The 7 Steps Of Every Market - Ignore Them At Your Own Peril

The SEVEN STEPS that every trader needs to know to succeed in trading.

Step 1: A move begins with the sponsors (smart traders) who have insider knowledge as it relates to a particular stock or market. This information will move a market up or down depending on the insiders' information. These buyers are smart, very smart, and recognize trading/investment opportunities very early in the markup cycle.

Continue reading "The 7 Steps Of Every Market - Ignore Them At Your Own Peril"

Why charts are important

When prices form pictures on charts, you can obtain realistic objectives for later moves. One of the most reliable chart formations is the head-and-shoulders top or bottom. This easily recognizable chart pattern signals a major turn in trend.

The main advantage of the head-and-shoulders pattern is it gives you a clear-cut objective of the price move after breaking out of the formation. Measure the price distance between the head and the neckline and add it to the price where the neckline is broken. This projects the minimum objective. Although the head-and-shoulders gives no time projection, it predicts a very strong trend in the future.

In most cases, a head-and-shoulders formation will be symmetrical, with the left and right shoulders equally developed. Although the neckline doesn't have to be horizontal, the most reliable formations stray only a little.

Flags and pennants are consolidation patterns which give objectives for further moves. As the formation develops, price action in an uptrending market will look like a flag flying from a flagpole as prices tend to form a parallelogram after a quick, steep upmove. Flags "fly at half-staff." The more vertical the flagpole, the better.

A price objective is obtained by measuring the flagpole and adding it to the breakout point of the formation. The flagpole should begin at the point from which it broke away from a previous congestion area, or from important support or resistance lines. Flags in a downtrending market look like they are defying gravity and slant upward.

Continuation patterns

A pennant also starts with a nearly vertical price rise or fall. But, instead of having equal move reactions in the consolidation phase like a flag, pennant reactions gradually decrease to form short uptrend and downtrend lines from the flagpole.

The same measuring tools used in flags are used in pennants. Add the length of the flagpole to the breakout point to get the minimum objective. Remember, flags and pennants are usually continuation patterns in an overall trend which resumes after the breakout of the consolidation area.

Also, the coil formation, or symmetrical triangle, appears while prices trade in continually narrower ranges, forming uptrend and downtrend lines. This pattern doesn't tell you much about the direction of the next move. After breaking one of the trendlines, the objective is found by adding the width of the coil's base to the breakout point.

Cattle Monthly Futures

Springing from coils

The formation gets its name from the way prices contract and suddenly spring out of this pattern like a tight coil spring. One caution about this formation: It's best if prices break out of the formation while halfway to three-quarters of the way to the triangle's apex. If prices reach the apex, a strong move in either direction is less likely.

Ascending and descending triangles are similar to coils but are much better at predicting the direction prices will take. Prices should break to the flat side of the triangle.

Price objectives from ascending and descending triangles can be obtained two ways. The easiest is to add the length of the left side of the triangle to the triangle's flat side.

Another method of projecting price is to draw a line parallel to the sloping line from the beginning of the triangle. Expect prices to rise or fall out of the triangle formation until they reach this parallel line.

Gold Weekly Futures Corn Weekly Futures

More objectives

In the chapter on trends, we mentioned double and triple tops and bottoms. These formations also provide us with objectives. Once a double bottom is completed, prices should rise at least as far as the distance from the bottom of the "W" to the breakout point.

A double bottom is confirmed when prices close above the center of the "W" formation. This is referred to as the breakout. The difference from the bottom of the formation to the top gives a price objective. Targets for price declines from double tops are figured the same way.

Often, prices will retest the breakout point after completing the formation. After a double top is completed, prices may briefly rebound to test the resistance, which is the same point where the original double top was completed.

Adam Hewison


Co-creator, MarketClub

Traders Toolbox: The Elliott Wave Principle

As with any tool, the Elliott Wave Principle is not the answer to most analysts' problems. It is only a tool, but used properly with other analytical aids, it can greatly enhance the understanding of the overall direction of a market.

The following discussion will be very basic. The primary goal is to give you an understanding of the basic structure or skeleton of a market.

With all due respect to Robert Prechter, I have seen very few other analysts survive almost solely on the Elliott Wave theory. However, having a working knowledge of the principle can prove invaluable when analyzing markets. While I do not purport to be an Elliott Wave expert, I have had success applying many of the basic elements of the principle. In fact, I like to think of myself as an Elliott Wave realist instead of a theorist.

I like to compare the Elliott Wave theory to an outline one might use to present a speech; it provides a general format to follow without having the text etched in stone. The primary pattern for a market consists of a 5-wave rally, as illustrated, followed by a 3- wave downmove, commonly referred to as an a-b-c correction. The 5-wave pattern is referred to as an impulse wave which means a wave in the direction of the prevailing trend.

