Best Thread The Basics of Trading

First of all FTSE, can I say that this thread is excellent , no matter how much we know or think we know, threads like this just go to show we don't or if we do, we've forgotten most of it or it's become a little bit murky.


That done, here's my sixpenneth on the Dxns chart.
 

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FTSE I don't doubt that TA works for you, and for an awful lot of the guys on here, and I'm only raising the following point as a matter of intelectual debate- not out of obnoxiousness ( I have no personal trust nor faith in TA) In the above 6 months Dixon's chart- posted yesterday afternoon. Did you, go long at the 120 level after seeing the gap appear? surely anyone other than a long term investor, who went long hoping for the gap to be filled, would have been wiped out by the fall to 80p? In the long term almost every trade will come right- it's just very few of us here run a trade for the long term.

There was another Phillip Cogan article in the FT yesterday- did you read it? But do you trade purely from charts? or do you combine TA with FA? or gut feeling?

Wayno
 
FTSEB.
Thanks for the lesson on gaps,this answered a query I had with gaps.
I have read some posts on T2W and they mention Trading Set-
Ups.I understand this is about looking for the best entry patterns
to trade,EG failed retest etc.
Could you please tell me the best set up you use to enter a trade either long or short.Could you set them out in order of importance.
I am looking at position trading as apposed to day trading,hope you can help.
Regards.
 
Hi Lockstock.

I'll have a closer look at your analysis in the next day or two. I like to give others a chance to put their views forward :)


Hi Spreadbet.

Sorry no Holy Grail. I gave up looking a long time ago. :eek:


Hi Fluke

The next topic will be looking at strategy building :)
Should be done over the weekend....all things being well.
 
Some thoughts on Gaps:

A price gap occurs when the market opens sharply higher or lower and therefore misses out a section of price, which appears on the bar chart as an open space. Clearly they occur most frequently in markets which have been closed overnight. It is a period of high volatility.

There are three main types of gap:

The Breakaway Gap

This gap signals the beginning of a new trend, normally within the completion of a major reversal pattern. The gap is usually created on heavy volume and is not immediately filled.

Runaway or Measuring Gaps

This is where the market is in an established a trend and gaps up again in the direction of trend. It can be partially filled, but that is unusual. It has predictive value in the sense that it usually appears at the 50% level in the up or down trend.

The Exhaustion Gap

Appears near the end of the trend and is nearly always filled. It denotes a market that is exhausted as the price quickly falls back against the prior trend and into the gap.

Price Gaps Example

gap1.gif


A classic set of gap plays occurred in the run up of the nasdaq:

gap2.gif


The Island Reversal

The Island reversal occurs at the top or bottom of a market. The first part of the formation is an exhaustion gap followed by a period of sideways price action. The market then gaps in the opposite direction of the previous trend (downside breakaway gap). The chart pattern appears detached from all the other price action.

gap3.gif



Please note:

1. Gap trading is an artform in its own right, there are not too many traders who manage to make money out of it because:

a. most consider that all gaps must be filled - this is completely incorrect and liable to cost money.

b. most do not consider the 'bigger picture' when looking at gaps and as such do not take a view on what type of gap they are likely to be facing.

2. The easiest way of treating gaps is as a band of support or resistance, nothing more or less. In doing so it gives you specific levels from which you can formulate your trade plan.

3. The most reliable gap pattern is the island reversal.

4. You will rarely see gaps on cash indices as they inevitably open at the previous days close - you will only see the true gap in the futures markets.

HTH

TBS
 
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Hi all

Thank you to those who have replied and thank you TBS for another excellent post :)

Lockstock - your analysis was spot on. The important thing to spot was the gap leading up to the filling of the previous gap.

I hope that covers the important parts about gaps, and as TBS has said they are a good form of support and resistance :)

As I've said I'm going to be talking about strategies over the weekend, and if anyone would like me to talk about a specific thing the week after, please feel free to contact me :)
 
Hi all

I’ve now covered the major basic areas of TA trading, so now it’s time to bring them altogether and start building a workable strategy. :)


Strategy Building

The strategy should be so clearly written, so that at any point you should know what to do. This will make trading a lot easier and a lot less stressful, there can be nothing worse than looking at a losing position and not knowing where to get out, or how big the loss is going to be.
There are a number of elements that make up a good strategy and it will be different for every trader. Here are the most important elements:


Which markets

It may sound obvious, but which markets are you going to trade and are you able to trade them. It’s no good deciding to trade the UK markets on a day-trading basis if your doing a full-time job during the day.
You also have to ask yourself “What advantages does this market have over the other options I have available?”


