ounded at the money you can make byspecializing in one trading strategy at a time.
368
TAKING ADVANTAGE OF MARKET BEHAVIOR
ROADMAP TO SUCCESSObjective
Course of Action
Trading approaches: When and howdo I begin trading?
Determining current conditions requireslooking at a number of different things:• Market sentiment utilizing sentimentanalysis techniques.• Technical outlook utilizing varioustechnical analysis tools.A conclusion is drawn from these readings. Itshould be assumed that no matter howcarefully you study market conditions or howcareful you are, you will make mistakes alongwith your successes. Human beings areunpredictable and therefore so are themarkets.• Cut your losses early.• Let your profits ride.
To begin, look at a graph of themarket.• Dow Industrial ($INDU)• Nasdaq Composite ($COMPX)• S&P 100 ($OEX)
Wall Street Journal and Investor’s BusinessDaily publish daily charts, or go online to anynumber of financial home pages.• Yahoo! Finance• MSN MoneyCentral• Optionetics.com (www.optionetics.com)• CNNfn• CNBC
There are three things that themarket does: Goes up, down,or sideways (trendless).
Look to see if a trend exists. It is estimatedthat the market trades in a flat range(sideways) about one-third of the time.• Consolidation phase in which sellers andbuyers (supply and demand) are inequilibrium.• Technical analysis tools that help identifytrends are of little use in this phase.• This type of market is very difficult tomake money in. Traders usually wait forthe next trend to develop, whether it is inan index or an individual stock.In Figure 12R.1 QCOM heads up, steepens,tops out, consolidates, then goes into adowntrend.
Figure 12R.1 Qualcomm’s ThreeTrends (Courtesy of QCharts(www.qcharts.com))
ROADMAP TO SUCCESS
369
A trend can be viewed in threedistinct sections:• Primary• Intermediate• Short-term
The long-term trend lasts a year or more. It isinterrupted by the intermediate trend, knownas a correction.• If the primary trend is up, the intermediatetrend will be down.• If the primary trend is down, theintermediate trend will be up. Manyanalysts and traders call it a bear marketrally or a bear trap.
When an uptrend begins, in either astock or an index, the early stagesare typically the most profitable.
Early trend identification yields the mostprofits.• Investor sentiment may still be extreme—bullish or bearish—as the new trendbegins.• Contrarian views are very useful at thisstage, because the crowd is always wrong.• Therefore, identification not only of trend,but also of sentiment indicators is critical.• There are definite chart patterns that canforecast (to a certain extent) the beginningof a new trend.In Figure 12R.2, AMD shows how profitable anew trend can be as it breaks out of aconsolidation pattern and turns north with avengeance.
Figure 12R.2 AMD Breaks Out(Courtesy of QCharts(www.qcharts.com))A new trend begins as the result of areversal of the old trend.
“The trend is your friend until the trendends.”
The Bottom: What It Looks LikeA market bottom sometimes takes a long timeThe launch pad for a new bull market. to put in place, certainly longer than a top.Here are some common characteristics of amarket bottom.• If pessimism is high, it will be indicated by:–A high VIX (above 30).–Put/call ratio indicates the crowd has adownward bias.–There are plenty of good reasons whythe market shouldn’t go up.• Rallies have stalled; as the stock or indexclimbs, volume drops off. People aretaking their profits quickly and leaving themarket.–The market reacts negatively to news,Figure 12R.3 Triple Bottom—good or bad.Starwood Hotels & Resorts (Courtesy–Interest rates have risen, and remainof QCharts (www.qcharts.com))high.
370
TAKING ADVANTAGE OF MARKET BEHAVIOR–Odd-lot short sales spike up (IBD) (The
small investor buys and sells at theexact wrong time).Stocks can put in bottoms withoutthe market.• The entire market doesn’t go up ordown at the same time.• Some sectors will bottom (andtop) before or after the market asa whole.
Many of the signals that apply to an index orthe broader market don’t apply exactly toindividual stocks. However, you can still lookat these sentiment indicators:• Large short positions: There’s a goodamount of open short positions, whichwould need to be covered if the stockbegan making a solid move up(www.trading-ideas.com).• Put/call ratio: Indicates a bearish bias.–E*Trade (www.etrade.com)–CBOE (www.cboe.com)• Volume has dried up, and the stock hasgone sideways for an extended period.
