TRADEGUIDER FOR
®
WINDOWS
Basic Trading Guide PUTTING TRADEGUIDER INTO CONTEXT…
POWERFUL
ANALYSIS
FOR
SERIOUS
TRADING
&
INVESTMENT
Basic Trading Guide Putting TradeGuider into Context…
All Rights Reserved Copyright © 2004 Printed in the UK & USA
Burnhill Business Centre, Provident House, Burrell Row, High Street, Beckenham, Kent, UNITED KINGDOM, BR3 1AT www.TradeGuider.com
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TradeGuider, VSA and Volume Spread Analysis are trademarks of TradeGuider Systems Ltd. IBM is a trademark of International Business Machines Corporation. MS-DOS, Microsoft Windows, Microsoft Windows 95, Microsoft Windows 98, Microsoft NT, Microsoft 2000, Microsoft Me, Microsoft xp, Microsoft Intellimouse, Microsoft Office, Microsoft Word, and Microsoft Excel are all trademarks of Microsoft Corporation. All other product names or services mentioned are trademarks or registered trademarks of their respective owners.
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Contents INTRODUCTION ………………....……………………………………………………………….....................
7
ABOUT THIS MANUAL ……………..…………………………………………………………………………………. 8 BASIC TECHNIQUES THAT CONSTANTLY WORK …..………………………………………………. 9 SUPPORT & RESISTANCE ……………………………………………………………………………….…………. Drawing Manual Support & Resistance ………………….…………………………………………. Showing Automatic Support & Resistance ………………………………….………….………… Showing Highs & Lows …………….………………………………………………………………..………. Automatically Displaying Highs & Lows ………..……………………………………………..…… Trend Clusters ……….………………………………..….…………………………………………………….. Displaying Trend Clusters ………………………………………………………………………………….. Pivot Point Levels …………………………………….…………………………………………………………. Displaying Pivot Point Levels ……………………………………………………………………………..
10 11 11 11 13 13 15 15 17
TRENDS ……………………………………………………………………………………………………………………….… The Last Active Trend ……………………………………………………………………………………….. Displaying the Last Active Trend ……….……………………………………………………………… The Trend Indicators ………..…….………………………………………………………………..………. Displaying the Trend Indicators …………………..……………………………………………..…… Short Term Trend Changes – The Diamonds ……….………………………………………….. Interpreting Trend Status Using the Diamonds ……………………………………………….. Taking an Overall View of the Diamonds …………………………………….……………………. Displaying the Diamond Indicators ………….……………………………………………………….. Medium Term Trend Changes – Bar Colouring …………….…………….……………………. Displaying the Trend Bar Colouring System ……………………………………………………..
18 18 19 19 20 21 22 25 25 26 26
SUPPLY & DEMAND ……………………………………………………………………………………………….……. The TradeGuider Indicators …………………………….……………………………………………….. Understanding the Indicators …………………………………………………………………………… The Relative Volume Indicator …….…………………………………………………………..……….
27 27 28 30
TRADE MANAGEMENT ……………………………………………………………………………………………….… 31 Displaying the ‘H’ Stops …………………………………..……………………………………………….. 32 BRINGING IT ALL TOGETHER ……………………………………………………………..……………………. Basic Trading Set-Ups ……………………………………………………………………………………….. Position Trading ……….………………………………………………………………………………………… Selecting Stocks for Position Trading ………..…….…………………………….………..………. Analysis Regime for Position Trading …………………………………………………………..…… Trading Set-Up for Position Trading ……………………..………………………………………….. Analysing the Cisco Systems Daily Chart …………………..…………………………………….. Analysing the Cisco Systems Weekly Chart ………….…………………….……………………. Analysing the Parent Index ……………………..……………………………………………………….. Exiting the Position ………………………………………………….…….…………….……………………. Real-Time Trading ……………………………………………………….…………………………………….. Analysis Pre-Check for Real-Time Trading …………………………….…….……………………. Trading Set-Up for Real-Time Trading ……………………….…………………………………….. Exiting the Position …………………………………….……………….……………………………………..
33 33 33 33 34 35 36 36 36 37 38 38 39 41
THINGS TO REMEMBER …….……..…………………………………………………………………………………. 42
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Introduction Welcome to TradeGuider Now that you’ve had chance to settle in, it’s time to put TradeGuider into context. You’ve probably read the Getting Started manual, and you may have glanced through the “Master the Markets” book. At the moment, you’re probably wondering how TradeGuider fits into your current trading methodology, or if you’re new to trading, you’ll want to know how to use the tools in TradeGuider so that you can approach your trading in an objective way. There are two basic ways to use the TradeGuider software package: 1.
The software can be run on a separate monitor screen alongside your other trading software, technical indicators, or proprietary systems. In this mode, TradeGuider is adding value to your trading, by allowing you to see the extra dimension of volume beside your current systems. When used in this way, TradeGuider can be referred to as a Decision Support System, enabling you to make more effective and timely decisions throughout the trading session. Indeed, this concept of Trade Guidance forms the basis behind the name of the software - TradeGuider.
2.
Alternatively, you may not have any other trading systems and you’re looking to TradeGuider to help you to approach your trading in a definitive and objective way. You need a solution to remove the guesswork from your trading decisions.
Whichever category you fall into, we think you’ll find the Basic Trading Guide useful as an introduction to using TradeGuider to make your trading more profitable, and ultimately, more enjoyable.
Thank you for using TradeGuider.
