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  Examples #1

 

The Pattern Forecaster Plus end-of-day analysis software will help you find opportunities in the markets - every day or week. I teach my clients to focus on the longer-term charts first (to identify the overall market trend) then refocus this information onto the Daily charts (to find the proper opportunities).

The purpose of any traders it so identify potential trading opportunities and to identify the BEST POSSIBLE trading strategy to execute a trade. My revised Training Section will assist you in finding the appropriate trading strategies. My PFP applications will assist you in finding the trading opportunities

Every trader approaches trading differently. Some like to hold trades for weeks (attempting to ride out profits), others list to hold trades for shorter time-frames (attempting to scalp smaller profits). These examples will show you how the PFP application can assist each trader.

The basis of the Pattern Forecaster Plus application is the interactive analysis models - for Japanese candlesticks and other pattern libraries. These pattern libraries provide users with a clear understanding of any potential market move. From there, the user simply needs to select an appropriate strategy. let's look at some examples...

ERTS - Electronic Arts - both the Daily and Weekly charts.

ERTS Daily Chart
ERTS Weekly Chart

I suggest to all my clients to "View the Weekly Chart First" - to get a feel for the overall market trend. Then, go back to the Daily chart to identify trading opportunities. Here on the weekly chart (on 10/29/04) a "Thrusting Pattern" was formed (which confirmed the following week). This confirmed pattern had a HIGH (spanning all three bars) near $49 and a LOW (spanning all three bars) near $43.50. Looking back on the weekly chart - we can see recent HIGHS near $55. So, why would we trade a symbol with a potential $5.50 risk and only a $6+ target?? It's simple - we are looking at this as an opportunity for $6+ profit and have to attempt to contain our risk.

Looking at the pattern that generated our BUY signal (the thrusting pattern), we can see EXPANSION in the confirmation bar. Given the size of the expansion bar (confirmation bar), I would expect two things to happen.. a. a potential pullback (maybe 50% or so of the pattern size), b. a continued rally above the pattern highs (near $49).

This leads us to "Strategy". If the pullback happens, then I'm going to try to BUY near $46.25 (or a little higher). This will reduce my risk by about 50% and increase my target by about 50%. I would place a GTC BUY order for nn shares @ $46.25 (or a little higher). Once/if this order gets filled, then I would place my GTC Stop order @ the suggested stop price (near $43.50 or less) and wait to see what happens. In this case, this order type would have been filled (looking at the daily charts action).

The 50% range of the triggering pattern is a good rule to work from, but I find I often ADJUST the 50% value to my needs for the pattern/trade. My PFP applications will teach you to see things in the chart that you might not be seeing now. As a rule of thumb, if you can "time" your entry trade and decrease your risk - great, but don't be greedy. Pick a level you think the stock can reach and then maybe adjust it a bit.

Notice that my strategy included a "B option"? What if my "pullback trade" never got filled? Then I would be looking to buy above $49 (probably near $49.25~49.45). If this trade was the one that got filled (and not the pullback trade), then I would adjust my stop level to help contain my risk. Let's say I got filled at $49.50 and the PFP program suggested a stop below $43.50 - well, I might not be able to live with that RISK. So, I would adjust my stop to a level I can deal with.

In this trade, I'm looking for about $6 profit - so, ideally, I want to have my RISK at a ratio of 1:3 to my target. Thus, my stop should be near $2 - but I might adjust this level too. I might add/subtract from this risk level to adapt to market conditions. In this case, because of market volatility, I would probably increase it by 0.15~0.30 - making it about $2.25.

In either case, both of these trades WOULD/COULD have been triggered by price action. You can see you I'm adapting my "stategy" to provide me with the BEST SOLUTION for my trade. When to move a stop and what to do when your profit target is reached - these are answered in the TRAINING SECTION. I'll give you a hint though...