Figure 12R.4 Global CrossingSeptember 1999 Bottom (Courtesy ofQCharts (www.qcharts.com))Technical indicators to watch for:• Chart formations• Volume increasesIn Figure 12R.5, support is broken,higher lows and good volume markthe low, and stock breaks throughresistance.
Figure 12R.5 JNJ Daily (Courtesy ofQCharts (www.qcharts.com))
A stock or index will produce similar chartpatterns. Technicians place a great deal ofcredence in these, even if you don’t, becausethey show how the balance of supply anddemand fluctuates. Here’s a list of chartpatterns that would indicate a bottom hasbeen reached:• A double or even a triple “bottom.” Whenyou look at a stock chart it appears thelowest points look like legs sticking down,like table legs. When there are two, it’s adouble; three, of course, is a triple bottom.• The wider the legs are apart, the moresolid the base is. This means that a new uptrend could really go a long way. This iswhy so many traders like to see thesedouble and triple bottoms.The consolidation period indicates stock ischanging hands, from weak ones to strongones. Dow Theory states that this is the firststage of a bull market—the accumulation of astock by insiders and astute investors.
ROADMAP TO SUCCESS
Figure 12R.6 GE Daily—Support,Then Resistance, Then Uptrend(Courtesy of QCharts(www.qcharts.com))
371• The rounding bottom chart patternresembles the bottom of a bowl, thestock’s consolidation gradually shiftingfrom distribution to accumulation.Remember: Insiders (and some institutions)know best what the outlook is for theircompany. If you see them buying, it’s avery positive sign.• The Cup and Handle chart gets its namebecause of its appearance(www.stocktables.com).• The Inverted Head and Shoulders: A stockor index on a downtrend will have lowerlows and lower highs. The final two lowswill form the left shoulder. When the charthits the second low and rallies back, it hitsthe resistance line of the left shoulder anddrops, but not as far. (A higher low marksthe right shoulder.) Should the stock clearresistance on the next rally attempt, theinverted head and shoulders is completed,and is a very strong bullish (reversal)pattern (www.hardrightedge.com).
Figure 12R.7 Cup and HandleFormation—Trying to Rally aboutSupport/Resistance Line at Right(Courtesy of QCharts(www.qcharts.com))The Market Top: An AgonizingDecision to Sell
Figure 12R.8 Conceptus (CPTS)—Breaks Resistance, but Is LookingTop-Heavy (Courtesy of QCharts(www.qcharts.com))
When everything is going your way, andinvestor confidence is at its greatest, the top isnear. (The crowd is always wrong at theextreme highs and lows.)Sentiment indicators that suggest the marketis headed higher include:• Put/call ratio is bullish.• VIX is in low 20’s or even the teens. (Thisindicator is more reliable for indicating abottom rather than a top.)• Investors Intelligence survey (IBD) percentof bullish advisers is 55% or higher.Watch for other signals, too.• Specialist short sales are a very goodindicator. These are the people on the
372
TAKING ADVANTAGE OF MARKET BEHAVIOR
Figure 12R.9 Georgia Gulf (GGC)(Courtesy of QCharts(www.qcharts.com))Continuation patterns: resting orretreating?
Figure 12R.10 Amazon.com (AMZN)(Courtesy of QCharts(www.qcharts.com))
NYSE floor and are usually accurate intheir assessment of market direction.• Advance/decline line begins todeteriorate.• A rally attempt following a big rally fails,and on lower volume.• Odd-lot transactions are up. I sound like abroken record: The little guy, like thecrowd, is always wrong.In Figure 12R.9, GGC makes a nice rallyattempt, but cannot sustain it as buyersdisappear; goes on to break support asmassive selling appears.You watch a stock climb and you want toown it, but don’t want to chase it. When itstops for a rest, will it continue or reverse?• Watch for continuation pattern to form:–Ascending triangle–Pennant–Trendless range• A short consolidation is a weak one. Becareful for a reversal if the stock tries toclimb too soon.• Long consolidation is what to look for.Watch volume; breakouts on big volumeare the ideal situations to look for.• Bearish plays are possible if support isbroken; there’s no such thing as panicbuying, which is why stocks drop fasterthan they climb.In Figure 12R.10 Amazon.com breaksthrough a key support level after adescending triangle.In Figure 12R.11 Applied Materials has ashort narrowing consolidation period andbreaks to the downside on big volume—avery bearish sign.
Figure 12R.11 Applied Materials(AMAT) (Courtesy of QCharts(www.qcharts.com))Pulling the trigger; he whohesitates is lost.