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About This Manual This manual will provide you with some common-sense ideas for use in your trading and is aimed at the beginner who is just starting out, rather than the accomplished expert. So, the first thing to do is read the Introduction on page 7, which explains the two basic ways of how you should use the TradeGuider software. This guide sets out to achieve three objectives: 1. 2. 3.
explain the basic tools that are available to you provide you with various hints and tips to help you use the tools effectively suggest a possible way of using the tools for position or intraday trading.
Don’t forget to refer to the “Things to Remember” section right at the end of this guide! This manual is part of a set that helps you become acquainted with the software: The Getting Started manual is designed to get you up and running with TradeGuider as quickly as possible. It describes how to get data into the software and shows you how to load and use charts. The Getting Started manual leaves out a lot of details so that you can make a start with TradeGuider right now. For more help with the Volume Spread Analysis (VSA) indicators and methodology, read the Master the Markets book. The Glossary will help you come up to speed with various terms that are frequently used as part of TradeGuider’s proprietary Volume Spread Analysis (VSA) methodology. For help with your EOD data vendor, refer to the EOD Data Directory, which will enable you to locate a data provider in your country. If you’re using QCollector to acquire data from QCharts, you’ll need the QCharts Connection Guide, which describes in easy steps, how to link TradeGuider to QCharts. For a quick tour around the screen, you’ll find the Quick Reference Card useful to help you learn what the various buttons and toolbars do. For more detailed information regarding the TradeGuider product, please refer to the Video User’s Manual. There is also a separate video series to provide you with a walkthrough of using TradeGuider’s tools to good effect.
NOTE: At the time of writing, some of these manuals may still be in the closing stages of development. If you cannot find a particular manual under the Help menu in TradeGuider, please refer to the Support section on the TradeGuider website (www.TradeGuider.com) and choose the Documentation link. From here, you’ll be able to download the latest versions of the documentation.
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Basic Techniques That Constantly Work IMPORTANT: Before we go any further, you need to understand that trading, especially in the futures markets, is a high risk activity. Although we are presenting strategies that will help you to become more effective as a trader, you must keep in mind that unless you’re properly capitalised, disciplined, and willing to exercise protective measures to manage your risk (such as implementing a stop loss), you should seriously review your circumstances before continuing any further.
Four Commonsense Principles This guide is about looking at your trading from a commonsense viewpoint to make money. Hence, you’ll find nothing in here about astrology, planetary conjunctions, moon phases, arcane mathematical formulas, or complex geometrical patterns. We are here to tell it like it is. There are four basic principles in trading that continuously stand the test of time. Taking note of these principles will pay large dividends for you – they are as follows:
1. 2. 3. 4.
Trading in accordance with areas of Support & Resistance Trading with the Trend direction Taking note of the forces of Supply and Demand Protecting your profits with a Stop-Loss Strategy
There are tools within the TradeGuider software to help you take advantage of all these commonsense principles. The following pages explain the various tools available to you, with good advice on how to use them in order to minimise your risk and maximise your chances of success.
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Support & Resistance Take a chart of any instrument you care to mention. Draw a horizontal line from any point where price failed to go higher (resistance), or any point where price failed to go lower (support.) These price areas are highly significant and you should always be aware of them. Keep in mind that: • Prices will nearly always reverse from a resistance (or support) area when the spreads narrow and volume drops. • Conversely, prices will nearly always penetrate a resistance (or support) area when the spreads widen to penetrate the resistance and volume increases substantially (usually seen as a spike in the volume histogram at the bottom of the chart.) The following graphic is an example of support and resistance:
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Drawing Manual Support & Resistance To draw manual support and resistance levels, click the horizontal line drawing tool as shown in the toolbar below:
Then, just follow the prompts to complete drawing the line.
Showing Automatic Support & Resistance There are several ways to show potential support and resistance levels automatically: 1. 2. 3.
The Show Highs & Lows feature The Trend Clusters feature The Pivot Points feature
Showing Highs & Lows TradeGuider is capable of automatically drawing highs and lows (support and resistance) on a chart, and projecting these lines forward into the future. The chart below shows a typical example of this feature.
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When analysing support and resistance in this way, you’ll begin to notice various phenomena: •
Lines of historical support or resistance will often band together. The effect of support and resistance levels is cumulative. In other words, several lines that occur around the same price level represent stronger support or resistance, which forms a barrier to price penetration. In the example above you can see 3 lines of historical support which act as solid ‘ground-level’ support. In order to penetrate this band of support will require a lot of ‘effort’ in the form of significantly higher trading volumes. You would also expect to see much wider spreads that punch through the banding, or the price may even gap over the banding entirely. The other cumulative factor is time. The longer a line of support or resistance has been in effect, the more resistant it will be to price change.
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Price action will sometimes meander around a support or resistance level, and will occasionally congest around these areas. In this instance, prices will move erratically, with rapidly fluctuating spreads and volume levels, as the bulls and bears fight it out. When prices exhibit these indications, it’s advisable to stay out of the market until this stabilise. The rectangular area that has been marked off at the bottom of the chart demonstrates how price action can move along an old level of support in a tight congestive range.
•
In order to successfully pierce through a support or resistance level, ‘effort’ is required in the form of a significant volume surge, accompanied by a much wider price spread. In the example on the previous page, this sort of price action is shown just right of centre, and is labelled as, “Rising thru resistance on a wide spread.”
•
Finally, you may also notice areas where a line of support switches to becoming a line of resistance (or vice versa). This sort of action can be seen on the chart below:
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Knowing the aforementioned principles, whilst watching narrowing or widening spread sizes, coupled with the associative volume (effort), will provide you with a fresh insight into price mechanics.
Automatically Displaying Highs & Lows To draw automatic highs and lows: •
Select Tools > Show Highs & Lows > Show from the menu.
