Hi Trader

Welcome to Part Three of your free Stock Market Trading Mini Course:

“What The Wall Street Hot Shots Won’t Tell You!”

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Part Three - Only Four Techniques!

As a trader,the critical decision we need to make on a daily basis is which stocks do we choose to trade and when is the right time to get in.

There are many stock selection techniques that don’t work. And in our course we cover the key ones that you need to avoid.

But there are four valid methods traders use to decide which stocks to trade. Whilst there is merit in all of them, we have a strong preference for one over all others.

We will explain why we prefer the method we do soon but the choice is yours.

You need to decide which of these methods you will incorporate into your own trading plan. The simplest method is to select those that appeal and then test them out. Over time you can refine the technique or techniques that work best for you.

Entry Doesn’t Matter

Trade entry is not the most critical step in your trading plan. Studies have indicated that random selection of trades matched with strict money management can be quite successful.

Now, this is not to suggest that you shouldn’t stack the odds further in your favor by careful trade selection. Just realize that it is not the most important step.

So choose a system or a combination of systems that appeals to you and that you are comfortable with. And refine it over time as you gain experience.

We have a strong preference, based on our experience. So we would suggest that you give it consideration. But then add to it or substitute with your own preference.

Market Cycles Markets tend to move in cycles. The problem is identifying clearly what the time frame for these is and at what stage the market is in the short-term.

W D Gann and Elliot Wave are the two main examples of cycle predicting systems. You can find many proponents of both together with books and software in a quick search of the internet.

But we must admit that this approach has never appealed to us.

Many traders are obsessive about market time cycles. We don’t have the patience for this. Whilst we are sure cycles exist and there have been some significant predictions over the years, from a day to day trading perspective, we believe they are pretty worthless.

We have looked at the work of WD Gann but could never get interested in the complexity of his theories. He divided trends and time into eighths, with special importance placed on three-eighths (38%); 50% and five-eighths (62%).

He also used various angles on charts and the squaring of price and time to predict future price levels. Many of his theories are intricate and open to interpretation.

Wave theory stems from the work of RN Elliot who in turn was influenced by the Dow Theory. Elliot believed that markets had well-defined waves that can be used to predict price movement.

It is based on repetitive wave patterns and the Fibonacci ratio. This approach permits traders to assess where the market is currently in comparison to the overall predicted market movement.

For example, retracement levels are set at 38% and 62%. They can also be used as target levels for potential reversals. Interestingly these percentages match Gann’s analysis. And for that reason alone they are worthy of consideration.

But whilst this is a fascinating area, our suggestion to the novice trader is to forget about them for the moment. Just concentrate on understanding price action until you feel the need to expand your focus.

GENIE TIP

Market cycles are very complex and of little value as a predictive tool. Novice traders should ignore them.

Another aspect of cycles that has relevance is that the stockmarket tends to move in cycles throughout the calendar year. We discuss this factor much more in a our StockMarket Genie Trading Course.

News

Some traders rely on news events to select stocks. They look for significant announcements that they believe will affect either the whole market or a particular sector or stock.

The basic problem with this approach is that the market generally anticipates rather than reacts to news. By this we mean that the stock market is always looking forward and trying to predict what is going to happen. And so the market has already factored the news into the current price of the stock.

By the time the news is released the smart money has already moved on.

The other fact to realize is that news usually causes only one movement of price. If this occurs before the actual news announcement, as a result of rumors and expectations, then it is unlikely to be repeated after the announcement.

Stated in another way, the actual news event is of little importance. It is how the market anticipates or reacts to the event that matters and that we can’t know.

We therefore have no way of determining what influence news might have or whether it is already priced into the stock. In addition, news is not detailed enough for short term trading.

GENIE TIP

Never make a trading decision based solely on news.

But there are some instances when news can have a significant and immediate impact on the stock market. This is because the news events were not anticipated.

Catastrophic news events are significant because they are unpredictable and they affect sentiment.

Because these sort of news events cannot be anticipated, the market has an immediate reaction. And whilst the direction of the move can often be predicted, the extent of the move is very difficult to estimate.

So they are not particularly useful as a trading tool. But if you are in a trade they are important signals for you to take appropriate action.

But if cycles and news are not of much use, what can we use to narrow down our trading selections? Traders generally use one of the techniques known as fundamental or technical analysis or a combination of the two.

Fundamental Analysis

Fundamental analysis is a method of analyzing a stock through primary economic data.

The analysis includes the study of the general economy; the industry sector in question and information about the company itself. It requires an assessment of the financial and physical factors that may affect a company’s performance.

