Whether your choice of trading vehicle is stock options or stock trading, one thing we can all agree on is that despite the market's ever changing movements, over a period of many decades the index has definately increased compared to it's beginnings. If we were to have followed the investing principles of Warren Buffett, we would be happily laying on a tropical island sipping a Pina Colada right now.
However, to derive a consistent income in the short term through trading stocks on the market, we would be happier witnessing a solid up trend. This is why I am so passionate about options trading. When you trade options, you can profit no matter which direction the market is moving in. Now that I have said that though, there are still times when we need to take caution. And there are often times when not taking a trade is the best move to make.
During the latter six months of 2007, before the start of the current trend, the market was undecided about which direction to head and we witnessed a period of consolidation, where it rose and fell in a narrowing range. These type of market conditions make it a little difficult for inexperienced traders.
This period of change in the market direction has been difficult for new traders. Some have patiently "sat it out" in the hope of the market "going back to normal". Others who were not so patient have been scarred by the nasty surprise of a share price that suddenly changed direction. Others stayed in too long and could have taken a profit, only to see those profits withered away when the market "changed its mind". Others got out following their stop, only to find out that if they'd stayed in longer the price would have come back in their favour.
So today I would like to introduce you to a way of reading the market that will allow you to safely trade in turbulent times, so as to lower your level of risk and improve your profitability as a trader.
I have managed to earn a consistent income throughout this period of time using Technical Analysis to identify Chart Patterns. Chart Patterns are a system for predicting stock market trends and turns! Hundreds of years of price data seen on stock charts show that prices tend to move in trends.
A trend is really an indication of an imbalance in the supply and demand. These changes can usually be seen through changes in share prices. Price changes often form meaningful patterns that can act as signals in trying to determine the future direction of shares prices.
Research has proven that chart patterns offer the user high forecasting ability.
While most others have found the market difficult to read, professional traders have managed to make consistent and reliable profits and for them it has simply been business as usual.
How Chart Patterns work...
Technical Analysis (Charting) is the study of the way that crowds of people will react (market sentiment) to certain market situations. Once we identify certain patterns in price charts, we are able to form a view on the probable direction that the price of a share will head. Note I said probable and not definite!
Chart patterns are used to confirm a continuation of trend, or a change of trend, however they are not a GUARANTEE this will happen!
Chart Patterns are categorized into 3 main types:
1. Reversal Patterns - such as Double Tops, Double Bottoms, Head & Shoulders and The Outside Day.
2. Continuation Patterns - such as Ascending & Descending Triangles, Flags and Pennants.
3. Dual-Purpose Patterns - such as Symmetrical Triangles.
These are some of the most common I find consistently on my favourite stocks to trade. It is very important to note that recognition of a possible pattern formation is not enough information on it's own to base a trade on. Our approach is to not pre-empt what the market will do. Rather we sit back, observe, monitor and simply wait and most importantly - take caution in our trading decisions until we see an outcome to this situation.
Fact: If 100 people were to start trading for the first time today, only 20 of them would still be trading after one year. After five years, there would only be five left!
Why? Because the single most difficult decision a trader must make is when to pull the trigger, and when NOT to - most traders simply do not have the experience, or the nerve, to get it right often enough.
The secret to finding highly profitable trading opportunities
Ask any professional trader their secret to making money, and they will inevitably tell you that their method is based on some level of chart pattern recognition. There will undoubtedly be many varying degrees of methods and techniques to find these patterns, but it all comes back to the same thing; and that is... they are all waiting for certain conditions to occur before they enter a trade.
In other words they let the market itself tell them what to do.
The secret to successful trading has always been to enter the market when the risk of it moving against you is low, and once you know how to spot chart patterns and how to trade them, you can easily profit.
By Jules Dawson
60 Years of the Dow Jones Trend
Article Source: http://EzineArticles.com/?expert=Jules_Dawson
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