When a consolidation ends and a new trendis forming, don’t be caught by analysisparalysis. Make your decision and go for it.
ROADMAP TO SUCCESS
373• Watch for trader’s remorse, which couldtake you out quickly. Give it some wiggleroom.• If it falls back into range, get out. You canalways buy it back.• Keep an eye on volume. Volume shouldtrend up (overall). If volume dries up asprice increases, be on the lookout for aquick reversal.• Use stochastics or another oscillator tohelp determine entry and exit points.
Use sentiment analysis for reversals.
Contrary indicators will help alert you tooverbought and oversold conditions.Look at stochastics, MACD, or RSI foroverbought/oversold readings.• Watch the put/call ratios for lopsidedsentiment.• On-balance volume indicators will alertyou to shifts in accumulation ordistribution. (This is the first phase of anew trend according to Dow Theorists.)• Insider buying or selling is a solid indicatorof the company’s fortunes by those closestto the information. They will bet with theirpocketbooks (www.insiderscores.com/index.asp).
Market Information Terminology:Overcoming the language barrier fora better picture of market activity.
• Market Breadth: Readings of how the overall market performed. This will provide youwith a more accurate picture of the underlying strength (or weakness) of the market.–Advances—Total number of issuesgaining in price.–Declines—Total number of issuesdeclining in price.–Unchanged—Total number of issueswhose prices did not change.• Advance/Decline Line—Compares thenumber of advancing issues (thoseincreasing in price) against those thatdeclined. Calculations are based on theopening trade of normal market hours ascompared to the closing price.• New Highs—Stocks making new 52-weekhighs. The number of new highs issignificant because in order for the marketto advance, a good number of stocks needto break out of their recent trading rangesinto new territory.
374
TAKING ADVANTAGE OF MARKET BEHAVIOR• New Lows—Stocks making 52-week lows.The opposite is also true for the new lows.Everyone, regardless of the purchase price,is underwater. Expect more selling if it staysdown, because investors cut their losses.• Advancing Volume—The combinedvolume of all advancing stocks.• Declining Volume—The combinedvolume of all declining stocks.• Total Volume—Trading volume of allstocks traded.• A/D Volume (and total volume)—A goodindicator of market strength. If the market isup big, but volume is poor, the rally’scredibility is uncertain; that is, it doesn’t domuch to inspire further buying, as investorsare sitting on the sidelines to get a betteridea of market direction. Large-volume daysare better indicators of market psychology;if it’s down or up on big volume, that’s yourcue as to sentiment and the trend.
TRIN—An overview of volumedifference between advancing issuesand declining issues.
The TRIN, or Trader’s Index, is the differencebetween advancing and declining volume. Areading above 1 means the market is sellingoff; below 1 the balance of volume is buyingvolume. The TRIN is useful intraday to act asa contrary indicator, signaling overbought oroversold conditions. A TRIN of 1.5 wouldindicate incredible selling pressure, and,according to the contrarian, a reversal is due.(The duration or magnitude of the reversal isnot so easily spotted.) A TRIN of .35 indicatesconfidence levels are high, and is thusconsidered to be a bearish indicator. Duringthe trading day, most traders watch thedirection the TRIN is going more than thelevels themselves. Only at the extremes is thenumber truly important.
Tick—This figure is derived by thenumber of stocks heading up andthen subtracting the numberof stocks headed down.
The typical tick will range anywhere from+500 to –500. However, the extremereadings of +1,000 or –1,000 serve asexcellent contrary indicators, because thistype of a reading cannot be sustained; it mustreturn to the normal trading range. It’s also agood idea to track the direction the tick isgoing. Direction is more important mosttimes than the actual reading.
ROADMAP TO SUCCESSVolatility levels can be defined as ameasure of the amount by which astock price is expected to change.