This information is analyzed and compared with the sectors performance and then a decision is made about whether the company’s stock price indicates it is over or undervalued.

If this sounds like a convoluted process it is.

And whilst computer programs can simplify the analysis process, it is still a subjective analysis in many ways. And the selection of criteria is in many ways quite arbitrary.

But more importantly, it is not a particularly accurate measure of a stocks price movement, particularly in the short term. The implication is that price reflects the fundamental value of a company.

This is simply not true! Stock prices often have no relationship to a company’s fundamental economic data.

And the best example of this is the dot.com boom. During this time many company’s stock price bore no resemblance to the fundamental value of the stock or to its future earning potential.

And the reason for this is that stock prices reflect sentiment not economic theory. Traders don’t always act rationally and it is people that cause prices to move, not theoretical models.

So whilst fundamental analysis may provide a theoretical stock value it is the sentiment of the market participants that sets the actual price.

So even though a fundamental analysis of prices may prove accurate in the long term, the current price is a reflection of the current view of all the people trading the stock. They may or may not change their minds over time to more closely match the theoretical price. But at the moment their view is different.

We don’t know if the markets view will ever match the theoretical price. And guess what it doesn’t matter because all we can do is trade the actual, current price.

The truth is that the stock market does not respond to news or economic factors in a predictable manner. If fundamental analysis were able to predict price movements then every piece of news or information about a company would be reflected in it stock price.

The reality is that economic news announced in any one week hardly ever changes the long-term trend and it seldom helps toward knowing what to buy or sell or when to do it.

A Use for Fundamental Analysis.

Despite its limitations, you should not ignore fundamentals completely.

Some fundamental data does have a direct impact on the market. For example, an interest rate increase will usually have a negative impact whilst an increase in the rate of employment will typically cause the market to rally, at least for the short term.

It is also important to realize that fundamental analysis is still relied on by most institutional investors and brokers. You can therefore gain a better understanding of how the market may react by reviewing fundamental data.

But from our perspective, the most useful application of fundamental analysis is as a filtering device.

We use it to narrow down the stocks that we consider for further consideration.

GENIE TIP

Fundamental analysis is of limited use to a trader and should never be used for timing trades.

Technical Analysis

Technical analysis is the interpretation of price action through the use of charts and indicators calculated from the base stock price information.

Whilst fundamental analysis seeks to understand the reasons for stock prices going up or down, technical analysis doesn’t care why price is moving. It just wants to understand the actual movement.

So rather than using a filter of financial analysis to review a company’s stock price, technical analysis studies a stock’s price movement directly.

We believe that virtually all you need to know is in the price action and represented on the price chart. Technical analysis operates on the theory that price reflects all known factors affecting supply and demand at that time.

We have made the point before that people make and move markets, not balance sheets. So the price action of a particular stock reflects the combined view of all those trading it.

Charting price action tells us what has happened in the past and as the past tends to repeat itself it can give us an indication of what might happen in the future.

In fact, we find that technical analysis is the most powerful tool in our trading plan. And because of this, technical analysis provides the framework for a systematic approach to trading.

More importantly, it gives us the confidence to make our trading decisions. And both these aspects are critical for success.

And as distinct from fundamental analysis, technical analysis provides precise mechanisms for trade entry and exit. So we want to suggest to you that the best strategy for determining the timing of your trades is technical analysis.

GENIE TIP

The only technique for timing trading decisions is technical analysis.

In summary, of the four analysis techniques, our strongly preferred strategy is technical analysis.

Whilst certainly not foolproof, technical analysis is a valuable tool in our trading and is particularly useful over the short-term.

But also learn how stocks react to news events and understand some of their fundamentals. You will then be way ahead of those traders who limit themselves to only one method.

That’s it for this issue of “What The Wall Street Hot Shots Won’t Tell You!”, I hope you have found something that is of help to you.

If you have anything you want to see covered in this course please don’t hesitate to email us at the address below.

Keep a look out in your inbox for part 4 of this course which uncovers the mystery of the saying:

“Even If You’re Winning, You Can Go Broke!”

Yes, that’s right, you can go broke taking profits if you don’t get this right.

This free course is brought to you by the StockMarket Genie(TM) Trading System.

“Ordinary People Making Extraordinary Profits!”

Regards David Chandler www.StockMarketGenie.com/Course support@stockmarketgenie.com

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David Chandler StockMarket Genie StockMarket Genie 43 May Road Torbay AUSTRALIA 6330