The way I approach a trade is "think everything out so you know what to expect". Doing this means you'll never take a trade not knowing what to expect. When you trade like this, you know the trade will either move up to your target or not, so you don't need to be overly protective of your stops. Let the trade "play out" - give it a chance to prove you right.

When/if the trade reaches your profit target, the best thing to do it liquidate 50~70% of your trade and lock in a stop to insure profits for the rest of your trade. The other important thing is, if the weekly chart still looks good (which in this case it does) - let the rest of the trade continue. You can even re-deploy the strategy to "add shares".

The result - trading 1000 shares, our risk was contained to a maximum of $2.75 and our target was $6+ minumum/ and $9+ maximum. I think you can figure out the rest of it.

The Results
Strategy
A
B
# Shares
1000
1000
Target
$9.00+
$6.00+
Stop
$2.75+
$2.00+
Risk/Reward Ratio
1:3.27
1:3
@ Target Sales
50~70%
50~70%
Target Achieved
Yes
Yes

 


AMZN - Amazon.com - both the Daily and Weekly charts.

AMZN Daily Chart
AMZN Weekly Chart

Ah, the example of when a Weekly chart does NOT show you good trends. This Weekly chart of Amazon does not show any real trend - unless you count a recent downtrend. It also shows us this symbol moves very rapidly - look at the volatility on the chart. When I see this, I know I have to be more cautious of my trades and attempt to "scalp" profits from this chart. I can't really trade and "ride" the trend for many weeks.

The other thing I notice on the Weekly chart are "channels". Look at the highs and lows of the most recent trends and you'll see a nice channel (moving lower). You'll also see a "middle level" (of the channel) that will act as support/resistance. These channels provide "guidance" as to potential reversal areas that we should see as opportunities.

Now, on to the trading strategy side of things. Whenever we see a chart that is "choppy" and is not showing strong trend capabilities, the best thing to do is average the last 5~7 trading days range. In this case, it will be anywhere from $1.75+~4.50+ (depending on the area of the chart we focus on). So, for this example, let's just use the MIDPOINT of these two numbers - $3.12. Now, once we have the "average daily range", we use this value (or multiples of it) for our targets.

For example, in MAY 2004, there is a very large white candle that generated a buy signal (near the middle of the weekly chart). Because this weekly candle was SO LARGE, I would not expect the next few to be as large as this candle - thus, if I acted on this buy signal, I might only try for a target of $2.50~$3.00 (about 1 * the average range). Also, given this type of chart action, I would also sell 100% of my shares at the target (considering it a great trade) and wait for the next opportunity. I would place my stop $1.00~1.50 from my entry price (trying to keep a 3:1 risk/reward ratio - but not quite).

Another example is the sell signal just after the MAY 2004 buy signal. This signal forms near our upper channel after a DOJI formation. The size of this candle is still considered LARGE, but because this sell signal formed after bouncing off the upper resistance channel - I might look for a larger target and let a little "ride" after the target is hit. For example, I would consider the lower channel level (below $39) and my expected entry price (near $48) and adjust my target to 2~2.5 times the average price range. Thus, my target would be about $6~7+ below my entry price.

In this case, I would look for the selloff to take out the LOW of the previous BUY signal (as a potential target) - near $41. At a bare minimum, I would expect it to attempt to breach the midpoint of the previous buy signal (near $45). We should have entered just above $48 and the PFP program would have suggested a stop above $54.75. Now, that type of RISK I can't live with. So, I would have adjusted my stop to a level near $52 (close to the "body" of the DOJI near the top). This is a simple attempt to adjust my strategy (and ratio) to something I can handle. The body of DOJI candles is often support/resistance and I use these all the time.

When you are trading these volatile stocks, your stops typically tend to be a little WIDER than when you trade a stock that TRENDS. The idea here is to give yourself the best opportunity for SUCCESS and not use a stop that is too tight. If I want my trade to have a chance, I have to give it room to trade - also notice how this changes our risk/reward ratio (near 2:1).

