Speed and Resistance - A simple trading plan!

With the use of speed and resistance lines you can discover one of the more simple mechanical methods of trading. You just follow the signals as they are given. While this method is far from perfect, it is an excellent basis to start trading and can be combined with other market information to provide a reliable short to medium term trading method.

The idea behind the speed and resistance indicator is that markets and stocks that are in a trend will at some point have a decent size correction or retracement in price. The most important word of that previous sentence is the word TREND. The stock or market must be in a recognizable trend for this
method to be useful.

By recognizing a correction to the trend when it occurs, allows you to enter a position in that particular stock or market and participate with much less risk involved. This method is particularly suitable if you don't want to try to pick absolute tops and bottoms. You can wait for the trend to develop first, apply this method and still participate in a lot of the price action.

Another part of the theory of speed and resistance is that the markets and stocks will correct to somewhat predefined areas or prices. By having these price areas known to you beforehand gives you an upper hand in trying to trade profitably.

Again, in order to be able to fully utilize the speed and resistance indicator or method, you must FIRST find a stock or a market that is in a strong trend. It doesn't matter whether it is in an up trend or a down trend; only that a strong trend be present. If you only buy stock and never go short, you would only look for stocks or markets in an uptrend.

Once you have your trending stock picked, identify the bottom for the range of the trend and also the current high price. You now have to draw a line to connect those two points. Also draw a vertical line from the high price down to the price area of the low. Subtract the high price from the low price for the price range of the gain.

Take the price gain amount you figured above and divide it by three. On your vertical line from the high make a mark for the 2/3 point and also at the 1/3 point. Go back to the low and draw a line from the low through the 2/3 point and repeat it for the 1/3 point. When complete, you will have your trend broken up into thirds. You likely have this method already built into your stock graphing program which really makes this simple to construct.

One of the basic ideas of speed and resistance is that when a correction occurs, it will traverse at least to the 2/3 line that you have drawn. Any smaller price moves will not be enough to allow you to identify a tradable entry point using this method. If the price of the stock approaches the 2/3 line area on your chart you would want to watch it carefully. If it appears that it will not break the 2/3 line with a further downward move, you would enter a long position in the stock. Look at your
other indicators and at the volume to confirm what this method is telling you.

If the stock price does move below the 2/3 line price then you should expect the price to continue downward to the area of the 1/3 price line. Once again as the price approaches the 1/3 line area you may find yourself with a low risk buying opportunity. CAUTION: If the 1/3 line is also broken, you may be looking at an overall reversal of the major trend. The trend may have turned down with the high point that you previously found as the overall turning point.

The lines that you have drawn will offer resistance to any correction that occurs. Once the 2/3 line is broken and the price moves further down, the 2/3 line will offer resistance to the stock price when it moves back up. You have a somewhat mechanical method to tell you when and which way to trade.

Be sure to study the price action when the stock price nears one of your lines. If you can get confirmation from the price action and have your other indicators signaling similar action, you may very well have a profitable trade staring you in the face. CAUTION : One of the problems with this method of trading is the tendency to get whip sawed back and forth between buying and going short.

By using speed and resistance lines, you will have predetermined price areas that will help guide you in your trading. You will have a mostly mechanical trading method. No emotions required.

Is Technical Analysis the HOLY GRAIL or is it just another fools folly?

Technical Analysis - Is it the HOLY GRAIL to making money in the stock market?

Since the markets and most of the stocks have been in apparent free falls over the last several weeks, you may have been asking yourself if this technical analysis thing is the HOLY GRAIL or is it just another method that has no reason to it's madness.

If you were not able to predict the correction that we just underwent, could it be that you are questioning your methods, your work and maybe even technical analysis? If this is something that you are currently going through, consider it a good thing. You should always question what you do, how you do it and the conclusions your then draw from your work. The markets have a way of making us do just those things even if you don't regularly try to do it on your own..

Every type or method of analysis is supposed to help you see around the corner of time and get a glimpse of what is to come. Any method that helps you to understand and maybe get that glimmer of the future is a method worthy of your consideration. Is technical analysis the only way to make money in the stock market? By all means, no.

As I have discussed in a previous newsletter, some of my friends use nothing but their memory to aid them in buying and selling stocks. They can somehow keep in their minds the price levels and trading levels of the issues that they watch. When those levels are crossed they will then buy or sell according to some internal radar.

The people I know who use this method are by no means always right. And that's the important thing to remember; NO ONE using any method is always right all of the time. The good news is that you don't have to be. You just need to be right most of the time and learn some other money management methods to help with the errors that always seem to come up from time to time.

The very nature of the stock market makes it impossible to always be right 100% of the time. There are just too many individuals and institutions with their own agendas going against each other. And some of those agendas are specifically geared to pushing you to make the wrong decisions. They intend to make you sell out of positions at losses or buy into stocks when your best financial interest
would be served by doing just the opposite.

You must remember why people buy stocks. People buy stocks when they feel the price will go higher; the greed factor. Why do people sell stocks? There are many, many reasons for people to sell. They may very well have fear as the basis of their trading but they may just as well have other considerations. They may have to raise cash for some reason such as taxes, school or anything else imaginable.

Maybe their health just doesn't allow them to trade any longer and they are quitting the game. My point is, you do not know why prices go down because of selling but when prices are moving up you can be much more sure that it is the greed factor at work.

When you are doing your analysis, remember important dates and what may be happening on a national or international level that may affect prices and the supply and demand factors. We just passed through the US tax deadline for taxes to be paid on a lot of profits that were made last year. Many people had to sell positions just to pay those taxes; I did. Keep these kinds of things in the back of your mind as you do your analysis.

Don't forsake your analysis methods until you are absolutely convinced they deserve it. Expect to be wrong from time to time. Every method I know about is wrong some of the time. You should be able to trade using your method and be making money over the long term. Your method should serve you by helping you make the right decisions, more if not most of the time.

If your primary method is technical analysis and you have been wrong over the last several weeks don't just throw it all away. Learn from your mistakes and keep your errors in perspective; remember the times that your analysis work has been right on target and helped you to make money.

If you are just starting to learn technical analysis, the focus of your work should be on the longer term. As you gain confidence and experience, then and only then should you start to refocus more on the medium term. Eventually you, like everyone, will want to move to the short term and try to trade that period of time. The short term is also, of course, the most difficult to trade.

As the time period of your analysis grows shorter, you need to be able to more accurately do your analysis. If you have been drastically wrong over the last several weeks, maybe you should just move your time period out a little bit. As long as you are trading stocks and not time oriented investments like options, this may very well help you. You can always move back in to a shorter period of time as you regain confidence.

Lastly, if you are already well versed in technical analysis, you may want to find another method to help you. As you know, I use the Elliott Wave to help me see around those corners. I like to have both my technical analysis and the Elliott Wave counts showing me the same things at the same times. I can then trade much more confidently.

Gann analysis is also something that has always interested me but time has never been in enough abundance for me to get proficient with it to really use it to my advantage. It is something you may profit handsomely from learning.

There are many other methods which you should at least explore and learn a little about. You may find something that really interests you and therefore you find that you do well.

Invest in your mind as you invest in the markets and you will be rewarded many times over. Don't ever allow yourself to get complacent or allow your mind to stagnate. Stick with the methods that you have been using and that have worked for you in the past but always be on the lookout for new ideas and methods to help you. Always be straining to see around that next corner and one day you will be surprised at what you find.