- Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.
- Cup: The cup should be "U" shaped and resemble a bowl or rounding bottom. A "V" shaped bottom would be considered too sharp of a reversal to qualify. The softer "U" shape ensures that the cup is a consolidation pattern with valid support at the bottom of the "U". The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.
- Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3, which is conforms with Dow Theory.
- Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennantthat slopes downward, other times just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the retracement is, the more bullish the formation and significant the breakout. Sometimes it is prudent to wait for a break above the resistance line established by the highs of the cup.
- Duration: The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.
- Volume: There should be a substantial increase in volume on the breakout above the handle's resistance.
- Target: The projected advance after breakout can be estimated by measuring the distance from the right peak ofthe cup to the bottom of the cup.
April 1, 2011
The Cup & Handle
$HS - Break Out on Heavy Volume Today
After basing for almost two months, nice break out on heavy volume. Just getting started.
Trading
Do not sit down and enter a position right away- see what is going on first
Do not fight the trend- wait for indicators of a reversal such as increase in volume, technical indicators- double top or bottom,
After a successful trade and the stock settles down- wait for it to show you something before entering into the same position as before because you think you are going to miss the “real move”
Do not initiate a position at the resistance or support- instead wait for it to break the level then get involved ( do not buy hole numbers or other such levels unless you are adding to a position)
If the market is quiet be more selective about trades to enter because you will get jigged out and end up paying spreads and not being confident enough to hold the position even if you are right
Make each trade count- do not enter a position without knowing why you are involved- have a reason: market movement, tops, bottoms, increase in volume, levels
Do not chase a stock as it is moving unless you are adding to an established position; instead, wait for the pullback and when the stock settles down and it looks like a promising trade then get in
Do not get frustrated and try to fight a trend and keep shorting into an up move or vise versa and then decide to flip especially when nothing is going on- be selective, keep your cool
Try to choose one way and stick with it instead of going back and forth, but if you are wrong do not hesitate to rethink your strategy
If you are playing a stock based on hidden buying and selling- not in the book then be more patient. Take one long position from a good entry point and hold onto it rather than constantly getting in and out- churning
Do not trade if you are in the wrong frame of mind
If you start off the month on a bad note do not try to make it back in one day…have one solid day and build off that
Identify a trend in the market and the sector and stick with it until you see a real reversal- use the pullback as entry points of following the trend instead of thinking every small move up or down is the beginning of a reversal
When choosing tops or bottoms, be quicker to hit out when things go against you because the trend is still holding
Use the 50 day EMA to identify trends in the stock- it will act as support or resistance and once it breaks to the other side the stock should start to move
Stock selection is key- do not get hung up on one stock if you are unable to make money in it
After making a nice push in the morning do not be afraid to stop trading- and if you do decide to trade- pick your spots better and have a real plan instead of doing random trades
If you are going to trade a volatile stock like PD, do not protect your PL when you trade or else the risk your taking on is greater than your reward
Do not base your trades on news that you read. If the stock shows you otherwise then trade the stock accordingly instead of sticking with a bias. Use the news as a guide but do not base trades on it unless it is confirmed by the stock itself
Resist the urge to trade stocks that you have not been carefully watching
If you make a good trade in one direction and get out successfully, then try to get back in on the same side and it doesn't work- do not continue to do it- instead, wait for the stock to show you that the trend is continuing and then get involved
Use volume as an indicator of overall market activity
When volume is lower than usual it means that institutions are not active and stock moves will trend less and have little follow through
When volume is lower be quicker to scalp and do not get involved as much because although the futures may be swinging the stocks will not react and it will cause you to write tickets and lose money by paying the spread only causing frustration
Track the volume of the stocks you follow for periods of the day- such as how many shares until 11, until 12, etc.
