The Traders Journal

Tensile Trading: Stage #4 How to Put the Winds at Your Back with Stock Market Analysis

ImagesDon’t ever try to stand in front of a fire hydrant to quench your thirst – you’ll hurt yourself!  The same holds true if you try to trade the stock market without a clear methodology.  Global internet stock markets offer 24/7 temptations to those investors with no control.  The big fish tell the little fish to come on in – the water’s just fine.  The big fish know that if you operate without a personally appropriate well-designed investment approach, they can make a quick tasty morsel out of you.  The truth is that if you take the time to build a methodology and have the discipline to follow it, then you’ll be able to significantly shift the probabilities to your advantage and not become someone else’s lunch. 

In my Tensile Trading seminar, I make a concentrated 10-point effort to show you why you should put your trust in your charts.  Believing 100% in what you see – not in the chatter from the Wall Street disinformation machine – impacts in a big way the probability that you’ll become a consistently profitable trader.  As Bernard Baruch loved to say, “show me the charts and I’ll tell you the news.”

This is not just academic drivel but reality that’s based on my own trading journals.  Year in and year out, the lessons and conclusions are always the same as I recap my trades:  the majority of my winners materialize when I follow my methodology.  I’m not worried about sharing my holy grail with you. Why?  For 3 simple reasons:


 

  1. Most investors don’t have the necessary discipline – even if you handed them the keys to the kingdom.
  2. There’s that “not invented here” syndrome – you probably won’t use a methodology because someone else created it.
  3. Either the time frame or the specific instruments I trade don’t appeal to you.

Irrespective of these barriers, I’ll explain my methodology to you so that you can decide for yourself how you can best benefit from it.  My methodology is composed of 3 key elements.  The first is an approach that I call “Permission to Buy”.  It contains 6 chart-based modules that I study:

        a. Trend of the market
        b. Allocations (for example, is it a large, mid or small cap market?)
        c. Breadth, volume and volatility
        d. Sector analysis
        e. Industries
        f. Equities

The second element of my methodology focuses on timeframes.  The “Big Picture” comes first.  The analogy I use in my seminar is that it is much like science class where you explored your subject through a series of lenses.  To start, I examine years of monthly data through a large telescope lens.  Next, I fine-tune the focus by using daily data and weekly charts.  Finally, the last lens is much like a microscope that focuses on daily charts incorporating minute-to-minute data.  It’s like a good investigator who starts with the big picture first and then zeroes in on the minute details.    

The third element of my methodology is my tool kit of indicators.  Investors (and students) have a hard time believing the caveat that less is more.  My classes tend to be populated with very smart people who have succeeded in their careers and thereby accumulated assets for which they are now responsible.  Invariably, they seem to believe that adding just one or two more creative indicators will ensure fabulous trading results.  When I suggest otherwise, it sometimes doesn’t go smoothly!

To be precise, 10 is the magic number of indicators you should use – as shown by a whole host of studies and corroborated by my own experience.  My trading toolkit looks at 5 essential facets of an equity and then utilizes 10 technical indicators.  These are ten indicators that I understand thoroughly and know how best to apply them.

Trading Toolkit                                               Indicators

1.  Price action relative to the market        Price Relative

2.  Trend                                                         Trendlines  / Moving Averages  / ADX

3.  Volume                                                      Chaikin Money Flow  / On Balance Volume

4.  Momentum                                               RSI  / MACD /  Stochastics

5.  Reward to Risk                                          Point & Figure

How specifically these 3 elements of the methodology work together synergistically to increase the probabilities of making consistently profitable trades is the subject of a day-long seminar.  But there – in a nutshell – is my methodology.  If you can lay out your own methodology as succinctly as that, I bet you are well down the road as a successful investor.

To be candid, I have represented a picture of total technical analysis.  In fairness, I do look closely at earnings-related indicators, although I don’t fully weight it as one of my 3 essential elements.  These earnings-related indicators include items such as earnings growth, earnings surprises, earnings rankings and earnings trends.  I refer to it as the rational analysis part of me. 

I should also acknowledge the extensive influence that studying the works of Richard Wyckoff (1873-1934) has had on my trading.  I embraced his Composite Man model early on, and I’ve found it to be both powerful and profitable.  To dissect the market’s phases of accumulation, markup, distribution and markdown – and to consider the composite man’s true objectives at each cyclical phase – grounds one’s trading perspective in a manner like no other.  Given the opportunity, I could talk to you all day about the brilliance of Wyckoff.

My closing observation is that investment wisdom begins with the personal acknowledgement and acceptance of the fact that no one can predict the stock market with 100% consistency, but a logical chart-based investment methodology will significantly shift the probabilities for your investment success towards that direction.  Yes, it will indeed put the winds at your back.

Trade well; trade with discipline!
-- Gatis Roze

 

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Tony,Thank you for your comments and your interest in my blog. I use Candlesticks and Candle Volume for most of my chart plotting although on longer term charts I will use  OHLC Bars.Cheers,Gatis Roze
I'm enjoying your lessons. There's one thing that I didn't see in #4, and that's how price data is plotted on a chart; I like Heikin-Ashi candlesticks. Maybe you will be covering this in a future lesson.
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