Tuesday, June 20, 2006

Master Trader Session 3

In this session, the third of six, Matt Gildea began talking tactics. Before we looked at today's high probability swing trade set-ups (tactics), we covered Chaikin Money Flow and Averiage Directional Indicator (ADX) -- both are secondary technical indicators. We also studied ideal uptrend (and downtrend) characteristics as well as a system for determining the outlook.

Matt also gave us a peak into his office (pictured on the right). I don't know about you, but I'm getting a case of display envy!

We began this evening's session with Chaikin Money Flow (CMF), one of Matt's favorite secondary indicators that is a practical tool for confirming swing highs in uptrends and swing lows in downtrends. Because CMF is a volume based indicator, it is particularly useful in showing us the buying or selling "pressure" (remember what we learned about volume in Master Trader Session 2).

Adding to our arsenal of indicators, we learned about the Average Directional Indicator (ADX) which is a great tool for measuring the strength of a trend. ADX is particularly suited as something to aid in determining when to exit a trade. Similarly, it's quite good for tightening up our stop (stop loss).

At this point in time we have a lot of indicators -- various Moving Averages, MACD, Stochastics, ADX, CMF -- from which to identify ideal uptrends and downtrends. They are also useful in determining our outlook, which can be from Extremely Bullish, Bullish, Bullish to Neutral-Stagnant, Neutral-Stagnant, Bearish to Neutral-Stagnant, Bearish, to
Extremely Bearish. Quite honestly these outlooks are obvious enough, but consider how valuable this information is when applying it to a specific stock, when attempting to capture the swing movements with the trend. The aforementioned outlooks can be applied in a top-down manner to aid in determining what kinds of trades or option strategies we would like to employ for the highest probability and reward/risk ratio. This top-down method of determining the outlook means scoring the market as a whole -- by looking at broad indices such as SPY, QQQ, and DIA -- as well as scoring the sector, and eventually the individual stock. Although we're given great rules to determine the outlook, it becomes a subjective task. For example, it will be extremely rare when all the criteria is met for an Extremely Bearish outlook. Generally some aspects will show as Bearish to Neutral-Stagnant or even Neutral-Stagnant, while other aspects may be showing a solidly Bearish trend.

And finally, after being steeped in indicators and general chart reading skils, we have enough knowledge to contextualize our tactics. Today we looked at the price correction Swing Bull Pullback Long. This tactic takes advantage of a stock's natural tendency to have price correction pullbacks during an uptrend. These tend to occur because of profit taking; traders sell at swing highs in order to lock in profit. We looked at this as a powerful setup for entry into a trade and covered how to place a stop-limit order based on the stock's movement. We also discussed one strategy for placing out stop (stop loss) for exiting the trade.

Unfortunately, in the current bearish market, we were unable to have a solid example in the live market. Honestly, this makes sense and we wouldn't be looking to enter a Bullish trade in a Bearish market, unless we had a stock (hopefully in a Bullish sector) that was truly outperforming the market.

Next session begins our shorting tactics. If the market continues its bearish trend we could have plenty of examples for a Swing Bear Rally Short. Until then, thanks for taking an interest in my blog, I hope you're finding what I have to useful and (hopefully) entertaining.

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