Charting Wealth, The Book, Chapter 3, Learn Stock Chart Trading with Charting Wealth
Empower your investing by learning to read stock charts.
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Chapter 3, Emotions
Next to your knowledge of how to chart, controlling your emotions is the most critical skill you can learn as a trader or investor.
Greed will destroy you. The trap of greed is how it makes you think you know more than the charts. In the end, you will find yourself falling into the trap that a rising market will never go down. It seems that everyone is a genius when the market is on an upswing.
Greed also keeps you in the market when you should otherwise get out. You will find yourself saying: OK, I wanted a 20% gain, but why can’t I have 100%? When you stay in a trade too long and the profit you thought you had dwindles, it is greed that convinces you to stay in the trade in order to get back the profit you never had until you lose everything.
Fear, on the other hand, paralyzes you and prevent you from taking any action, good or bad, until everything you do is a poor choice. You can always talk yourself into a trade. The role of emotions in your trading should be zero. It is always a chart decision. It is never a hunch, gambling, a feeling or your desire. All such actions are based in pride. They can and will kill you in the market.
Pride arises when you think you know more than the charts and pride keeps you out of good trades so you do not risk a loss and, thereby, hurt your opinion of yourself. The only pride an investor should ever have is pride related to following the charts: whether you win, lose or draw.
As we have already said, there is no guarantee that the perfect chart will lead to a profit. We hope it will, but things can and will at times fall apart. When something bad occurs, it is time to close the position, take the loss and move on. Period. No pride. No blame. No problem.
Once you control your emotions, you will be so far ahead of the game that you will look back later and be amazed at yourself. Please commit yourself to maintaining your commitment to work on the market and your “chart knowledge” a little each day through thick and thin, regardless of your emotions and any perceived progress.
You may initially progress at what seems like a quick pace and then suffer from learning pains. Or, you may start slowly and plod along feeling little success. Everyone will suffer significant challenges. You will have ups and downs, but the prize will only go to those who persevere. Study, follow the charts day-by-day and make lots of practice trades. Review your successes and failures. Never pat yourself on the back for successes that amounted to pure luck when you did the wrong thing or the right thing by accident.
If you will commit yourself to this endeavor and stick with that no matter how you feel, follow the rules and get up every time you fail, you will succeed and become a market master in due time. As Lao Tsu said: the journey of a lifetime begins with one step. So let us begin.
Let’s move onto chapter 4!
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At ChartingWealth.com, every day the market is open, we chart the S&P 500, the NASDAQ 100 (tech stocks), 20-Year Bonds and Gold. In just a few short minutes, we give you a valuable training update and quickly review the trends we see taking place in the market. At the end of every week, we give you an overview of what happened over the last five days and what’s on the calendar for the next trading week.
With our stock chart training we focus on developing our skills in technical analysis. This activity is the forecasting of future financial price movements based on an examination of past price movements. Like forecasting the weather, technical analysis does not result in absolute predictions of the future. Instead, we try to anticipate what is “likely” to happen to prices over time. Technical analysis can use a wide variety of charting time periods and indicators that show price movements over time.
Since our objective with stock chart training is to predict future prices, it makes sense to focus on price movements. Price movements usually precede fundamental developments. By focusing on price action, technicians are automatically focusing on the future.
The market is a leading indicator and generally leads the economy by 6 to 9 months. To keep pace with the market, it makes sense to look directly at the price movements. More often than not, change is a subtle beast. Even though the market is prone to sudden knee-jerk reactions, hints usually develop before significant moves. We see the hints in our charts.
Our simple stock chart training, reviews and analysis can help identify support and resistance levels. These levels are usually marked by periods of congestion within the trading range where prices move within a confined area for an extended period of time. This limited movement tells us that the forces of supply and demand are deadlocked. When prices move out of the trading range, it signals that either supply or demand has the upper hand. If prices move above the upper band of the trading range, demand is winning. If prices move below the lower band, supply is winning.
Technical analysts view the market to be 80 percent psychological and 20 percent logical. Fundamental analysts consider the market to be just the opposite – 20 percent psychological and 80 percent logical. Psychological or logical is open for debate, but there is no questioning the current price of a stock, index, commodity, ETF or option.
Price is available for all to see and no one can doubt its legitimacy. The price is set by the market and it reflects the sum knowledge of all participants. These participants have considered and discounted all available information and settled on a price to buy or sell. The price shows the forces of supply and demand at work. By examining price action to determine which force is prevailing, technical analysis focuses directly on the bottom line: What is the price? Where has it been? Where is it going?
Even though there are some universal principles and rules that can be applied to stock chart training, it must be remembered that technical analysis is more an art form than a science. As an art form, it is subject to interpretation, but it is flexible in its approach. Each investor should use only the techniques that suit his/her style. Developing a style takes time, effort and dedication. The best news of all is the rewards can be significant.
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