Wednesday, December 29, 2010

5 tips from a senior undergrad of the stock market

It's funny when I recalled how I started doing technical analysis. It was after I was wondering why warrants are going up and down that I wanted to find out more about TA. Yes, I started on warrants even before I learn anything about techniques or money management. It's a surprise why I wasn't killed, especially so when I started on the more volatile HSI warrants instead of the more benign STI warrants.

You know, after reading a few books on TA, suddenly you felt all invincible. It felt like you know the 'trick' behind how to make money. The worst thing that can happen when you're starting on the stock market is that you win money. It'll be even worse if you win big money. Then you start to have fancy ideas about not working and doing this full time and all. Hey, been there done that.

But therein lies the pitfall. What the market lends you in your first winning, it'll take it back more with interest. I thought it's a good time to warn all the undergraduates of stock market taking the BSM (read bro8888's post if you don't know what I meant) degree. Here's 5 tips from a senior undergraduate of the stock market. No way am I an expert, just sharing my viewpoints.

1. TA is part art and part science. Do your science first before you venture into the arty part of TA. What I mean is that you should know the basics and fundamentals well, before you start to mess around with the grey areas. What grey areas am I talking about? Grey areas include details about the fundamentals like:

a. When drawing trendline, do we use candlesticks to draw or closing price?

b. When drawing support lines, which points do we use? Can the support line cut through the price in between?

c. Volume must be low or high. What volume? Daily volume or average volume? Average over how many days?

d. Rising wedge pattern is bearish. Which point does it become bearish? Which point does it become bullish?

and so on and on...

2. There's more to TA than just looking at MA crossover or RSI is high or low. I mean indicators is one thing but unless you test out your system over several charts and verifying for yourself what works and what don't, you can't just rely on something that some guru mentioned in his book. You've got to try it out for yourself, in order to gain the confidence that your system or your rule works. Don't take it for granted that because so and so said so, it's the rule. If I don't anything about investing/trading, there's not hard and fast rule. 'Fluid' rules rule the market.

3. I think testing system is not so easy also. If you try out this method, it succeeds, could it be because of your luck or your skill? Similarly, if you fail in this method, is it because you're unlucky or because the method just sucks in general. You've got to keep a thorough record in order to sort out all the randomness that is everywhere in the market and the part that works for you. A good record is a must.

4. Stick to one system that works for you. If using just support/resistance works for you, fine, stick to it and become a master in it. The worst you can do is to learn a bit from everywhere and end up being master of none. A fine system is one that gives you few trades but have good risk reward. A lousy system is one that churns out trades but has lousy good risk reward. You don't have to win by quantity. You win by quality.

5. What's more important than the system is money management. You hear that from all the old timers here, but what is that really? Basically, it's how you handle money when you're winning and when you're losing. What's your position sizing for your capital? Do you have a cut loss system and which % do you cut at? What do you do if you lose a few trades in a row? When do you use a larger capital? Again, it's all about tracking how you handle your money when you're losing and when you're winning.

TA needs as much hard work as FA, to be good in it. I think, so is everything else.


Anonymous said...

what are the TA books u have read and can recommend?

what are the highlights should i look out for when doing TA?

Anonymous said...

what are the TA books u have read and can recommend?

what are the highlights should i look out for when doing TA?

la papillion said...

Hi anony,

Here's the books I've read. The ones in 2009, the highlighted ones by Alexander Elder are the ones I'll recommend.

The highlights? I've mentioned some of them in the post already :)

Createwealth8888 said...

Read? Larry Williams - Trading Rules

I said...

thanks for the post.
PSLE student here.

Anonymous said...

thanks all! will read up!

still learning how to stack wooden blocks! hahaha

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