Important Points that I learned from Come Into My Trading Room by Alexander Elder - Part 2

II - Important Points that I learned from the book – Come Into My Trading Room by Alexander Elder

METHOD— TECHNICAL ANALYSIS 

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   1)      It is important to select analytic tools and techniques that make sense to you, put them together into a coherent system, and focus on money management.
   2)      You must follow up chart analysis by establishing profit targets, setting stops, and applying money management rules.
   3)      Individual behavior is difficult to predict. Crowds are much more primitive and their behavior more repetitive and predictable. Our job is not to argue with the crowd, telling it what’s rational or irrational. We need to identify crowd behavior and decide how likely it is to continue.
   4)      An uptrend is a pattern in which most rallies reach a higher point than the preceding rally; most declines stop at a higher level than the preceding decline.
   5)      A downtrend is a pattern in which most declines fall to a lower point than the preceding decline; most rallies rise to a lower level than the preceding rally.
   6)      An uptrendline is a line connecting two or more adjacent bottoms, slanting upwards; if we draw a line parallel to it across the tops, we’ll have a trading channel.
   7)      A downtrendline is a line connecting two or more adjacent tops, slanting down; one can draw a parallel line across the bottoms, marking a trading channel.
   8)      Support is marked by a horizontal line connecting two or more adjacent bottoms. One can often draw a parallel line across the tops, marking a trading range.
   9)      Resistance is marked by a horizontal line connecting two or more adjacent tops. One can often draw a parallel line below, across the bottoms, to mark a trading range.
   10)  We identify downtrends by drawing trendlines across the peaks of rallies. Each new low in a downtrend tends to be lower than the preceding low, but the panic among weak holders can make bottoms irregularly sharp. Drawing a downtrendline across the tops of rallies paints a more correct picture of that downtrend.
   11)  Congestion areas reflect crowd behavior, while the extreme points show only the panic among the weakest crowd members.
   12)  Exchanges are owned by members who profit from volume rather than trends. Markets fluctuate, looking for price levels that will bring the highest volume of orders. Members do not know where those levels are, but they keep probing higher and lower. A tail shows that the market has tested a certain price level and rejected it.
   13)  A one-day splash of uncommonly high volume often marks the beginning of a trend when it accompanies a breakout from a trading range. A similar splash tends to mark the end of a trend if it occurs during a well-established move.
   14)  Divergences between price and volume tend to occur at turning points. When prices rise to a new high but volume shrinks, it shows that the uptrend attracts less interest. When prices fall to a new low and volume falls, it shows that lower prices attract little interest and an upside reversal is likely.
   
   
   
   
   INDICATORS—FIVE BULLETS TO A CLIP
   1)      Simplicity and discipline go hand in hand. To be a successful trader, choose a small number of markets, select a few tools, and learn to use them well.
   2)      Keep in mind that indicators are derived from prices. The more complicated they are, the farther they are from prices and the farther away from reality. Prices are primary, indicators are secondary, and simple indicators work best.
   3)      Time—The Factor of Five :- Choose your favorite timeframe and then immediately go up to the time-frame one order of magnitude higher and start your analysis at that point. Use at least two, but not more than three, timeframes because adding more only clutters up the decision-making process.
   4)      A stock catches the public’s fancy, shoots up 20 points one day, and then slides 24 points down the next. What drives those moves? Fundamental values change slowly, but waves of greed, fear, optimism, and despair drive prices up and down.
   5)      When Bollinger bands become narrow, volatility is low, and options should be bought. When they swing far apart, volatility is high, and options should be sold or written.
   6)      When prices blow out of a channel but then return to the moving average, trade in the direction of the slope of that MA, with a profit target near the channel line.
   7)      There is an old Russian saying: “your elbow is near, yet you can’t bite it.” Try it now—stretch your neck, bend your arm, go for it. So near, yet so far. It’s the same with day-trading—the money is right in front of your face, yet you keep missing it by a few ticks.
   8)      There are no certainties in the markets, only probabilities.
   9)      An aggressive trader can make that stop “stop-and reverse,” meaning that if stopped out of a long position, he will reverse and go short. When a super-strong signal doesn’t pan out, it shows that something is fundamentally changing below the surface of the market. If you buy on the strongest signal in technical analysis and then your stop gets hit, it means that bears are especially strong, making it worthwhile to sell short. Reversing positions from long to short is usually not the best idea, but the failure of a divergence of MACD-Histogram is an exception.