Why You Should Know Exactly Where You Are

Continuation From Friday……(The Circle Of Profits)

Rule #4: Know Exactly Where You Are At All Times.

By default, you should know exactly where you are at all times. Although it may not be as easy as you might imagine, particularly, if you are new to the whole process.

More or less, the composition of all stock moves can be divided into four distinct parts.

Bottom formation (accumulation or trauma).
Bull market.
Top formation (distribution or blow off).
Bear market.

Now, the composition above gets fairly complicated once we begin to add multiple time frames and structural patterns to the underlying moves.

For instance, the overall stock market might be in a 10 year bull market, yet it is about to suffer though a massive 50% correction. Or we might be in a 17 year secular bear market, yet the overall stock market might be ready to stage a massive multi-year rally. Just as it did from both 2002 and 2009 bottoms. Further complicating the matter are the different size cycles developing in the market at any one time. Ranging in duration from hourly to decade long. In fact, it is their eventual combination (long and short cycles) that causes the final stock market composite we see on a daily chart.

Is there a way to tell exactly where we are in the overall composition?

Yes, there is. Unfortunately, such a method cannot be described in any reasonable manner, let alone in this short book. It can only come through years of experience and a tremendous amount of work. Particularly, when the above analysis is applied to individual stocks. Not to tout my market timing service, but you might want to take a look at the subscriber section of my website if this type of an analysis is of interest to you.

For the purposes of this book, we can apply the following tools or shortcuts.

Know What Time Frames You Are Working With and/or Trading:

If you are day trader, chances are, you are trading based on weekly, daily, hourly and minute charts. If you are more interested in catching larger moves, as I am, it is highly probable that you are trading based on both long-term and short-term charts. Whatever your situation might be, the first step is to define, without a shadow of a doubt, what it is that you are trading.

In other words, if you are day trading based on your daily charts, stick to that. If you are trading based on weekly or monthly moves, continue on with that approach. Do not move between various time frames until and unless the move is permanent. Why? It is highly probable that constant shifting between different time frames will lead to multiple errors and substantial losses.

To Be Continued Tomorrow…….