A number of lines will be drawn on the screen, and you will most probably find that there are too many to begin with. To adjust the number of lines drawn, select: •
Tools > Show Highs & Lows > Adjust Sensitivity from the menu.
Use the spin control to adjust the sensitivity level from 1 to 20, where 1 is the least sensitive and 20 is the most sensitive.
Trend Clusters Trend clusters are discussed in the “Master the Markets” book in some depth. Basically, these areas are an extension of support and resistance, but applied to trends, rather than highs and lows. Where historical trend lines intersect, we call this a ‘trend cluster’, and display a rectangular block on the chart to signify this. Trend clusters represent strong areas of resistive price levels. The chart below shows the clusters and the highs/lows features displayed together.
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There are a number of things to look out for when using the cluster facility:
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When the price is in the vicinity of a trend cluster, there will be a good chance that price action will retreat from the cluster, on narrowing spreads and a reduction of volume.
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If the prices break past the cluster, they will tend to continue in the same direction, until further support or resistance is encountered. There are examples of this sort of thing happening in the chart on the previous page.
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In situations where the clusters and the show high/lows feature are displayed at the same price level, one can assume that there is a greater possibility of prices reversing.
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Prices can often be seen to meander between a narrow, confined area, such as in the chart below.
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On occasion, the price will punch straight through the cluster on a wide spread with significantly increased volume (see chart below.)
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When prices are in the vicinity of a cluster, they will normally be extremely resistive to price penetration – see the rectangular area that is shown top centre in the following chart for an example of this sort of observation.
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Displaying Trend Clusters To display trend clusters, click the cluster drawing tool as shown in the toolbar below:
Then, choose the desired sensitivity level from the drop-down menu.
Tip For more detailed information regarding the use of trend clusters, refer to the “Master the Markets” book.
Pivot Point Levels Pivot points are a popular means of showing where the limits of trading ranges are likely to be. Prices tend to revolve around a pivot, which is calculated in accordance with the previous day’s action. Above the pivot are key points of resistance, which are marked as R1, R2, and R3 (which is the most extreme point of resistance that is likely to be met during the current trading session.) Below the pivot are key points of support, which are marked as S1, S2, and S3 (which is the most extreme point of support that is likely to be met during the current trading session.) The chart below shows what pivot points look like:
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Pivot points can be used to gain insight into potential price direction, just like the support/resistance tools that have been discussed previously. Similar sorts of principles apply: •
When the price is in the vicinity of R1, R2, or R3, there is a good chance that price action will turn downwards if the spread narrows and the amount of volume reduces.
•
Similarly, when the price is in the vicinity of S1, S2, or S3, the price action is likely to turn upwards if the spread narrows and the amount of volume reduces.
•
If the price penetrates through a level, especially on high volume and a wide spread, one can usually use the next level as a price target. For example, if the price moves down through R2, one could expect the price to carry on moving down to a price target indicated by R1.
•
In the same way, if the price moves up through the Pivot (P), one could expect the price to carry on moving up to the price target indicated by R1. If price continues to move up through R1, one would then use R2 as the next price target. Lastly, if the price continues to move up through R2, one would then consider using R3 as the next price target. An example of this sort of price movement can be seen in the left side of the chart on the previous page.
IMPORTANT: Keep in mind that the further the price moves to the extreme price targets represented by R3 (or S3 if moving down), the less likely it is for those price objectives to be met.
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If the price reverses from a level, especially on high volume and a wide spread, one can usually use the next level as a price target. For example, if the price reverses from R2, one could expect the price to carry on moving down to a price target indicated by R1.
•
In situations where the pivot levels and the trend cluster features are displayed at the same price level (red circles), one can assume that there is a greater possibility of prices reversing. The chart below shows how these two features can work together, and it also demonstrates how the pivot point levels can act as price targets (black circles.)
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•
Prices can often be seen to meander (in a state of congestion) between a narrow and confined area. Note how the price moves in a congested area bounded by R1 and R2 in the chart on the previous page (just right of centre.)
•
On occasion, the price will punch straight through a pivot level on a wide spread with significantly increased volume. A good example of this is shown on the previous page, where the price rises through R1 to the left of the chart.
Displaying Pivot Point Levels The Pivot Points for the current trading session can be automatically calculated and displayed by pressing the PIV button on the Technical Tools toolbar. When using the Pivot Point feature, it’s important to make sure that the levels are calculated properly. To ensure this, follow the steps below: •
Click the chart (with the left mouse button) at any point of today’s trading session.
•
Then click the small black triangle to the right of the PIV button, which will show a small pop-up menu.
•
Click on the “Select New Start Point” option. You can now see the pivot point levels for today’s trading session.
NOTE: The Pivot Point feature in TradeGuider is for live trading use only. Please do not try to apply this line study to EOD (End of Day) charts, because it hasn’t been designed for this purpose.
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Trends Most people have heard of that overused phrase, “the trend is your friend.” This next section is all about using the automated trending tools in TradeGuider to keep you on the right side of the market. Drawing manual trends has already been covered in the Getting Started manual (Step 7 – Drawing a Line Study.) We’re going to start our tour with a very useful feature to show the Last Active Trend.
The Last Active Trend Knowing the current trend direction, along with the trend boundaries (often referred to as a trend channel), is a useful starting point in your analysis. The chart below shows a trend channel that has been automatically calculated by the TradeGuider software:
The boundaries of the trend channel are shown by the dotted blue line. The following points are useful observations that will help you to judge potential moves:
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The chart above shows that strength appearing (denoted by the green rectangle) at the bottom of a trend channel is usually a significant event that results in an upward price move.