Determining Volatility Levels
More Terminology RegardingMarket Behavior
375Market pricing inefficiencies make certaintrades feasible.Calendar spreads: A calendar spread is createdby using long and short options with the samestrike price but different expiration dates.• The objective of this position is to havetime eat away at the short option while thelong option retains its value.• Look for options with unusually highimplied volatility in the front months andlow to normal implied volatility in theback months.The overall volatility in the market is mosteasily seen by the Volatility Index ($VIX).When the VIX is high (+30) it’s time to buy;when the VIX is low, it’s time to go.• More reliable for high readings than whenit gets low.• Bollinger bands are often used todetermine volatility of individual stocks.–www.equitytrader.com–www.clearstation.com spotlights stocksexperiencing high volatility readings.• Price envelopes are also used, but theywork for measuring extreme highs andlows by using a set average above andbelow the previous 20 days or so movingaverage of the stock.• Stock Price Cycles—There exists a groupof technicians who closely follow pricepatterns. Since patterns repeat themselves,cycles become observable. Probably themost notorious and well-known cycle is theElliott Wave theory. Cycles are discerned bycombining the application of movingaverages and oscillators over extendedperiods. For more information, go to:–Mr. P. C. Wong’s Presentation (home.netvigator.com/~pcwonghk/ewt.htm)–The Investment FAQ (www.invest-faq.com/articles/tech-an-elliot.html)• Declining Stock Behavior—A stock thatchanges direction, shifting from anuptrend to a down one, tends to exhibitsimilar chart patterns, although not everystock reverses the same way every time.Some important indicators will flash
376More Terminology RegardingMarket Behavior
TAKING ADVANTAGE OF MARKET BEHAVIORwarnings beforehand, in most cases. Someof these include:–Price Volume Divergence: The stockkeeps going up, but on decliningvolume.–A “Gap Down” Opening: This one istough to miss, especially if you own it.A stock will open lower than theprevious day’s close, creating a gap inthe chart. If it’s on heavy volume, thiscould spell trouble.–OBV Is Negative: On-balance volumeor OBV tracks the volume of buyers andsellers, and clearly illustrates on chartswhether a stock is under accumulationor distribution. The OBV line will trenddownward in a distributioncircumstance.–Analyst Downgrades a Stock: This kindof event will likely cause the abovesignals to show. Brokerage firm analystscan exert a lot of influence over astock’s performance. A downgrade canmean just an adjustment, or an obscuresignal to the firm’s clients to get out.–Earnings Warning: A warning from acompany, announcing they will missStreet expectations for the currentquarter is enough to send a stock to thedoghouse for a long time. Sometimesit’s a timing issue, sales being pushedback or didn’t get booked in time.Nonetheless, pay attention to anycorresponding downgrades fromanalysts.• Averaging Down—The concept ofaveraging down on a stock that movesagainst you sounds okay at face value, butin reality is discouraged. Perhaps a lowercost basis might mean profitability sooner,but usually not.• Rallies and Sell-Offs—The marketsexperience exaggerated displays ofconfidence and fear as shown by ralliesand sell-offs. A rally can mean thebeginning of an extended up move, or aretracement back from whence it came. Asell-off could mean profit taking or aserious correction. In both cases it’s hard to
ROADMAP TO SUCCESS
377
•
•
•
•
•
•
tell without getting some confirmation fromother indicators.Buybacks—Corporations do their best tocontinually boost their profitability, andsometimes the market just doesn’tappreciate it. It’s at these times a companywill announce it will go into the openmarket and buy back or repurchase sharesit has previously sold to the public. This isa bullish sign and a strong display ofconfidence.Stock Splits—Stock splits occur when acompany decides its stock price is (usually)too high, making it beyond the reach ofmost noninstitutional investors. A commonform is a 2:1 split, in which a shareholderreceives another share for every oneowned. If you owned 100 shares in a 2:1split, you’d end up owning 200 shares, butat half the presplit price. A reverse splitworks the other way. If it was a 2:1 reversesplit and you had 100 shares originally,you’d own half that, or 50 shares,afterward, at twice the previous price.Advancing Stock Behavior—Stocks in abullish mode will exhibit similar patterns.Fundamentally, demand will begin tooutweigh supply, but before then volumewill increase. There’s an old saying:“Volume precedes price.”Divergence—Divergence is a term appliedto any two indicators that begin togenerate conflicting signals. Divergencesare an early warning sign of a reversal inthe current trend of an index or stock, andare of great significance to traders.Correction—A correction is a mild downmove in an up leg of the market, and lastsa relatively short time. A correction turnsinto a bear market at 20% of a downmove from its recent high.Capitulation—A capitulation occurs mostoften in bear markets. It’s that point wherethe last optimist says, “I’ve had enough,”throws in the towel, and quits the market.Signs of capitulation occurring are a hugedown move on big volume, with marketsentiment indicators turning extremelypessimistic.
378
TAKING ADVANTAGE OF MARKET BEHAVIOR• Market Tops and Bottoms—Spotting abottom is almost easier than a top, due tothe near-cataclysmic cave-in of a bottom.A top is marked by an impressive displayof confidence and wanton disregard offear; big up day, impressive volume, lowVIX, and every indicator flashing buy.
