Monday, November 21, 2011

MetaStock SPRS Series - Week 43 - MENT...

MetaStock SPRS Series - Week 43 - TechniTrader® Weekly Discussion for MetaStock Users: MENT - November 21, 2011
By: Martha Stokes C.M.T.

Hi Everyone:

Thank you to all of you who wrote me to tell me how much you enjoyed last week’s MetaStock and TechniTrader Webinar on “Riding the Momentum Out of a Bottom.” The webinar can be viewed on our site with the work booklet.

One of the things I spoke about during the webinar is the Science of Trading which is what MetaStock Charting Software is based upon. This concept is something you should embrace as it is the basis for chart analysis.

It is easy to get caught up with the news on the internet. You can’t go anywhere and not run into news and reporters commentary. As traders, it is essential that you not get caught up in that emotional chatter.

Charts do not lie. They do not have any agenda. Charts do not skew facts. Charts simply reveal:

1. Who is in control of price:
a. Institutional Investors
b. HFTs, or other short term large lot traders
c. Retail traders (you and others like you)
d. Odd lot investors (the last of the 8 Market Participants to buy or sell)
e. Smaller Funds reacting to larger fund buying or selling
f. Corporations investing in smaller firms
2. Is there sufficient volume and activity to drive price up and sustain price?
3. Is the ANGLE OF ASCENT OR DESCENT too low, too steep or angling at a rate that is sustainable for that particular trend: primary, intermediate, or short term?
4. The Market Condition: where most stocks are in the general cycle: platforming, topping, bottoming, consolidating, trading range, moderately trending? You need to know this in order to determine what trading style will work optimally and what indicators to use.

During my webinar one attendee wanted to know why I wasn’t using stochastic when I was teaching about momentum runs out of a bottom.

Stochastic is ideal for trading ranges. It is fine for platforms but it is not the indicator for a momentum run out of the bottom.

Why? Because momentum causes the oscillation of stochastics to fail. It is designed for sideways market action not momentum action.

Below is a prime example of why you should not use stochastic in a momentum bottom.

Stochastic shows an overbought condition at the end of October, just as momentum starts in this stock to propel it out of its bottom. So, if you were using Stochastic as you are taught by most seminars, this would have been an exit point. Since Stochastic floats during a momentum action, there was no trough to tell you to buy back in for the momentum move. However, with the TTQA, even though price is not moving at first but resting, we can clearly see momentum building before the long white candles.

Chart 1

Using the wrong indicators for the current Market Conditions is the most common mistake traders make. This one mistake or lack of understanding and education, costs retail traders the bulk of their profits. It is the reason most traders chase stocks, why they enter a stock too late, why they take chronic losses, and why they are so frustrated much of the time.

Do yourself a big service, learn what indicators to use in each market condition. Your profitability will increase dramatically if you do this one thing.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2011 Decisions Unlimited, Inc.

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