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Similarly, if weakness appears (denoted by red indicators) at the top of a trend channel, this normally indicates that a downward price move is imminent.
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•
Irrespective of whether an indicator is present or not, prices are usually seen to bounce off the sides of channel.
•
If prices break out of the channel, especially if they gap over the channel boundaries, this is normally indicative of an explosive move in the direction of the gap. In the example on the previous page, prices are seen to gap down, over the bottom of the channel in an effort to quickly break through the support level. The price moves downward in a steep and determined move to the downside. This principle is just as applicable if a gap to the upside is witnessed.
Tip For more detailed information regarding the use of trend channels, refer to the “Master the Markets” book.
Displaying the Last Active Trend To draw the last active trend: •
Select Trends > Last Active Trend from the menu.
You should immediately see a trend channel superimposed over the chart. If this isn’t the case, it could be that you need to adjust the sensitivity for this feature. To adjust the sensitivity: •
Select Trends > Sensitivity from the menu.
•
Use the spin control to change the sensitivity level from 1 to 20, where 1 is the least sensitive and 20 is the most sensitive.
The Trend Indicators TradeGuider has a volatility-based, trend break-out system, which displays blue indicators when trends breach an automatically calculated price level.
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The effectiveness of the trend indicators can be improved by combining them with other systems, such as the “Show Highs & Lows” feature (see below.)
… or, you could add the volume spread analysis (red/green) indicators for an extra dimension that takes volume into account.
Displaying the Trend Indicators To display the trend indicators, click the trend indicator button, which can be found on the Analysis toolbar. If the trend indicator button is pressed again, the blue trend indicators are turned off.
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Short Term Trend Changes - The Diamonds If you’re an active trader, you should find the ‘diamonds’ particularly useful as a simple and quick visual guide as to whether the trend is up (green), down (red), or about to change (white). The diamonds are an attempt to normalise and smooth the price action. Whatever your trading style, it’s a flexible indicator that can be set up to aid you in ‘scalping’ or swing trading on intraday charts, position trading on daily charts, or even in medium/long term investing on weekly or monthly charts. Apart from the changing colour of the diamonds, one of the great things about this indicator is the way it levels out, as prices become slow to progress. If prices suddenly surge forward, this indicator will also accelerate upwards or downwards, smoothing out the fluctuations caused by minor corrections or reactions. The chart below shows what the diamond indicator looks like when it’s superimposed over a chart.
In common with other tools and indicators in TradeGuider, the diamonds can be used on an individual basis, but they are more effective when used as part of a trading set-up, in combination with other features. We shall be looking at a suggested set-up later on in this guide.
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Interpreting Trend Status Using the Diamonds When attempting to trade with the trend, one question that has always posed a problem is, “How do I know when a trend is in progress?” And similarly, “How do I know when a trend has reversed?” The diamond indicators can be used in a definitive and objective way to answer these questions, helping you to trade in a more informed and less emotional way. Below is a brief description of the definition for a trend, a pause in trending, and a trend reversal.
1. Trend in Progress The graphic below shows a downward trending market. This is characterised by the following:
- Red diamonds - Falling diamonds - Closing price below the diamonds
The graphic below shows an upward trending market. This is characterised by the following:
- Green diamonds - Rising diamonds - Closing price is above the diamonds
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2. Trend is Stalling The graphic below shows a pause in a downward trending market. This is characterised by the diamonds turning colour from red to white:
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The graphic below shows a pause in an upward trending market. This is characterised by the diamonds turning colour from green to white:
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3. Trend is Reversing The graphic below shows a trend reversal from long to short. This is characterised by the diamonds turning colour from green/white to red:
The graphic below shows a trend reversal from short to long. This is characterised by the diamonds turning colour from red/white to green:
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Taking an Overall View of the Diamonds The next graphic shows the diamonds operating over an extended period of time. You can see very graphically how this indicator can help you to recognise when a trend is changing from one direction to another. Moreover, you can also see how the colours tend to lock onto the trend and absorb minor adverse moves that are against the trend.
Displaying the Diamond Indicators To display the trend indicators, click the diamonds button, which can be found on the Analysis toolbar. If the diamonds indicator button is pressed again, the diamonds are turned off. It’s possible to change the setting of the diamonds to take into account your own personal preferences. To adjust the settings, click the small black triangle that appears next to the diamond button. Change the Period setting using the spin control. The larger the number, the more smoothing (and lag) will be introduced.
Tip When using the Diamond Indicators, you’ll achieve better results from markets that trend in a consistent way – look at the major currency pairs and the bonds (T-bonds etc.)
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Medium Term Trend Changes – Bar Colouring There is a second trending system in TradeGuider that is designed to be a lot more insensitive to minor trend changes. It’s a volatility-driven system which takes into account how much a market moves. The more a market moves, the more forgiving the system becomes to adverse price excursions against the trend. However, if a market isn’t that volatile, the trending system becomes more responsive to movement. Have a look at the chart below for an example of this system in action:
As can be seen from this chart, this type of trending system is more forgiving with regards to adverse moves, or a temporary slowing of price momentum (unlike trending systems that are based on moving averages.) This system can be used in conjunction with other features (according to your preferences), as part of an overall trading set-up. A suggested set-up is demonstrated later in this guide.
Displaying the Trend Bar Colouring System To display the trend bars, click the trend bar button, which can be found on the Analysis toolbar. If the trend bar button is pressed again, the coloured bars will be turned off.
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Supply & Demand Not many people would disagree that free markets move to the dictates of supply and demand. For the sake of completeness, this next section has been replicated from the Getting Started manual. For a more comprehensive discussion of supply and demand, and the various indicators in TradeGuider, please refer to the “Master the Markets” book document.
