The Art of Observation III
"Great works
are performed not by strength, but by perseverance."
~ Book of Reflections ~
Just two days
ago, I received an e-mail from a student who had a trade go wrong.
He was beyond distraught. The sky had figuratively
clouded over and he saw all his hopes and dreams shatter like a
living room window just assaulted by a homerun baseball. As I read
the description of how and why he entered into the trades he did,
I began counting the broken rules he had ignored but knew. At no time
in life are we allowed to move from the starting blocks to the
finish
line without traveling the distance between. This
is certainly and quickly evident in the realm of trading. Over the past
few weeks you have been led through a line of thinking that is
intended to take you from your starting block to the point
at which you can and will achieve extraordinary results in the
stock market. Today the journey continues with the next level of
TTC understanding. Remember that we first looked at price trend
as the beginning of your analysis of a stock, index, or commodity
chart. Next we observed the short term price moves away from the
larger and more established trend. As a reminder, take a look at
the following chart.
As you can see, I have placed the arrows over points at which
prices briefly moved against the established trend. The next
level of observation involves prices moving back into the broad
trend. When they do this, we have an opportunity to make money
by following along the path of least resistance. One of the
tools that work well for this job is a simple 7-day moving
average.
You see, we must have some way to quantify and define when
prices have indeed returned to their former trend. To fail
to have some
measure for this would be to simply guess as to when the right
time to go into the trade is. On the chart below, you’ll
find the addition of a 7-day moving average of price as a red
line.
We’ve
switched from a down-trending chart to an up-trending one as
you noticed. The red 7-day moving average line helps us
to quantify the short-term price movement quirks as compared to
the overall trend on the chart. On the next chart, I’ll add
arrows at the trade entry points. These arrows will be placed where
price has closed above the 7-day moving average after prices had
moved away from the broad trend. This chart has also been magnified
so you can more clearly see the exact entry point. Because we
were patient in observing what the chart had to show us, we were
richly rewarded by entering the trade at the correct
time. Here is what we looked for:
- The overall trend.
- Short-term
price movement away from the trend.
- A return
in price to the original trend.
Are you beginning
to see how simple this all really is? It becomes hard only
as you make it that way. Shakespeare must have
been thinking of stock charts when he wrote, “There’s
nothing either good or bad but thinking makes it so.”
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