Who am I going trade through

How are your trades going to hit the market. Will you use a spreadbetting company, a CFD account or a traditional broker?
Which has the greatest advantages and do they have the level of service you require. Some people might find that spreadbetting offers the best deal for trading, but it might not be best for everyone.


Entry criteria

This is where things have to be detailed.
Are you looking to buy low and sell high (swing trading) or buy high and sell higher (momentum trading). What will get you into the market.
Are you looking for a test of support to hold price up, or are you happy to get in mid-move. What will be the factor that confirms whether you take the trade or not. E.g. You might be looking for the general index to be moving higher, or might be looking for some sort of indicator to signal a move in your favour is imminent.
Does the trade your about to take have a good risk / reward ratio. As I’ve said before, I would be reluctant to take any trade with less than a 3:1 R/R ratio.
How are you going to place your trades. Are you going to use limit orders or market orders to get you in.


% Risk of capital on any trade

I’ve mentioned earlier that 1-2% of risk on every trade is reasonable. Any more than that and you risk a large drop in your account if you hit a bad patch or drawdown.
Are you prepared to have more than one position open at any one time. Having more than one position open can get confusing on a short-term basis but for longer-term traders it’s the most efficient way to trade.


Exit Criteria

As I mentioned earlier, there can be nothing worse than looking at a losing position and not knowing where to get out, or how big the loss is going to be. The exit criteria can take many forms.
Are you going to set a stop-loss in the market or use a mental one. I would always advise using a stop in the market if you can.
Are you going to use a trailing stop and lock in profits when you can or take them off the table when offered.
Are you looking to exit at your price target or just tighten the stop.
Are you going to scale the position out (selling out bit by bit) or take everything off the table in one go.
How long are you looking to hold the trade open for. Are you looking to sell in hours, days, weeks, months or years from now.


What charting set-up

Which time-frames are you going to be looking at. This is the table I posted earlier and should give you an idea of what charts you should be looking at:.

<table border=”1”><tr><td>Type of Trader </td><td>Holding Period</td><td>Chart to trade off </td></tr><tr><td>Tick Trader</td><td>Minutes</td><td>Tick / 1 min </td></tr><tr><td>Day Trader</td><td>Less than a day</td><td>1-5 Min </td></tr><tr><td>Position Trader</td><td>Hours / Days</td><td>15-60 Min </td></tr><tr><td>EOD trader</td><td>Weeks / Months</td><td>Daily </td></tr><tr><td>Long-term</td><td>Years</td><td>Weekly / Monthly / Yearly </td></tr></table>

Are there any indicators you look at.


Testing

Are you going to test the above strategy by paper trading, simulating or are you happy to go straight in and trade from the start. I would advice paper trading any strategy to make sure it works. Some look great on paper, but when it comes to actually trading they are not actually workable. I’ve come up with quite a few strategies that haven’t worked when it came to testing them.


Time to change the strategy

How long will you give the strategy, before you start to amend it. If you start changing a strategy too early, you will risk not giving it a chance. Give it too long though, and you risk draining your account with a strategy that isn’t working.



The question above are ones that you SHOULD WRITE DOWN. I’m sure you can think about them in your head, but when it comes to the crunch, you need to be able to look at a piece of paper that tells you what to do – it shouldn’t need much thinking about. These questions are the minimum that I would have as part of a strategy, you might find that there is other areas that I haven’t talked about, but you still want them in your strategy. Great, the more detailed you can make it the better :)


The following is a strategy that I used a while ago before I started trading full-time. It is a basic swing trading strategy that I was able to trade off when I was at work, as I only needed to look at the market every few hours.
This is NOT a recommended strategy, only an example of a possible one. You must trade a strategy that you feel 100% happy with.


Sample strategy Text in red is my response to the questions


Which markets – I will be trading UK FTSE 100 Stocks, as I know these are the ones I can get easy access to chart for. The main advantage is I know the market well, and information is easily available when I’m at work.