On slow days, be quicker to switch to another stock/sector. Don't let pride hurt your trading
On slow days, if you get off to a bad start and then make half of it back- take that as a positive and stop trading...However, if the market is active and you get burned early, refocus and carry on trading normally
If you lose on your first few trades take a step back and understand what you are doing wrong instead of repeating the same thing over and over
Do not flip in between stocks- if you are trading poorly in one, then switch- if you succeed in the new stock do not go back to the other one unless you think you have reevaluated it enough to be able to trade it successfully
Do not make trades hoping for a miracle by getting into massive size for no reason
Do not fight the trend- wait for indicators of a reversal such as increase in volume, technical indicators- double top or bottom,
After a successful trade and the stock settles down- wait for it to show you something before entering into the same position as before because you think you are going to miss the “real move”
Do not initiate a position at the resistance or support- instead wait for it to break the level then get involved ( do not buy hole numbers or other such levels unless you are adding to a position)
If the market is quiet be more selective about trades to enter because you will get jigged out and end up paying spreads and not being confident enough to hold the position even if you are right
Make each trade count- do not enter a position without knowing why you are involved- have a reason: market movement, tops, bottoms, increase in volume, levels
Do not chase a stock as it is moving unless you are adding to an established position; instead, wait for the pullback and when the stock settles down and it looks like a promising trade then get in
Do not get frustrated and try to fight a trend and keep shorting into an up move or vise versa and then decide to flip especially when nothing is going on- be selective, keep your cool
Try to choose one way and stick with it instead of going back and forth, but if you are wrong do not hesitate to rethink your strategy
If you are playing a stock based on hidden buying and selling- not in the book then be more patient. Take one long position from a good entry point and hold onto it rather than constantly getting in and out- churning
Do not trade if you are in the wrong frame of mind
If you start off the month on a bad note do not try to make it back in one day…have one solid day and build off that
Identify a trend in the market and the sector and stick with it until you see a real reversal- use the pullback as entry points of following the trend instead of thinking every small move up or down is the beginning of a reversal
When choosing tops or bottoms, be quicker to hit out when things go against you because the trend is still holding
Use the 50 day EMA to identify trends in the stock- it will act as support or resistance and once it breaks to the other side the stock should start to move
Stock selection is key- do not get hung up on one stock if you are unable to make money in it
After making a nice push in the morning do not be afraid to stop trading- and if you do decide to trade- pick your spots better and have a real plan instead of doing random trades
If you are going to trade a volatile stock like PD, do not protect your PL when you trade or else the risk your taking on is greater than your reward
Do not base your trades on news that you read. If the stock shows you otherwise then trade the stock accordingly instead of sticking with a bias. Use the news as a guide but do not base trades on it unless it is confirmed by the stock itself
Resist the urge to trade stocks that you have not been carefully watching
If you make a good trade in one direction and get out successfully, then try to get back in on the same side and it doesn't work- do not continue to do it- instead, wait for the stock to show you that the trend is continuing and then get involved
Use volume as an indicator of overall market activity
When volume is lower than usual it means that institutions are not active and stock moves will trend less and have little follow through
When volume is lower be quicker to scalp and do not get involved as much because although the futures may be swinging the stocks will not react and it will cause you to write tickets and lose money by paying the spread only causing frustration
Track the volume of the stocks you follow for periods of the day- such as how many shares until 11, until 12, etc.
On slow days, be quicker to switch to another stock/sector. Don't let pride hurt your trading
On slow days, if you get off to a bad start and then make half of it back- take that as a positive and stop trading...However, if the market is active and you get burned early, refocus and carry on trading normally
If you lose on your first few trades take a step back and understand what you are doing wrong instead of repeating the same thing over and over
Do not flip in between stocks- if you are trading poorly in one, then switch- if you succeed in the new stock do not go back to the other one unless you think you have reevaluated it enough to be able to trade it successfully
Do not make trades hoping for a miracle by getting into massive size for no reason
The 10 Commandments of Trading
By Todd Harrison
Former Vice-President f Morgan Stanley
THE 10 TRADING COMMANDMENTS
RULES LEARNED FROM A CAREER OF SUCCESSES AND MISTAKES
I remember why I wanted to be a trader. I figured that the easiest way to make money was to stand near the cash register. Of course, as I discovered through my 16-year career, there's a reason why consistent producers get paid the big bucks. Flashy bets and big swings sometimes connect but, in the end, a disciplined approach pays the bills. I've tripped plenty through the years, the types of missteps that almost cost me my livelihood. But I preserved, climbed the ladder and morphed those mistakes into valuable lessons. My approach wasn't always constant but, in the end, certain rules allowed me to stay in the game.
These are the rules:
1. Respect the price action but never defer to it. The action (or "eyes") is a valuable tool when trading but if you defer to the flickering ticks, stocks would be "better" up and "worse" down and that's a losing proposition. This is a particularly pertinent point as headlines of new highs serve as sexy sirens for those on the sidelines.
