Chapter 15 - Putting it All Together Flashcards
What is pyramiding?
Adding to an existing trading position in
order to gain leverage.
What is a trading plan?
A collection of technical analysis tools and
processes assembled to aid in investment
decisions.
How can one combine various methodologies and their indicators?
- A top-down approach to identifying buy and sell signals should include the
following steps:
– Analyze the overall health of the market.
– Find the best-performing sectors using relative strength analysis.
– Select those stocks that are outperforming according to relative strength analysis.
– Study the charts of selected stocks.
– Determine low-risk entry points and profit objectives.
- Analyzing the overall health of the market includes utilizing the various chart analysis
tools, wave theories, and momentum, sentiment, and breadth indicators - Relative strength analysis can be used both to pick sectors and to pick stocks within
those sectors - A study of selected stock charts can be used to determine which stocks have the most
potential for favourable moves - Determining low-risk entry points and profit objectives helps determine when and
where to get into the position, and when and where to get out of the stock
Why is it important for traders to be well capitalized and to understand their strengths and weaknesses?
- Being well capitalized is important for two main reasons:
– Well capitalized traders can set more meaningful price levels and are more able to
avoid getting whipsawed by the markets; traders with less capital may get forced out
of positions before the indicators register buy/sell signals.
– Under-capitalization affects the trader psychologically; knowing that a loss may
wipe you out (at least of the trading game, and sometimes more) can weigh heavily
on trading decisions.
Why is it important for traders/investors to know the markets they are trading in?
- Although technicians should always be focused on market action, ignoring important
fundamental aspects of a market may be hazardous to your trading health, particularly
when using leverage. - Surprise announcements can cause large, unexpected movements in prices.
How can one implement various money management rules?
- Know yourself, and always keep in mind the following 12 money management rules:
– Look for trades where the profit potential is at least three times the loss potential.
– Always use a stop-loss order or an appropriate option to limit your risk.
– Never alter your stop-loss levels to permit greater losses.
– Do no add to your position until you can do so without increasing your original
risk (pyramiding excepted).
– Do not trade against the trend.
– Limit the size of your losses.
– Trade with money that you can afford to lose.
– Be patient and wait for good trading opportunities.
– Reduce position size when you find your self in the midst of a losing streak.
– Make your own trading decisions (IF YOU DON’T KNOW WHY YOU ENTERED THE TRADE IN THE FIRST PLACE, HOW WILL YOU DECIDE TO EXIT IT?).
– Don’t base trading decisions on tax consequences.
– Be flexible in your trading approach.
What are some important concepts in formulating a trading plan?
- Have a trading plan or philosophy.
- Understand the various markets that are being traded.
- Have sufficient capital.
- Implement a disciplined approach to money management.
- Understand your strengths and weaknesses.
Explain the steps to a top-down approach to choosing a particular sector and stock to invest in.
- Analyze the market to determine its overall health.
- Determine which sectors are likely to outperform over your investment horizon, using
relative strength analysis. - Determine which stocks are performing well, using relative strength analysis.
- Once stocks are selected, do a chart analysis of those stocks to determine the potential
outcome for the stock. - Determine low-risk entry points and profit objectives.
What should one analyze when trying to determine the overall health of the market?
- Elliott Wave,
- Dow Theory,
- chart patterns,
- momentum,
- sentiment, and
- breadth.
Having identified a strong sector, what is a trader/investor now tasked with?
Having identified a strong sector, THE TASK IS NOW TO IDENTIFY THE STRONGEST STOCKS WITHIN THE GROUP.
What is a sub-index?
The term subindex refers to a smaller component of a larger index that tracks the performance of a group of securities. The securities in a subindex are usually stocks that share common variables differentiating them from other securities in the larger index.
Why must you understand the markets you are trading in?
Although technicians believe that all known market
information is already reflected in prices, these reports and releases can often surprise the market
with information that had not already been discounted.
What is dollar-cost averaging?
Dollar cost averaging is the practice of investing a fixed dollar amount on a regular basis, regardless of the share price. It’s a good way to develop a disciplined investing habit, be more efficient in how you invest and potentially lower your stress level—as well as your costs.
What is averaging down?
Averaging down is an investing strategy that involves a stock owner purchasing additional shares of a previously initiated investment after the price has dropped. The result of this second purchase is a decrease in the average price at which the investor purchased the stock.
What are some important rules to follow when pyramiding?
If you want to add to an existing position to gain leverage, known as pyramiding, there are
several rules that should be followed. First, never add to any position unless the last trade there
is profitable. Second, do not add to any position if the stop level (exit point) would produce a
loss on the overall position. Third, for the additional pyramid trades, use protective stops at the
breakeven points. Fourth, the initial pyramid trade should not be larger than the initial position
size, and subsequent pyramid trades should be progressively smaller in size.