Who am I going trade through - I will be using Finspreads as I can access there trading platform from work.

Are you looking to buy low and sell high - Buy low and sell high

What will get you into the market - I will be looking for a bounce up off of support a support line to go long, or a bounce down form resistance to go short. This applies to trendlines as well as horizontal support / resistance. I will also be looking for a R/R of no less than 3:1.

What will be the factor that confirms whether you take the trade or not. - I will only enter the trade if I get one bar in my favour. So if support is tested, I’m looking for an extra up bar to appear before going long

How are you going to place your trades - I am happy to enter with a normal market order.

% Risk of capital on any trade - I will risk 2% of my trading capital on any single trade.

Are you prepared to have more than one position open at any one time. - I will be looking to have no more than 3 positions open at anyone time, so my maximum exposure to the market will never be more than 6% of my trading capital

Are you going to set a stop-loss in the market or use a mental one. – I will use a mental stop, and check the market every hour. My initial stop-loss will be placed just under support for a long trade and just above resistance for a short.

Are you going to use a trailing stop - I will using a trailing stop to make sure my R/R ratio stays at 3:1 throughout the trade.

Are you looking to exit at your price target or just tighten the stop. - AS price reaches my price target I will tighten the stop up, so if it goes through I can benefit from it and still keep my 3:1 R/R ratio

Are you going to scale the position out - I will sell / cover all my position if my stop is hit

How long are you looking to hold the trade open for. - Holding for about a week.

Which time-frames are you going to be looking at - I will be trading off a 60min chart, as this moves slow enough for me to check the market every hour.

Are there any indicators you look at. - No, purely price

Testing - I am happy to trade straight away as the strategy is based on solid support and resistance theory.

Time to change the strategy. - I will review my strategy in 3 months time


I’m sure there are other areas in the strategy that should be covered but the ones above are the main ones. If anyone wants help with their strategy feel free to post it in the First steps section of the Bulletin Board and I’ll be sure to have a look at them, and hopefully get some useful comments from others :)

Take care,
 
FTSEB.
Thanks Paul,I have copied your trading plan and will adapt my trading to include the points I have learned from you.
I am currently Position Trading with Finns SB and slowly making head way.
After following you over the weeks since you started this First Steps Basics for trading,I have now reached the stage where I need to ask you about some specific trading techniques.So if you dont mind I will come back with some questions later.
LOL
 
How successful at trading are you Ftsebeater ?
i.e. how many points per day/week consistently ?

Glenn
 
Hi Fluke

No problems, fire away when ready. Although I would ask you to start a new thread in the First steps board, as it would help keep this post fairly clean :)

<hr>
Hi Glenn

It's a very good question and one I'm not 100% sure how to answer. Towards the end of last year I was a very consistent trader, making about 20% a month. This year has been a lot harder for me (for one reason and another) including a period where I wasn't trading for 6 months.

I suppose the next question is "Why do I insist on teaching / preaching :cheesy: when I can't trade professionally"
The answer is simple, I'm currently a better teacher than trader.

I hope that answers your question. :)
 
MM gets a wake up call in the middle of night from fund manager X to sell 200K share of stock Y @ say 30C price above yesterday close.. So the MM fakes the gap to attract momentum traders to fill the 200K sell order and.. once his positon is filled he might run the stock up or down depending on futures and the event affecting the particular stock..

It is crucial to understand why Gaps occur.. Not all gaps mean momentum.. It would be even more crucial to watch the block trades at top of the gap to read the MM's hand..
 
Grey1 -sorry to ruin your conspiracy theory, but in your above scenario, it's probably safe to assume, that as Fund manager x is selling stock, so will fund managers y & Z, and if the naive MM is dumb enough to call the stock up in front of an existing sell order, not only will Fund manager X being screaming for his fill at the new (artificial price) but so will fund mangers' y & z, who will also go to Mr Naive MM as he's the one visibly leading the stock up. So, our poor naive MM is now long of way more stock than he can accommodate, a few crappy retail buyers maybe buying 100 shares here and there, and the MM praying he can sell stock before the risk manager finds out his position and stupidity , and sacks him.. sorry grey nice theory, but not quite right.