Now, in this case, AMZN sold off hard (to near the lower channel level - near $34) before stalling. This move took only 4 weeks. Our target was hit - thus our stop got moved to "breakeven+" and we should have been covering the rest of our trade at/near the lower channel. Then what??

Well, here we are at the lower channel WAITING for the next opportunity - right? We only have to wait a few weeks before the next opportunity creates itself. Of course, it is a buy signal, but let's think about this... Which way is the "trend channel" moving - DOWN - right? So, this BUY SIGNAL is a counter trend trade. Do we want to use a larger target or smaller target? Right - we want a smaller target because we can't see a potential for getting back up to the upper level right away. We want to SCALP $2~4 back our of this trade with a fairly tight stop.

Take a look at the DAILY chart, you'll see how knowledge of the current weekly trend (bullish) could have played out really well for shorter term players. The Daily chart showed a very clear uptrend recently with a nice potential for profit. The Daily chart give similar opportunity for profits, but remember the "law of averages". That is why I like the weekly charts.

The Results
Trade
BUY
SELL
# Shares
1000
1000
Target
$3.00
$7.00+
Stop
$1.50
$4.00+
Risk/Reward Ratio
1:2
1:1.75
@ Target Sales
100%
50~70%
Target Achieved
Yes
Yes

 


YHOO - Yahoo.com - both the Daily and Weekly charts.

YHOO Daily Chart
YHOO Weekly Chart

Again, a nice trend on the weekly chart - this is what I look for. I think most of you (by now) can see the potential within this chart and the profits we could have made in this uptrend. But now, let's concentrate on what to do when we are WRONG. Yeah - what if we are wrong??

The PFP program is not perfect. The accuracy ratio averages about 60%+. So there will be times when it is wrong and we have to learn to adapt our strategy to protect against unwanted losses... There is a funny term... "unwanted losses". Nobody WANTS losses - the term should be "unnecessary losses".

Remember, if we "completely plan" our trade, then there are only "planned loss amounts" and "planned targets". So, if we decide when we initiate the trade we can handle the loss amount, there should be no problems if the loss happens.

The other side of this equation is "what if you enter a trade and within a day or two, something changed your mind (news, legal action, whatever). If this is the case, then you have to make a decision and attempt to cut your losses. This can be done my simply issuing a MARKET order to get out of your trade, or you can issue a LIMIT order to try to exit at a specific price, or you can simply tighten your stop to reduce the risk in the trade.

Either way, losses happen while trading. Successful traders try to contain the losses by selecting only the best opportunities and using "Money Management" to insure risk is minimized. One common practice is to move your stop to "breakeven+" after a certain point/percentage move. One thing to remember is to leave enough room with your stop to allow the trade to mature (continue).

What I'm trying to teach you is to "completely plan your trade". Know what to expect before you enter your trade. Know where your targets and stops are. Investigate "better strategies" that can increase your risk/reward ratio. Then, if you decide to make the trade, everything is planned and even if it goes wrong, you have established the conditions for your trade.

Now, looking at the YHOO chart, I can see 2~3 trades (in the congestion) that probably would have resulted in minor losses or minor profits. Remember, you are following the Weekly chart for triggers, then tracking the Daily chart to follow the market action. If the Daily chart appears to be WEAK or the new Weekly candle does not confirm your trading action, then it might be smart to adjust your stop to a new level that helps to reduce your risk. Ideally, after a buy signal, we want to see WHITE candles and after a SELL signal we want to see BLACK candles. Sometimes the market congests after a new signal though and we need to allow our trade to mature. So, if you adjust your stop, plan it out..

Let's assume our initial stop was $2.50 and our target was $6, but we see weakness in the market and want to adjust our stop... I don't suggest moving it to less than $1 right away. Try reducing it by 30~50% first - allow the trade room to continue. A reduction of 40% will create a risk/reward ratio of 4:1 - this is very acceptable.

Now, let's move on to the next page of these examples - My Little Secret

 

 

 
 
     
 

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