2. Discipline trumps conviction. No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and, above all, never believe that you're smarter than the market.
3. Opportunities are made up easier than losses. It's not necessary to play every move, it's only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.
4. Emotion is the enemy when trading. Emotional decisions always have a way of coming back to haunt you. If you're personally attached to a position, your decision making process will be flawed. It's that simple.
5. Zig when others zag. Sell hope, buy despair and take the other side of emotional disconnects in the context of controlled risk. If you can't find the sheep in the herd, chances are that you're it.
6. Adapt your style to the market At various junctures, different investment approaches are warranted and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you.
7. Maximize your reward relative to your risk If you're patient and pick your spots, edges will emerge that provide an advantageous risk/reward. Proactive patience is a virtue.
8. Perception is reality in the marketplace. Identifying the prevalent psychology is a necessary process when trading. It's not "what is," it's what's perceived to be that dictates supply and demand.
9. When unsure, trade "in between" Your risk profile should always be an extension of your thought process. If you're unsure, trade smaller, or paper trade, until your identify your comfort zone. Trading "feel" is cyclical and any professional worth his or her salt must endure slumps.
10. Don't let your bad trades turn into investments. Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk off win or lose.
There are obviously many more rules, but I've found these to be the common thread through the years. Each of you has a unique risk profile and time horizon, so some of these commandments may not apply. As always, I share these thoughts with the hopes that it adds value to your process. Find a style that works for you and always allow for a margin of error. No approach is failsafe. If there wasn't risk in this profession, it would be called "winning," not trading.
Dennis Gartman's Trading Rules
1. Never, Ever, Ever, Under Any Circumstance, Add To A Losing Position... not ever, not never! Adding to losing positions is trading's carginogen; It is trading's driving-while intoxicated. It will lead to ruin. Count on it!
2. Trade Like A Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types; mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not A Business Of Buying Low And Selling High; It is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. "Markets Can Remain Illogical Far Longer Than You Or I Can Remain Solvent." These are Keynes' words and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show The Greatest Strength; Sell Markets That Show The Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like A Fundamentalist; Trade Like A Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand, them run in tandem.
9. Trading Runs in Cycles; Some Good; Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In "good times," even errors turn to profits; in "bad times," the most well researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we've known have the simplest methods of trading. There is a correlation here!
11: In Trading/Investing, An Understanding Of Mass Psychology is Often More Important Than An Understanding of Economics: Simply put, "When they are cryin', you should be buyin'! and when they are yellin', you should be sellin'!"
12. Bear Market Corrections Are More Violent And Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow... usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient With Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year... and our profits grow accordingly.
15. Do More Of That Which Is Working and Less Of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; Cut back, or eliminate losing ones. If there is a "secret" to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken.... but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
2. Trade Like A Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types; mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not A Business Of Buying Low And Selling High; It is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. "Markets Can Remain Illogical Far Longer Than You Or I Can Remain Solvent." These are Keynes' words and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show The Greatest Strength; Sell Markets That Show The Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like A Fundamentalist; Trade Like A Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand, them run in tandem.
9. Trading Runs in Cycles; Some Good; Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In "good times," even errors turn to profits; in "bad times," the most well researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we've known have the simplest methods of trading. There is a correlation here!
11: In Trading/Investing, An Understanding Of Mass Psychology is Often More Important Than An Understanding of Economics: Simply put, "When they are cryin', you should be buyin'! and when they are yellin', you should be sellin'!"
12. Bear Market Corrections Are More Violent And Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow... usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient With Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year... and our profits grow accordingly.
15. Do More Of That Which Is Working and Less Of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; Cut back, or eliminate losing ones. If there is a "secret" to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken.... but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
The Cycle of "It"
Written By: Sam Seiden
I have been in the trading and trading education world for many years. This has allowed me to watch traders grow at different levels and reach different levels of success, and failure. I have often wondered and speculated on the difference between those who achieve success and those who fail. For me, the answer lies in the proper definition of success when it comes to trading, or any occupation for that matter.