Wayno
 
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FTSE Beater
"I hope that answers your question."
Not quite what I was expecting I must admit. I assumed that the answer would just be a number of points.
Not sure I see your logic about being a better teacher than trader though.
Surely one can only teach what one can demonstrably do ?
Is the strategy above in this thread the one which you traded succesfully for a while, or is it one you have arrived at since ?

Glenn
 
Glenn,

I have to disagree with you, Alex Fergusson has never played football to the level at which he has coached and this applies to many coaches so why not to trading ? There are a number of people who know what needs to be done but may lack the emotional discipline to do it themsleves when they need to do it.

Personally I dont see an issue with someone being a better coach than they are at doing the activity themselves. I would even argue that some of the best traders can be the worst coaches because, of the best I know, some trade by intuition which is something that cannot be taught.

Also look at the title of this thread it is aimed at beginners and FB has done well in passing this information on all FOC. If he was selling a method of trading or a system then I would be concerned but he isnt. I support what he is attempting to do here all of which takes time and effort and I believe is appreciated by the majority of those who have viewed his posts.


Paul
 
Yes it's not an easy subject to discuss. I have therefore only asked questions, rather than making statements.
However your comparison with a football team manager is imho not the best comparison.
The footballers Ferguson coaches can already play football very well as individuals. I don't think we are talking about building a team of already good traders.
..and fwiw, my recollection of Ferguson was that he was pretty good as a player. He was sold for a record fee of £65k in 1967 (when I was 21) , so must have been in the 10% of successful footballers at the time:)

Anyway, we have gone down a path which I didn't anticipate and wasn't being critical, just asking questions. People will make their own judgement about teaching vs doing. That question wasn't initiated by me.
Ftse has, as you say, spent a lot of time posting his notes and if that helps the newbies, then fair enough.

I was trying to ask about the success of the strategy he posted.
Glenn
 
Hi Glenn

Ok, sorry - I was making about 35-40 points a day :)
I can understand your thinking about teacher vs trader. Personally there are some psychological issues I'm dealing with at the moment which (Once sorted) will allow me to become the trader I know I am.

The strategy above when I was trading, was making small amounts of money. The win ratio was about 40% and the risk reward turned out to be about 2:1 (sorry I can't find the exact figures).

I've just read your most recent post, and I'm sorry if your questions have been taken out of context. For which I apologize :eek:

<hr>
Hi T333

There are a number of people who know what needs to be done but may lack the emotional discipline to do it themselves when they need to do it.
Click to expand...
This sums up my current situation. Maybe not so much emotional discipline, but yes puling the trigger is a discipline :)

<hr>
Grey and Wayno

I can understand both your points and they are made very well.
Please don't let things get personal

Thanks :)
 
Hey Grey, I have read your post again. and it still looks vastly oversimplfied to me. But then what do I know? I was only a MM for 17 years....

And I'm sure you do make money. But let's not get into a pissing contest here over it???

p.s. Very few PM's talk directly to MM's. Sure quite a few Hedge funds do, but not many ( if any) PM's
 
The British theoretical physicist Stephen Hawking (1942-) has devoted much of his life to probing the space-time described by general relativity and the singularities where it breaks down. And he’s done most of this work while confined to a wheelchair , brought on by the progressive neurological disease amyotrophic lateral sclerosis, or Lou Gehrig’s Disease. Hawking is the Lucasian Professor of Mathematics at Cambridge, a post once held by Isaac Newton.

As far as i know this great man has been totally physically restricted but it has not prevented him from accomplishing amazing feats in his field. He has lectured all over the world and yet he cannot speak, yet people come to listen to what he has to say... surely there is an irony there!

FTSE Beater has shared his knowledge like many other without want of anything in return. We are not Playing this game and it is not a sport it is a profession and the minute people realise this is a business and not a game is the day they will start being successful or decide they cant do it.

Sorry for my abruptness but this is a sensitive point for me.
 
Nice one FTSE-B, lots and lots of helpful organised material for newbies. As Newtron Bomb wisely implies, those who treat trading unprofessionally are apt to get their fingers burnt as their money is burning a hole in their pockets.
Wayno, I bet you chewed out and then spat out fund managers for those 17 years at the top of your profession ;-))
Blimey, there's some capable people on this board.
 
market makers can and do move a stock to any price they choose and they will especially force a stock to retrace a fast move that caught them out so they can recoup the losses they made on that move and conrol their inventory
 
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