The TradeGuider Indicators TradeGuider constantly analyses your charts for imbalances of supply and demand. Once an imbalance is found, a red or green indicator is displayed, alerting you to the likely strength or weakness in the market. The chart below shows a number of green symbols, indicating strength (demand) in a stock. Showing supply and demand graphically on a chart is one of TradeGuider’s major strengths. In the chart below, we can see that following the cumulative effect of a build up of demand, the stock responds with a positive and sustained price rise.
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The chart below shows a number of red symbols grouped together, indicating weakness (supply) in a stock. The stock falls in price following each cluster of supply.
Understanding the Indicators NOTE: This section is a basic introduction to the TradeGuider indicators. For more information, please consult the “Master the Markets” book. TradeGuider is armed with several hundred supply and demand indicators, which make it a sophisticated and effective guidance tool. TradeGuider can even give a visual indication of the approximate imbalance of professional activity and show where this appears on your chart.
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All of the indicators can be grouped into two broad categories: 1.
Indicators that show weakness are coloured red. Weakness is indicative of supply, professionals selling the market, or professionals withdrawing from the market (i.e. no participation.)
2.
Strength is indicated by green symbols and is indicative of market demand (i.e. professionals buying into the market.)
The red and green indicators are all able to visually express the estimated amount of residual strength or weakness and this is communicated by using different symbols:
Red/Green Rectangles Rectangles represent strong weakness (red) or strength (green) respectively. When TradeGuider displays a red or green rectangle, there is a good chance that the current price move will stop and reverse. If this does not happen, the market will usually stop trending and move sideways for a while. Sometimes rectangles are seen during a trending market as the professionals are either buying into or selling into the market. In the chart on the previous page, note how the professional money sells the market at the top left of the chart, which causes prices to fall (see the red rectangle amongst the other signs of weakness.) At the bottom of the downtrend, note the three green rectangles denoting heavy buying at this price level. The market rises as a consequence of this strength and is later countermanded by a red rectangle, which causes a resumption of the downtrend.
Red/Green Triangles These symbols denote an intermediate probability of a correction (down move) or a reaction (up move) in the market. Clusters of strength or weakness symbols often appear together on your charts, especially at certain price levels. This type of clustering is highly significant, especially if it appears in new high or low ground, or at areas of support or resistance (including pivot points.) In the chart on the previous page, the principle is demonstrated by 4 signs of weakness (top left), which results in a large fall in price.
Pale Red/Green Triangles or Pale Red/Green Small Rectangles These symbols all denote subtle changes in supply and demand factors. More than likely, there will not be an immediate move in the market when these symbols are shown. In the chart on the previous page, note the subtle signs of weakness left of centre – the market falls off soon after. There are more subtle signs of weakness right of centre and this time the market drops immediately. Also, you will see two additional subtle signs of weakness that appear before the red rectangle at the right of the chart: these should act as warnings, especially, when followed by a red rectangle as in the example chart.
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Tips •
The indicators are not buy and sell signals (or entry and exit points.) It is a mistake to use the indicators in isolation, without taking any other factors into consideration. You must view the market holistically, looking at what has gone before and also reading the market as it unfolds. Each signal is like a word in a sentence, but it is only when all the words in the sentence have been read, that the information is imparted. Take a look at the accompanying “Master the Markets” book for further assistance.
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Indicators can be used as part of a ‘trading set-up.’ So, once an indicator has appeared, you may wish to wait for the trend to change in the direction of the indicator, or you may take an entry point once the market has moved up or down by a certain number of points. For more information, see the “Master the Markets” book.
•
TradeGuider’s indicators can be used in conjunction with other trading tools, such as TradeStation, MetaStock, TC2000 and OmniTrader. The idea is to use the TradeGuider indicators, which take into consideration the added dimension of volume, as an additional confirmation tool in combination with the indicators or systems that you have already learnt to trust.
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You can use TradeGuider to analyse any liquid, well-capitalised market. So, it will work well with major world indices, the component stocks in the DOW, S&P, and NASDAQ, major currency pairs, and popular commodities.
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TradeGuider will work in any timeframe, so it is equally suitable for intraday traders, position traders, or investors looking at weekly or monthly charts.
The Relative Volume Indicator TradeGuider is continuously sampling the volume, looking at the relative amount of bullish and bearish volume at any particular time. The results of this analysis are shown on a gauge to the right of the chart. The amount of green that appears on the gauge is ‘bullish’ volume and the amount of red is ‘bearish’ volume. So, in the example shown to the left, we would consider this situation to be more bullish, and may even be looking to enter a trade based on this information. • •
If the amount of green is above the 50% mark, this is considered a bullish sign. If the amount of green is below the 50% mark, this is seen as a bearish sign.
It is best to use the relative volume gauge as part of a trading set-up to aid you in your entry or exit. Later in this guide, we’ll be looking at a potential set-up that you might consider using. However, we encourage you to experiment with the various features and decide what’s best for you and you’re trading style.
NOTE: If you can’t see the volume gauge, you’ll need to turn it on. To do this: Select View > Volume Indicator from the menu
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Trade Management Once you’ve decided to pull the trigger and enter a trade, you’ll need to manage your position so that you make the maximum amount of profit from it. TradeGuider has a number of different stop systems built into it for locking in your profits, but for now, we’re going to look at just one of them – the ‘H’ stop. The screenshot below demonstrates how the ‘H’ stops work and how they can be used to keep you in a trade until its full potential has been reached.