Let me explain a scenario that I have experienced hundreds of times with individuals going through trading education. There was a gentleman back in 1999 that I met at a trading seminar. He walked up to me before it started and introduced himself. He had been reading my daily trading advisory letters and was very excited to meet the face behind the letter and take the seminar that I was giving. He explained that he had a family and that trading was going to be "IT" for him. He wanted to make lots of money at it and do it for a career. After the seminar, he thanked me and could not wait to get home and get started on his quest for "IT". A couple weeks after the seminar, he sent me an email and said he was doing well but he said "Sam, if I could only take all my stop losses according to plan, I would really make IT". Time went by and I contacted him and asked him if he made "IT"? He said yes. I said, "How is IT"? He said "IT" was good. He then said that if he adjusted his rules a bit and added a moving average for a trail stop, he could hold on for larger gains and really make "IT"! More than a year went by before I heard from him again and when I did, I asked him the same question, "Did you make IT"? He said he did. I asked him how "IT" was and he said, "IT was good". He also added that his marriage was falling apart and he did not know where things were going in his personal life. He said that he only needed to make a little more money from trading than he did from his day job to quit the day job and that this would be "IT", this would save his marriage, his family.
Let me let you in on something I realized long ago: "IT" is never "IT". The "IT" cycle will have you chasing an illusion of happiness your whole life in many forms if you let it. If you are looking for "IT", it only exists in a much grander vision. This grander vision will meet all your needs and become "IT" for you. I want to invite you into a simple reality that most consistently profitable market speculators share. They are not looking for trading to be "IT" for them. They have a much grander vision. The best traders I know spend very little time trading and spend less time talking about trading. They make plenty of money trading and they use that money to feed the grander vision. One person I know has done very well in trading and has bought three vacation homes on a lake all next to each other. He has a family with many kids and invites families who would not be able to afford to do this to stay at these vacation homes in the summers. His life is all about his family, which has always been his grander vision. Because of this, he is not looking to change or improve his trading strategy, he does fine. In fact, he never talks about his strategy; he would never waste the time as he is too busy with his grander vision. I know his strategy and let me tell you, I see many people come out of the Online Trading Academy classes with better strategies that don't make money because they are always looking to improve the strategy so they can really make "IT". People who keep changing their trading strategy and keep taking more and more seminars never make it in trading. They are always looking for "IT". From what I see, the successful people at Online Trading Academy become passport members, take the classes, and then go and run the strategy they have developed from the education. They don't rush off to take more and more seminars and courses. The group that has taken every trading course around the world and has read every trading book written is not the group that makes money trading. This is the group that typically pays those who have a grander vision.
In trading, the best outcome each day is more money in your account. If you keep striving for more money, you will never be happy because you will never have all the worlds' money. How many times do men and women get into relationships because they think that partner is "it" for them? They are counting on that partner to make them happy and fill all their needs and voids. These relationships always fail because the other partner will never meet these expectations. So much pressure is put on that partner to be "it" for that person. Trading is not all that different. The pressure people put on themselves with unrealistic expectations is simply setting you up for failure.
Why do I trade? The focus for me is the grander vision, not attempting to attain all the worlds' money. THIS is what allows me to run a simple and successful trading strategy year after year after year. I have not changed one thing about how I trade in many years. The income from trading allows me to feed my grander vision. I have played hockey all my life and still play in the most competitive leagues around. I also coach kid's hockey and that has been great for me. Many of these kids can't afford to do certain things that will benefit them. Trading allows me to dive into these kids' lives and expose them to things most of them could not afford to do on their own. I don't have an I-Pod. I felt much better buying these kids one-year family memberships to the fantastic museums in Chicago. Hhmm, loud music in my ears or exposing a child to some of the best science, art, and history museums in the world? If I wanted the I-POD, I would also want the I-Phone, and the I-Car, and the I-life… You see, "IT" never ends and in the trading world, this thought process will drain your account. Instead of buying the latest power computer, my grander vision had me buy the Dr. Seuss series of books for a local school in the area that didn't have a budget for new books. My grander vision is making a difference in the life of children that will end up making a positive difference in the world. That is what I spend most of my free time doing. This just so happens to also allow a successful trading strategy to run, there is no pressure of better numbers and more dollars.
The next time you have a few minutes and you are about to tweak that trading strategy because your strategy, while profitable, may not be allowing you to really make "IT", understand that "IT" is never "IT". You are likely chasing something that does not exist. You're walking east and west trying to find the North Pole. Instead, open your mind to the possibility of a much grander vision that has nothing to do with trading. In doing this, you may just find that the grander vision is what will finally allow you to execute your successful strategy with disciplined precision for the rest of your life. More importantly, this grander vision is likely where you will find "IT".
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