scenarios includes not only the setup structure but also market conditions and our confidence in a successful break. It also includes volume as an element of a general reading of the movement. We want volume to increase when the price moves in the direction of our trade.

55. Setting stop is to prevent losses from growing on one side and protect us from being taken out of the trade until it’s proven no longer valid on the other side. There are two major factors that determine where we put our stop. The first is market indications of trade failure. There are signals that indicate the rising odds of a trade not working. So our stop should be placed under the level that indicates a trade failure if this level is broken. The second factor that determines where we put our stop is our risk tolerance. If our risk is $250 on each given trade, then we go for 1000 shares on the trade with the difference  etween the trigger and the stop levels being 25 cents. If this difference is 50 cents, we decrease our share size to 500, keeping within our risk parameters and still following market logic.

56. Two more distinctions to risk management: The first is slippage. As a rule of thumb, signs of a risky stock with the possibility of big slippage are a wide or often-changing spread, a big gap between price levels, small sizes shown by market participants, and few players at each price level. The second distinction to risk management is stop padding. This is a more sophisticated technique that factors in attempts by market participants to move the price to the level where most stops are located. This is known as “running the stops.”

57. Initial Stop Placement:

1.       1.Breakout Trade. A breakout trade is taken on the assumption that, if the stock is trading above a higher limit of the range, then it’s going to go higher. The stop should be placed below the support level.

2.       2. Range Trade. The reason for entry in a range trade is a bounce from support, assuming that a stock remains within the range. If the lower limit of the range is getting broken, the reason is no longer valid because the assumption hasn’t proved correct. The stop should be placed below the lower limit of the range.

3.       3. Capitulation Sell-Off. The entry for a capitulation sell-off is taken on the assumption that panic selling has washed the sellers out and a V bottom is forming. This kind of trade’s stop loss should be placed just below the low a stock made on the last decline, within our risk tolerance. In other words, any new low should be considered trade failure.

 

58. From the pure statistics point of view, partialling in is a better way to trade than is partialling out.  Adding to your position as it moves in your favor (so-called pyramiding) goes along the lines of “letting your profit run.” By partialling out, you limit your profit potential. Also keep in mind that yourentry point is usually the point of lowest confidence. As the trade develops, your confidence level rises with new confirmations that your initial idea is right. It makes perfect sense to enter just part of your position while you have no confirmation and add to it as the market tells you that you are right. If the trade doesn’t work, you get stopped with just part of your position.

59. from a purely psychological standpoint it’s much easier to keep your position when part of your profit is secured. Partialling out serves this purpose well. What is it that you insure against when you scale out? It’s a trade turning around halfway and hitting your stop. By scaling out, you decrease the size of your win and increase the number of your winners, while still maintaining part of your position in case a stock continues moving in your favor. favor. Insurance also buys you piece of mind, which could be as important as monetary issues

60. Stop Trailing

1.       Consequent Range Breaks. Consequent range breaks resemble ladder steps. The stock consolidates under each new resistance level, breaks it, and repeats the cycle. we place the new stop under this level,

2.       2. Trend Movement in the Channel. Trend movement in the channel is presented by a series of breaks and pullbacks without the consolidation stage. As it happens, we trail the stop so that it’s placed right under the lower envelope on each pullback. price breaks the upper envelope and moves vertically up, we face the euphoria stage of the movement, and the stop should be moved under the upper line.

61. CONFIDENCE LEVELS

Let’s say you bought a stock at $20, partialled out at $20.50, and are now trying to let the profit run on the second portion. As the stock breaks the next resistance at $20.75, you trail your stop to $20.45, in accordance with the principles discussed above. Now, $20.75 is getting taken out on the upside, and the stock stalls at $20.95, which gives you a strong feeling  that $21 will not be taken out. You don’t feel that a trailing stop to$20.70 is a good idea, because this level doesn’t show good support. It cannot serve as a reliable indication of weakness if this level is broken. Essentially, it all comes to the dilemma of, “Do I let the stock hit the trailing stop and give up a significant portion of the current paper profit? Or do I take the profit now and kill the chance for a bigger move?”

That’s where we use a confidence level, placing it at $20.75. If this  level is broken on the downside, we change our original plan. While our trailing stop is still in place, our exit strategy is now to sell our shares on the first worthy bounce. If the confidence level is broken, we don’t expect

the stock to go to new highs anymore, and any bounce between the price

range $20.90–$21 is to be used to exit our remaining shares.

 

62. As a rule we consider the second attempt of a break (test of resistance or support) to be more likely to fail, and the third attempt to be more likely to succeed.

63. In a double-bottom scenario we look to enter a long position when the price rises above the top located between two lows. The stop is placed below the low. We do not buy the second bottom itself.