The primary 5-wave structure may be subdivided into smaller 5-wave patterns, creating smaller impulse waves followed by a-b- c corrections. Note after these waves combine to create a 5-wave move, a larger a-b-c correction forms. The a-wave is shown in this example as a 5-count pattern, indicating this is the direction of the near-term trend and only the first part of a larger degree corrective move. Be aware that an a-wave may or may not be a 5- count wave but that a c-wave invariably will contain 5 swings.

Also take note that the a-b-c corrections ideally return to the area of the previous fourth wave. This may be followed by a new impusle wave or by a congestion or sideways pattern.

For an in-depth discussion of the Elliott Wave theory, I suggest you get the book Elliott Wave Principle, by Frost and Prechter. This book should be part of any serious technician's library.
<h2>Basic wave extension</h2>
As with any theory, reality proves variations of the ideal pattern will occur. The primary variation of an impulse is an extension.

An extended wave generally is an elongated or protracted wave within the 5-count basic wave. Extra swings develop which commonly appear to be individual primary waves but actually form a single impulse wave. The wave extensions are generally larger than the minor degree swings within a primary wave but often are not as large or clearly denned as the primary waves.

At times, the extended waves are difficult to distinguish from the primary waves, giving the appearance of a 9-wave structure. The extension is undefined, which is not critical since a 9-wave structure is an extended 5-wave pattern and holds the same level of importance. When dealing with an undefined extension, I have found the subsequent a-b-c correction often terminates in the area of wave 6 (see arrow) instead of the normal area of wave 4.

While the extra swings or extensions may occur within the first or fifth wave, the most common location is within a third wave. Extensions are common, especially in bull markets; generally an extension should be expected to occur in one of the three primary impulse waves. However, extensions normally occur in only one primary wave.

Once an extension has occurred, you can expect the subsequent wave(s) to be easy to identify 5-wave patterns. If the first two impulse waves form without exhibiting an extension, the final wave can be expected to contain an extension; if the first two impulse waves are of similar length as well, the last has the potential to be explosive. Explosive fifth waves may contain extensions within extensions.

For an in-depth discus sion of extended waves, lmpulae read Chapter 1 of Elliott Wave Principle by Frost and Prechter.

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Attitude = Altitude in trading

One of the most important tools that a trader possesses is his or her mind. Attitude can either make or break you as a trader.

To become a successful trader it begins with believing in yourself and having a winning attitude.

Everyone wants to be a winner, at least they think so. Unfortunately, most are not willing to perform the tasks necessary to become a consistent winner.

Winners generally achieve success by being focused on a goal. Being focused allows winners to remain committed to the tasks at hand. Most winners perform a lot of hard work, including a willingness to deal with sometimes mundane duties. Most of all, winners perform with an "I am responsible for both my failures and successes" attitude.

So, where does the would-be trader start to become a success? By focusing on the tasks at hand. Most of all, treat trading as a business. And, as in any business, money management is critical.

Money management, next to trend, is probably the aspect of trading most overlooked by smaller investors. Man, by nature, is an optimistic creature and the amateur trader often acts instinctively. Unfortunately, this instinct or optimism is often the undoing of the smaller trader.

When a person enters a trade, he does so with the hope that it will be a winner. When the position goes against him, he keeps thinking (or hoping) "it will come back." He knows he should have a stop in place, but hope keeps telling him to stay just a little longer since everybody knows, "you always get stopped out the day the market turns." Eventually, hope turns into frustration, desperation and, finally panic which prompts the trader to issue a GMO (get me out) order.

If the trader hasn't learned his lesson by this point, he develops the "I have to get it back" syndrome. He generally rushes into another poorly planned trade, throwing good money after bad.

Winners show several different characteristics. They enter the market knowing they can be wrong and, in fact are wrong as often as they are right. They have learned markets don't run on hope. They understand markets tell them when they are right or wrong. When a trader is losing money and getting worse, the market is telling them to get out.

Bad Trades

A bad trade is like a dead fish:The longer you keep it, the worse it smells.

Good Trades

When a trade is making money, the market is telling them they are right and to let the position ride.

Don't ever do this ...

Winners don't add to, or "average", losing positions. They dump the trade and go looking for a new opportunity. Successful investors may add to the winning trades. When ahead, they press their advantage while remembering that at any time the market can turn on them and prove them wrong.

In trading keep your mind clear and do not get emotional about a trade. Remember you are not married to a stock rather you are in the dating game.

Learn more about common sense trading.

Adam Hewison

Co-founder of MarketClub