Technical Analysis homework

[teapeebubbles]

In order to avoid being redundant by merely re-emphasizing some of the salient points already posted on this thread, I’m going to take a little different approach and provide a step-by-step general outline for new traders.

Few financial endeavors have occupied the time of more people over the years with less success than attempting to “beat the market.” Countless numbers of people have tried and failed. Particularly in academic circles, it is believed that no one can consistently outperform the averages.

Nothing could be further from the truth!

Granted, everyone cannot beat the market, simply because everyone is the market. But that does not preclude the possibility that some investors, utilizing more sophisticated approaches than the public at large, can earn above average returns on their trades and investments. To do so, however, requires the development of a logical investment strategy, which takes advantage of the very weaknesses that deny superior returns to most traders and investors.

As a prelude to increased stock market profits, it is necessary to reject the concept that chance alone governs who wins and who loses on Wall Street, while recognizing that most speculators who seek a get-rich-quick solution will instead end up amongst the big losers. Traders expecting to double their money every year will fail almost without exception, while those with reasonable expectations and a sophisticated and rational approach will usually be well rewarded for their effort.

The first step in building a successful trading strategy is to learn as much as possible about where stock prices in general are headed. Utilizing a vast array of stock market indicators, such as those listed in the link below, will provide some guidance in determining market direction.

http://www.technicalindicators.com/stocksshortind.htm

The second step is combining information from diverse sources into a single rational forecast. Although many of the indicators work well enough most of the time, virtually none are always correct and rarely do they all ever point in the same direction. Many forecasting models exist; therefore exposure and research are required in order to find which one(s) work best, depending upon each individual trader’s objective.

The third step is developing a stock selection strategy. There are a seemingly endless number of techniques for picking winners, most of which are of dubious value. For starters, here are a few sources I favor:

http://www.briefing.com

http://www.realtimetraders.com

and

http://cbs.marketwatch.com/news/default.asp?siteid=mktw

The fourth step a new trader should concentrate on is developing an approach that combines rational theory with a history of superior results. Evidence is adduced that raises extreme doubts about the validity of the random walk theory. An old Wall Street adage goes, “Don’t tell me what to buy, tell me when to buy it. In fact, what and when are two sides of the same coin. Both are essential to a successful trading strategy.

The fifth step to trading is learning to apply the tools to portfolio management. Traders must define objectives and utilize several methods, in order to improve total returns and adjust risk levels. These techniques include religiously using stop loss orders on losing trades and trailing stops on profitable trades in order to preserve gains. Living to trade another day is one of the main objectives.

The sixth step involves keeping score. The trading game obviously does not yield uniform profits to all its participants. Instead it dispenses large gains or losses to a relatively few traders, leaving most players as small winners and losers. Judging your portfolio returns, including accounting for shrinkage, against the market averages provides a measuring stick in determining relative performance.