Trend-Followers, Faders and Break-Out Players

When you're a beginner trader, you may find it's easier - or at least more intuitive – to follow the market. The market goes up and reaches a high and starts to fall, so you sell. Then the market bottoms out, reaches a low and starts to rise and you buy. This is a buy-after-the-dip-and-sell-after-the-high strategy.

For example, say S&Ps trade from 1475 to 1476.50 in two minutes. The trend-follower will be looking to sell after the market makes its high. Conversely, if S&Ps fall from 1475 to 1473.50 and then start to move up, the trend-follower wants to buy.

The other kind of traders are those who like to "fade" the next move. They're watching the same upward and downward movements as the trend-follower, but they're noticing something else. They're seeing that the momentum isn't quite "there" when the market approaches its peak, or the selling begins to die out as the market approaches the low. So they buy (or attempt to) just before the dip and sell just before the break.

Using the previous example, when S&Ps move from 1475 up to 1476.50, the "fader" would be looking to sell if he/she perceives that this rally is not going to continue. The "fader" may sell, for example, at 1476.30 or 1476.40 – where his/her price targets indicate. Or, when it moves from 1475 to 1473.50, the fader wants to buy before the market makes its upward turn.

Breakout Players Or a trader may want to play the "breakout." Using the example, as S&Ps rise from 1475 to 1476.50, the "breakout player" may believe - based on technical analysis - that the market is building for a breakout. Resistance at 1476.50 is wearing down. The next target is 1480 or 1481, or whatever the charts indicate. Conversely, as the market falls to previous support of 1473, the trader believes the market is going to extend to the down side to 1470 or 1468 or whatever downside targets have been pinpointed.

Now, experienced traders may combine all these styles with varying time frames. For example, I may be bullish overall on the day, but I'll scalp - in and out of the market - as the market gyrates on its way (hopefully) upward. In one instance, I'm looking for the break-out move, but in the meantime, I'm trading through a series of fake-outs before the "real" move comes.

How do you know what suits you best? Again, go back to your trading log. What kinds of trades have you been making? How successful have you been? More importantly, what kind of mistakes have you been making? Are you following the trend, only to have the market rally in your face after you've sold what you think is the top? Do you buy what you believe is the bottom, only to have the market suddenly drop through old support? As we'll discuss in Week Two, it's vital to know the personality of the market that you're trading. If it's a range-bound market, you can buy dips and sell rallies more effectively than if it's in a break-out mode.

As we'll discuss, your strategy will be based on your study of the market in a variety of time frames - from long-term charts - yearly, monthly - to shorter-term periods such as weekly, daily, hourly, five-minute, and down to a tick-by-tick basis. The patterns on these charts may look similar. But what you're looking for are those times when the breakouts are likely to occur or a reversal will happen. By studying the charts, you can manage your positions, including for the day and intraday.

And no matter if the market is range-bound, trending or breaking out, remember, it's your mental preparation that gets you in the game - and keeps you there.

WEEK IN REVIEW

I've been asked countless times about the "secret" to trading. It's not a formula. It's not an indicator or a system. It's a one-word answer. DISCIPLINE. Without discipline, you're not going to succeed - even if you have every trading tool at your disposal.

The most important part of being - and staying - disciplined as a trader is your psychological preparation. Each day you must put your head in the market before your money is on the line.

1. Do your homework. Study your charts and indicators. Read up on the stocks and markets that you're trading. What economic reports and events might affect the market that day?

2. Clear your mind of distractions.

3. Trade smart. You might not be able to handle at the screen eight hours a day. Focus your efforts in a time frame that best suits you. Monitor yourself for how and when you perform the best.

4. Accept the fact that you'll have bad days, or a string of them. Losses in trading are inevitable.

5. When you have a loss, take it. Don't hang on hoping to "break even."

Remember, trading is a mental game. As any professional golfer has a routine before a shot, as any professional basketball player goes through the same preparation at the free-throw line, so does every trader. Train your mind as you hone your trading skill.

FOR THE INDIVIDUAL TRADER:

Ask yourself these questions:

- What kind of preparation do I do EACH DAY before I trade? Do I enter the market feeling prepared for the day session?

- When am I the most active in the market? At the open and the close? All day? When do I have the most profitable trades?

-Can I keep my head in the market? Am I distracted by other things in my life and/or environment?

- Does the fear of losses cloud my judgment? Can I take a loss and move on?

In the next section we we will get more into specific technical matters. See you next week.

Welcome Back To Week Two Of The Course

Trading comes down to one simple objective: buying low and selling high. The problem, of course, is that ?in between the inevitable rise and fall of the market ?there can be a lot of whipsaws, stalls, gyrations and breaks in both directions. A market that looks like it? moving higher may encounter resistance that sends it sharply in the other direction. Or a market that? been grinding lower can suddenly react to positive news and take off like the proverbial rocket, causing a scramble to cover short positions that propels the market even higher.

As difficult as the market is to predict, there are some rules that can help you to determine the likely direction the market will take. This will also help you to see whether the market is range-bound or trending in one direction or another. Once you know the personality of the market, you can better determine the strategies that will best suit these conditions.

For example, if a market is range-bound, trading between previous highs and lows, the best strategy may be to pick the places at which to fade the tops and bottoms (buying as the market tops out and selling as it approaches the bottom). Or, if the market is setting up for a breakout, you?e going to look to buy the highs and/or sell the lows.

At all times, your guide will be your technical analysis. Perhaps you?e doing the chart analysis yourself. Or, you may subscribe to one or more technical analysis services that pinpoint support, resistance and key retracement areas. Whatever the source of your technical analysis, you must have at least a basic understanding of the chart patterns that the technicians are studying.

I remember when I started out in the trading pit filling orders some 20 years ago. As a young broker still on the learning curve, I saw that customer orders would come into the pit, sometimes within 50 cents of each other. Or else buy and sell stops that were way off from the current market would come in from a customer. More often than not, the market did move to those price levels, converting stops to market orders. What I saw in the ?rder flow?around me was the result of technical analysis conducted in dozens of trading rooms and offices.

Once I, as a trader, could identify price levels using technical charts and analysis, it was like I had a footprint diagram to learn to tango. I could follow the steps and ?ance?with the market. (Of course, there are days when the market stomps on you?

It? impossible in this venue to go over every variation of charts and patterns. Technical analysis is both art and science, and volumes have been written on the subject. My goal is to go over some of the more familiar patterns and indicators that I look at, which may also help you to analyze where the market has been to determine where it? likely to go.

Next.......

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