Selecting a Profitable StockGo to the sector that’s currentlyperforming well. Here’s a list of sitesto assist you in determining who’sdoing well and who’s not.
Rabbitt Analytics(www.rabbittanalytics.com/default.htm)StockTables (www.stocktables.com)Screen It• www.radiowallstreet.com• www.hardrightedge.com• www.hoovers.com• www.investors.com• my.zacks.com/screening/index.php3
Find the best-performing stockswithin that sector.
Investor’s Business Daily ranks them daily(www.investors.com).EquityTrader.com has a more limited listing,but it’s very good, too(www.equitytrader.com).Zacks has a terrific list, too (www.zacks.com).
Consult Fundamental andSentiment Analysis
• Use the sites listed in Chapters 7 and 8 toreview fundamental analysis.• Compare and contrast to other companieswithin the same sector.• Use IBD to get a snapshot report card of thestock’s performance, ranking, and whetherit’s under net accumulation or distribution.
Watch Technicals for Perfect Timing
Look for the formations we’ve discussedpreviously. Look for volume changes,breakouts, and break downs. Ask yourself:“What trend is this stock in? Up, down, or isit trendless?”
Value Screening Methods
The Value Screen• P/E ratios.• Market price to book value.• Minimum earnings growth rate.• A minimum dividend payout ratio ordividend yield could be specified.• A minimum return on total assets orowners’ equity could be required to reflectthe profitability of the firm.
Growth Screening Methods
The Growth Screen• Current quarterly earnings are exploding.• Annual earnings growth rate is greater thanthe overall market’s earnings growth rate.
ROADMAP TO SUCCESS
379• Close to or making new highs.• Have a smaller number of sharesoutstanding.• Price is greater than $30 per share.
Momentum Screening Methods
The Momentum Screen• Stocks that are in the strongest industrygroups.• Stocks that have recently made new highsand pulled back off those highs.• Stocks that have given a technical signalthat they are ready to resume theirupward trend (i.e., stochastic positivebreakout).
Screening Sites
• Morningstar.com (screen.morningstar.com/stockSelector.html)• Wall Street Research (www.wsrn.com/home/dataset/search.html)• Zacks (my.zacks.com/index.php3)• Silicon Investor (www.siliconinvestor.com/stockscreen/simplescreen.gsp)• Quicken Stock Screen(www.quicken.com/investments/stocks/search)• Clear Station Technical Events(www.clearstation.com/cgi-bin/events?Cmd=techev)• Hoover’s Advanced Stock Screener(www.hoovers.com/search/forms/stockscreener/0,2221,71,00.html)
Buy/Sell Signals
Figure 12.16 has a list of indicators that offerclues as to when to buy and sell a stock. Inaddition, other indicators include:• Oscillator extremes.• MACD (watch the histogram).• RSI.• Stochastics.• Insider buying or selling: The assumptionhere is that if the people that know themost are buyers or sellers, shouldn’t thatmean something to you?• Watch out for people just selling forliquidity purposes only.• When restricted stock becomesunrestricted, this is called the lock-update. Many employees and directors willjump to realize their gains. Watch forprice gyrations as this date nears(www.ipolockup.com).
380
TAKING ADVANTAGE OF MARKET BEHAVIOR• Candlestick charts have some very reliablebuy and sell formations. For a list of 11reliable bullish candlestick patterns:www.geocities.com:0080/WallStreet/Market/1078/surfport.html.• Or Steve Nison’s page; this guy literallywrote the book on candlestick charting(www.candlecharts.com).
Trading Software
Trading software requires overcoming alearning curve. These programs takeadvantage of the ever-increasing power ofcomputers to screen and spot for variouschart formations, volume alerts, even foroption risk characteristics. I have a terrificprogram on my site:www.optionsanalysis.com.Other good ones include:• Telescan (www.telescan.com)• Big Easy Investor (www.bigeasyinvestor.com)• Omega Research (www.omegaresearch.com)• Investor’s Business Daily has an excellentonline program called Daily GraphsOnline (www.dailygraphs.com).• AIQ (www.aiqsystems.com)
Some Final Thoughts
You can know everything in this book andthen some, and still the market will humbleyou. Even the odds by following these hardearned words of wisdom:• If you have something major on yourmind, some event or condition thatprevents you from focusing on the market100%, don’t trade. Period.• If you experience a string of losses andyour confidence is shaken, wait a fewdays before entering the market, thentrade small. Get your swing back beforeyou start trading in earnest.• Do your homework. Know what yourentry and exit points are before you entera trade.