Here are some interesting facts about the ‘H’ stop:
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It is volatility based, which mean that it adjusts quickly to price moves, and is more sensitive in calmer markets.
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The ‘H’ stop is actually a pair of stops, comprised of a near and far stop. The near stop can be used by more cautious traders to get out early, whilst the far stop can be used by traders who don’t mind risking the possibility of being taking out with a bigger loss, but with the potential for a far larger return.
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The ‘H’ stops can separate, so that one of the stops sits above the bar, whilst the remaining stop sits below the bar. This is useful for marking off potential areas of congestion. In these circumstances you should be watching the trade extra close.
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When both stops switch from being below the bar, to above the bar, this can be seen as a potential short position.
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Similarly, when both stops switch from being above the bar, to below the bar, this can be seen as a potential long position.
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The ‘H’ stops operate on a ratchet, so they will move in the direction of your trade and then stick at a certain level to lock in profit and protect your exposure.
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The ‘H’ stops are always ‘in the market’ and can be used as a basis for a trading setup.
Displaying the ‘H’ Stops To display the ‘H’ Stops, click the ‘H’ Stop button, which can be found on the Analysis toolbar. If the ‘H’ Stop button is pressed again, the ‘H’ stops will be turned off. It’s possible to change the setting of the ‘H’ stops to take into account your own personal preferences. To adjust the settings, click the small black triangle that appears next to the ‘H’ stop button. Change the parameter settings using the spin controls for either the near or far stops.
Tip When using the ‘H’ stops, you’ll achieve better results from markets that trend in a consistent way – look at the major currency pairs and the bonds (T-bonds etc.)
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Bringing it All Together Basic Trading Set-ups Trading is such a personal thing. We have tried to cover the primary TradeGuider tools in this Basic Trading Guide that will help you to use TradeGuider more effectively. It’s never a good idea to dictate a certain way of doing things, as everyone has there own preferences and styles, but we think there is value in going through a possible trading setup for educational purposes. Remember that we are giving you the tools - it’s up to you how you use them to give yourself an ‘edge’ in what is probably the most competitive, mercenary, unforgiving, and merciless business of all.
Position Trading Taking positions by using a daily chart offers several advantages over intraday trading: • • •
It’s less stressful than intraday trading It allows more time for analysis It enables you to pursue other businesses or interests during the day.
The first thing to do before considering any trades is to select your stocks or other trading instruments. If you’re trading stocks, you would be well advised to follow the rules below: •
To consider taking a long position (i.e. to buy), you need to select stocks that are acting stronger than their parent index. For instance, “Cisco Systems” belongs to the NASDAQ 100 index.
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To consider taking a short position (i.e. to sell), you need to select stocks that are acting weaker than their parent index.
Tip When trading stocks, always trade in harmony with the parent index.
Selecting Stocks for Position Trading Selecting potential candidates for trading is fully automated via the Stock Scanner facility. To use the stock scanner wizard:
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Select File > Stock Scanner from the menu
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Then follow the prompts from the wizard, which will take you through the whole process of stock selection. Once the scan is complete, you’ll have a list of the 10 strongest stocks and the 10 weakest candidates for trading purposes.
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Tip The process described on the previous page is most definitely sufficient to select great trading candidates. However, if you’re a perfectionist, and you have a good data vendor that can supply business sector indices, you could actually follow the alternative process below, which is known as a ‘top-down’ scan: 1.
Scan the business sector indices against the primary industrial indices for your country. This would produce a list of the strongest and weakest business sectors. For instance, the Telecommunications Sector Index may show that it is weaker that the NASDAQ 100 Index, and the DOW Industrial Average.
2.
From the business sector scan, you’ll have a list of the 10 strongest and the 10 weakest business sectors.
3.
You now need to scan the component stocks from the various business sectors (identified above) against their parent indices. So, if the Telecommunications Sector Index is the weakest sector, we now need to scan the Telco Sector Index against the NASDAQ 100 (and maybe the Dow Industrial), to produce a list of the weakest companies from the weakest business sector.
4.
This scan would theoretically show the weakest stocks in the market. In this example, you would know at the end of the procedure, that out of all the business sectors, the Telecommunications market was the weakest, and that Cisco Systems Inc was the weakest stock from this sector.
Analysis Regime for Position Trading Once you have a list of potential candidates (say 10) from the stock scan, we need to analyse each one to see whether it represents a viable trade at the moment.
Step 1 – Support & Resistance Checks We can check the stock for areas of support and resistance by using the Show High & Lows and Trend Cluster features. You may need to adjust the sensitivity of these features. See the Support & Resistance section on page 10. These facilities will give you a good idea as to whether the price is trading in the vicinity of support or resistance. In addition, you may actually want to manually draw your own support/resistance lines across double tops, double bottoms, or extreme high/low points.
Step 2 – Trending Checks Next, we can check the Last Active Trend feature to see whether the stock is currently in a trend channel, the direction of the trend channel, and the size of the trading range. See the Trends section on page 18. Also, you may want to switch on the Blue Trending Indicators, the Diamond Indicators or the Trend Bar Indicator to help you in your decision making (again, see the Trends section on page 18.) All these facilities will all help you to properly gauge the trend.
Step 3 – Supply & Demand Checks The next thing we can do is to check out the Relative Volume Gauge to see if there is more bullish or bearish volume at the moment (see the Supply & Demand section on page 27.) We should also look to see if there are any red/green indicators in the vicinity, which would represent latent imbalances of supply or demand in the background. You need to take particular note of rectangular symbols, or groups of triangular indicators, as these signs are often more significant. The “Master the Markets” book explains more about the various supply and demand indicators.
