Trends and Turnarounds – Trading Plan Formulation and System Establishment
About Trading… Are You Really Ready?
Lets Get To Know Yourself First
1. Source of funds(trade only with spare cash)
2. Time Available to Observe the Market (decide operation frequency)
3. Your own investment personality(long haul? short haul?)
4. Trading style(Active v.s Passive)
Source of funds
Once Confirm Capital Scale…
Find out how big a transaction you can do
(account balance*0.15)/500 = Maximum Operable Lot
(Maximum Operable Lot)/3 = Safety Lot
Time Available to Observe the Market
1. Able to have Sufficient Time to Observe the Market:
Low Risk Acceptability → short-term spread trading
High Risk Acceptability → intraday trading/swing trading
2. Lack of Time to Observe the Market
Low Risk Acceptability → find ways to improve conditions
High Risk Acceptability → medium and long-term layout
Your Own Investment Personality
1. Dislike Leaving Order(s) Overnight → mainly conduct intraday trading;
2. Dislike Bearing Order(s) → stop-loss immediately after incorrectly forecast;
3. Don’t be under pressure → take-profit in batches, leave the market flows by itself.
Active Investors(Aggressors) v.s Passive Investors (Non-Aggressors)
Often predict the top/bottom of the trend, the operation is more aggressive, but the reward is rich
When the trend is established, only take advantage of the trend to make orders; conservative but safe, less profit
In Regular Trading Practice
1. In practice, there is no absolute active/passive trader;
2. For patterns/signals that you have confidence in, you can lean slightly to the passive;
3. When facing a volatile market, try to take a wait-and-see or conservative trade;
4. Remember, the behavior of bottom-hunting/topping needs to be built on the premise of sensitivity to trends and accuracy of market judgment, otherwise, do not try at will.
After Learning About Your Preference…
Let’s choose a technical tool!
1. Trend Indicator
3. Price Action
4. Trend line
5. Fibonacci Retracement(Golden Ratio)
Advices for the Technical Analysis Tools
1. Do not solely refer to one indicator for analysis
2. All Indicators holds a certain degree of lag
3. Indicators and Theory Are Not Always Right
Trend indicators are good at following trends and are the most common indicators, but they are easy to fail during vacillations
Most Commonly used:
1. Simple moving average (MA) → the most common 60MA, the moving average parameters are ever-changing;
2. Exponential Moving Averages(EMA)
3. Bollinger Bands
※The most frequently cooperated technical theory: J.Granville Rules (Moving Averages)
It reflects the long and short position and the degree of price cold/hot, and there is often an overbought/sell zone setting, which is often used as a reference indicator for turning points.
Most Commonly used:
1. KD/KDJ → parameter (9/3/3)
2. Relative Strength Index → parameter 14Days
3. Moving Average Convergence Divergence(MACD) → parameter (26/12/9)
※Cannot be analyzed as a single indicator, usually would co-reference to the trend indicators
Pros: Can grasp the turning point of the band, especially when the indicator diverges;
Cons: Unilateral market, indicators are easily passivated and would lose it’s reliability.
Use the combination of candle charts to find suitable buying and selling points, as well as the continuation and reversal of the trend change.
Pros: Fastest of all indicators, no lag
Cons: Unable to provide target price, some k-line signal conditions are complicated
※Co-Reference: “Soba samni no den” or known as the Sakata Constitution.
Observe trends in an intuitive way, the easiest tool to practice.
Pros: Correctly drawn, can easily grasp the trends.
Cons: Subjective drawing that varies from person to person.
※Co-Reference: 1-2-3Reversal & Dow theory
Fibonacci Retracement(Golden Ratio)
Use the golden ratio to speculate on the possible pullback/rebound price. If you use it correctly, you may possibly Buy at bottom, Sell from top.
Regular parameter: 38.2%, 50%, 61.8%
Interval set: More effective on Long haul candlestick layout than the short haul.
1. Elliott Wave Principle
2. Dow Theory and Morphology
3. Granville’s 8 Rules
4. Price/Volume Trend
Which Combination To Choose For?
1. Find indicators that you can easily understand and are interested in;
2. After matching, use the demo account to test;
3. It is recommended to use the preset parameters first, and then fine-tune according to personal needs.
4. After the prototype is constructed, set the entry and exit conditions
5. Know the shortcomings of your own system and use relative tools to improve the accuracy
6. Use more often
7. Make sure the layout are not too complicated
8. Follow the system
9. If you have operated according to the system and still resulted in Stop-Loss, don’t be upset
10. Keep learning
Planning & Conditions for Long&Short-Term Positions
1. Are the current trends clear?
2. Has there been any major news recently?
3. Are the technical indicators signaling?
It is recommended to cultivate the long-term position from a short-term order. If the trend is extremely strong and may persist longer than expected, then transfer your short-haul order(s) to a medium- or long-term holding. There is no need to force it.
Analyst’s System Arrangement
MAs parameters: 6/24/60 three simple moving averages
KD: (9/3/3) as preset.
MACD: (26/12/9) as preset (Not Commonly Used)
※Suitable for following the trend, taking profits when the trend in favors, and using it when the trading odds appears
※Co-Reference: J.Granville Rules, Trend Line
- Stop-Loss Principle: If the previous high/low or support/pressure area breaks through, all positions will be stopped
- Take-Profit Principle: When prices falls below 6MA, or, price reaches support/pressure. Take-Profit in batches
- The Principle of Opening Positions: the band consecutively generates new high/low, and the position is established; or enter the market according to the eight rules of Granville.
Catching the Reversal
1. Elliott Wave Principle
2. 1-2-3 Reversal
3. 2B Pattern
4. New High/Low for each wave
Consolidation or Vacillations
1. Support/Pressure Trading Method, i.e. low-in & high-out
2. In case of sorting, use the Dow graph to determine whether to trade or not, such as: triangle pattern / wedge consolidation / box consolidation
Best Books To Digs In
Mindset/Getting Started –
• Reminiscences of a Stock Operator and The Investment Strategies. J.Livermore (ISBN-13 979-8696659763)
Technical Analysis –
• Technical Analysis of Stock Trends. R. Edwards & J.Magee(ISBN-13 : 978-1607962236);
• Trader Vic: Methods of a Wall Street Master. V.Sperandeo(ISBN-13 : 978-0471304975)
Academic Aspect –
• Macroeconomics: Policy and Practice. F.Mishkin(ISBN-13 : 978-1269691109)
• Financial Markets, Banking, and Monetary Policy. T.Simpson (ISBN-13: 978-1118872239)
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