13The Path to Trading Success
Fortitudine vincimus.(“By endurance we conquer.”)—Ernest Shackleton, Antarctic explorerLearning the rules of trading and investing in the stock market is a long and arduousjourney. It is a road which took me many years to master. Even now, I know there isstill a great deal more to be learned. The day that I think I have learned all I need toknow to be successful in the markets is the day that I retire. I will then know there isnowhere to go but downhill. One thing I have learned is that the market is the greatest equalizer of education. Whether you are a Harvard MBA or a high schooldropout, the market provides each individual with the same risks and rewards. Eachday you will be evaluated by your successes and failures in the market. Hopefully,you will have a great many more successes than failures.The objective in writing this book has been to provide a path to trading success.In this final chapter, I would like to summarize the steps that I like to use. You maywant to integrate these steps into your own trading style or modify them to bettermeet your own trading needs. Your personality and your personal risk profile shouldalways guide you to engage the types of trading or investment that best fit yourlifestyle. In the end, if you find a path that fits your personality and one that you enjoy, you will surely be more successful in the long run.
THE BASIC RULES OF THE GAME
Rule 1: Understand the Psychology of the TradeFirst and foremost, you need to get your head straight as to how to win. You havetaken the very first step by reading this book and can follow it up by practicing what381
382
THE PATH TO TRADING SUCCESS
we have been preaching here. I hope this first step places you on the path to success.Just remember that each and every day is a learning process with the markets.Never believe that you are smarter than the markets, as the markets will always win.Get your head on straight—practice humility; but be aggressive enough to jumpinto promising opportunities. Your psychological makeup will be as much a factorin your success as your knowledge of and execution in the markets.
Rule 2: Acquire the Knowledge on How the Markets Truly WorkJust because you read a book on the markets doesn’t necessarily mean that everything will work for you as a trader. If you like an idea or a concept, test it. Then testit again and retest it. Until you feel comfortable with a trade idea or concept youwill not be able to properly implement the strategy. The market is a complex animal. You will need to experience firsthand how the market reacts to market information such as interest rate changes or how individual stocks react to earningsreports. You must remember that the market is notorious for giving false signals toeveryone who participates. The noise in the market can sometimes be like the thunderous roar of a tornado. Just be careful and don’t be swept away by it.
Rule 3: Develop a Working Knowledge of Entry and Exit OrdersYou may have knowledge of the markets, but until you know how to place youridea in the market properly your knowledge cannot be put to work. The types of orders you use both for the entry of the order as well as the exit of the order willgreatly affect your trading profits. You must learn when to use limit orders as wellas market orders. Test these orders in the market when you start to place yourtrades. You will see a big difference on how quickly you get filled as well as howyou react to the trade. Sometimes the most frustrating thing is to place an order inthe market and have to wait around wondering if it’s ever going to get filled. Youmay be amazed at how your nerves react to just waiting for a trade to be executed.
Rule 4: Understand How to Manage RiskIf you want to survive as a trader or investor, you must develop a healthy respect forrisk and how to manage it. Most people enter a trade dreaming about how much moneythey can make. I worry about how much I can lose. So before you place a trade, makesure you ask yourself two questions: What if I am right and what if I am wrong? It maybe more fun thinking about what will happen if you’re right, but you’ll play the gamemuch better if you spend more time concentrating on the ramifications of being wrong.It is absolutely critical to know how much you can lose or accept as risk before youplace a trade. You must accept risk as a daily part of your trading. Learning to managethe risk will enable you to stay in the game and reap more rewards. I like to have a visual picture of risk and reward before I place a trade. So I suggest you do the same.There are plenty of software programs specifically designed to help traders accomplish
HOW TO PICK A STOCK WINNER
383
this feat, or you can use the Platinum program located at the Optionetics.com web siteto help you understand exactly what a trade’s risk and reward looks like.
Rule 5: Pick a Strategy that Matches the Market ConditionsThe market is like a storybook that tells a new story every day. Opening that bookeach day to read the story demands that you learn to read between the lines in order toforecast market performance and apply the appropriate strategies. When you understand the many strategies you can use, you learn to match the strategy with the marketconditions. Markets go up, down, and sideways. No strategy works all the time. If itdid, we would all be filthy rich. So you need to learn to read the market conditions andadjust your trading approach accordingly. Since it is important to use