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Step 4 – Trade Timing Checks Whenever you first consider participating in a trade, it’s always better initiate the trade near the start of a move. The ‘H’ Stops are always ‘in the market’ and they give you a good idea of (a) when a potential trade starts and (b) how long to stay in the trade. Basically, you are looking for both stops to switch above the bar (a short trade) or both stops to switch below the market (a long trade.) For more information regarding the ‘H’ Stops, see the Trade Management section on page 31.
Trading Set-up for Position Trading The charts below show a possible trading set-up and entry for initiating a short position trade for Cisco System Inc. The first thing to do is to set up your screen so it looks like the one below. This is achieved by making sure that Auto is selected from the tiling toolbar. Now, load up two daily charts for Cisco Systems Inc and convert one of these to weekly by selecting Chart > Convert > Weekly from the menu. Finally, load up a daily chart of the parent index (in this case the NASDAQ 100 index.) Finally, click the Cisco Systems daily chart and press the Tile to Pattern button. Your screen should now be laid out like the one below.
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Analysing the Cisco Systems Daily Chart The stock scanner identified Cisco Systems as a weak stock. Here we can see a daily chart of Cisco Systems on the right of the screen. The red vertical cursor shows the start of the trade. •
Note the band of heavy resistance that appears above the market. This tells you that there is more chance that prices will fall, rather than rising to penetrate the resistance area.
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The blue, downward facing trending indicator tells you that a possible short trade is about to start.
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Also, note that the diamonds are red and that they have actually been red for the last 5 bars, indicating that a down trend is now underway.
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Next, look at the ‘H’ Stops; both of the ‘H’ Stops have just switched to being above the bar. The evidence is accumulating and the timing is now looking OK for the start of a short trade.
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The Relative Volume Gauge is showing that the amount of bullish volume (seen in green) is well below the 50% mark, and that the closing price on this bar is below the opening price, which is also a bearish indication.
Analysing the Cisco Systems Weekly Chart The weekly chart (see bottom left of the screenshot on the previous page) shows a startling fact: Cisco Systems Inc has been in free-fall for at least 30 weeks! The red vertical line on the weekly chart is synchronised to the red line on the daily, so this really puts into context how badly this stock has been performing. •
Both the ‘H’ Stops and the Diamonds confirm the poor performance. The ‘H’ Stops have been above the bars all the time and the Diamonds have been red nearly the whole time too.
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Also, note similar resistance levels on the weekly chart, which confirms what we see on the daily chart. The chances of this stock rising up and taking out a potential short are minimal.
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As the weekly chart has been short for a long time, we now have an even better indication that now is a good time to short Cisco again. However, we’re not quite finished with our analysis – it’s now time to look at the parent index.
Analysing the Parent Index (Daily Chart) The daily NASDAQ 100 index is shown in the top left of the screenshot on the previous page. If our analysis of the parent index confirms the bearish indications that we have seen in the other two charts, it’s time for us to take up a short position. Let’s take a look. •
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The first interesting thing we can see here is the resistance (again.) We can now say that as far as we can comfortably ascertain, there is no way this market is going to be going up very far.
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It’s also interesting to note the action of the Blue Trend Indicator, the red Diamond, and the both the near/far ‘H’ Stops switching position to be above the market. The action of these indicators in the NASDAQ 100 index completely mirrors the behaviour of the indicators on the Cisco daily chart. This observation is highly significant – the time is now right to enter a short trade in Cisco Systems Inc.
Exiting the Position Once you’ve decided to enter the trade, all you need to do is track the position with a stop-loss system until completion. The position can be tracked very satisfactorily with the ‘H’ Stop system, as shown on page 35. However, for the sake of variety, the chart below shows the position being tracked by the Dynamic Stop-loss System. The shaded area represents the bounds of the trade, whilst the red ‘staircase’ line above the price bars shows the stop-loss system that is locking in profits as the price moves downwards.
To track your trade in this way: • •
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Right-click the bar where you want the trade to start. A pop-up menu is displayed. Choose Open New Position and then choose the settings as required.
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Real-Time Trading Intraday trading is much faster paced and demands a quick brain and an unemotional approach. • • • •
Live trading is far more stressful than position trading There’s not much time for analysis In a fast-moving market, live trading can be mentally exhausting Real-time trading leaves little scope for other business interests during the day.
Before setting out as an intraday trader, you need to decide on which financial instruments to trade. We recommend you specialise in one area and stick to it, rather than trying to trade everything. The major world indices, such as the FTSE 100, Dow Jones Industrial, S&P 500, NASDAQ and the Dax are a good place to start. If you’re trading indices, you would be well advised to follow the rules below: •
To consider taking a long intraday position in an index (i.e. to buy), it’s a good idea to check that the trend on the daily chart is UP. If the trend is up, only take long intraday trades. Do not risk taking short trades in a long market - wait for the trend in the index daily chart to change direction first.
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To consider taking a short intraday position in an index (i.e. to sell), it’s a good idea to check that the trend on the daily chart is DOWN. If the trend is down, only take short intraday trades. Do not risk taking long trades in a short market - wait for the trend in the index daily chart to change direction first.
Analysis Pre-Check for Real-Time Trading For the sake of this example, let’s imagine that you like to trade the S&P 500 1 minute (or the e-mini derivative).
Trending Pre-Checks The first thing to do is check the direction of the trend on the daily chart of the S&P 500. You need to look at the EOD chart of the S&P 500 to ascertain how you should be trading the following day. We can check the Last Active Trend feature to see whether the S&P is currently in a trend channel, the direction of the trend channel, and the size of the trading range. See the Trends section on page 18. Also, you may want to switch on the Blue Trending Indicators, the Diamond Indicators or the Trend Bar Indicator to help you in your decision making (again, see the Trends section on page 18.) All these facilities will all help you to properly gauge the trend.
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Trading Set-up for Real-Time Trading The charts below show a possible trading set-up and entry for initiating a short position trade for the S&P 500 index. The first thing to do is to set up your screen so it looks like the one below. This is achieved by making sure that Auto is selected from the tiling toolbar. Now, load up the following three charts: 1. 2. 3.
S&P 500 (1 minute) S&P 500 (2 minute) S&P 500 (5 minute)
Click the S&P 500 1 minute chart and press the Tile to Pattern button. Your screen should now be laid out like the one below. Finally, synchronise the charts by select File > Synchronise from the menu.
Step 1 – Support & Resistance Checks When trading in real-time, the last thing you want is a screen that is cluttered with lots of line studies and indicators, as this is tiring to watch over extended periods of time. Whatever tools we use for checking support and resistance areas, they need to be quick to set up and easy on the eye. Although not shown on the above chart, we recommend using the Pivot Points to show us where the key support and resistance areas are likely to be. See the Support & Resistance section on page 10 for more information on how to display and interpret the Pivot Points. These facilities will give you a good idea as to whether the price is trading in the vicinity of support or resistance.
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Step 2 – Trending Checks The next thing to do is to set up all your charts with the trending tools, so that it’s easy to see the trend direction across the different timeframes. In this example, we’ve set up the Diamond Indicators and the Trend Bar Indicator to give a visual indication of the short/medium term trend (see the Trends section on page 18 for more information.) You may want to switch on the blue trend indicators as a further visual cue to indicate a potential change in trend direction. •
In the example above, you can see that the both the 2 minute and 5 minute charts (on the left), are showing established down trends, indicated by the red diamonds and red bars.
Step 3 – Supply & Demand Checks In the example on the previous page, all the charts have the red & green VSA indicators switched on. These indicators can be activated by clicking the VSA indicator button on the Analysis toolbar, shown on the left. •
Ideally, before initiating a trade, we’re looking for a consensus indication of strength (green indicators) or weakness (red indicators). In the example on the previous page, you can see that weakness is present at the same time on all of the different timeframes.
The next we can do is to check out the Relative Volume Gauge for the one minute S&P 500 chart, to see if there is more bullish or bearish volume at the moment (see the Supply & Demand section on page 27.) You may also see red/green indicators in the vicinity, which would represent latent imbalances of supply or demand in the background. You need to take particular note of rectangular symbols, or groups of triangular indicators, as these signs are often more significant. The “Master the Markets” book explains more about the various supply and demand indicators.
In Summary So far, we have seen the following evidence for a short trade: •
The daily EOD S&P 500 chart for the previous day is in a downtrend situation (and weakness was also present.) This means that the intraday opportunities should be to the short side of the market.
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The Diamonds and Trend Bar indicators are red on the 2 and 5 minute timeframes, showing that a downtrend is in progress on the longer intraday charts.
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The Trend Bar is Red on the 1 minute chart, which matches the 2 & 5 minute timeframes. The Diamond is white, which means that the short term trend is now changing. The evidence is now looking good for a trend change across all three timeframes. We could wait to check for the diamond to change red on the 1 minute for further confirmation if required.
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There is a consensus of red VSA indicators (showing weakness present) across each timeframe. Based on these observations, we’re now expecting the market to drop.
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The Relative Volume Gauge for the 1 minute S&P 500 is showing that there is far more bearish volume in the market at the moment and the closing price is lower than the opening price.
Based on the evidence above, the time is now right to enter a short trade.
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Exiting the Position Once you’ve decided to enter a trade, all you need to do is track the position with a stoploss system until completion. The position can be tracked very satisfactorily with the ‘H’ Stop system, as shown on page 35. As seen below, the ‘H’ Stops remain above the market and keep you in the trade through a couple of adverse reactions. The settings of the near and far ‘H’ stops can be adjusted in accordance with your preferences. This type of stop system is designed to keep you in the trade as long as possible, sticking like a ratchet at points where your trade is under most risk.
Most traders will liquidate a position under one of the following conditions: • • • •
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Both ‘H’ Stops switch to the opposite side of the market The Near Stop is breached and the Diamond is white The Far Stop is breached and the Diamond is green (for a short position) The ‘H’ Stops straddle the bar (one above and one below) and either stop is breached.
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Things to Remember If you’re new to trading or investment, you’ll find the good advice below will help you to become more effective: 1.
Keep it Simple! Simple systems based on commonsense factors are nearly always the most effective. The more complex your system is, the more room there is for error.
2.
In any speculative venture, your main concern is to always put the odds of winning in your favour. That means, adhering to a set of trading rules, or a regime, that constantly favours your position. For example, if a stock is rising, but its parent index has been falling for the last 5 weeks, you should not be tempting failure by going long! Instead, locate stocks that are acting weaker than their parent index (by using the stock scanner facility) and short these instead.
3.
Once you have your trading rules together – stick to them! When the system says “Get out!” - DO IT! If you can’t operate with discipline, it’s time to quit; otherwise you’ll blow yourself out of the market.
4.
Money management should be something that is pretty high up on your agenda. Over exposing your capital base when trading will very quickly leave you with nothing to trade with. Everyone has periods where they seem to lose several trades in a row, no matter what they do. To the savvy trader or investor, losses are considered part of the operating costs of the business. The subject of money management is outside the scope of this guide. There are many books on the subject, so if money management concepts are unfamiliar to you, our advice it to arm yourself with a good book.
Thank you for choosing TradeGuider.
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