Wednesday, March 14, 2012

The Three Phases of a Trader's Education

Team - 

 You know how big I am on education.  Please read the following article from my partners at EWI for some tops on becoming a successful trader through education.

Enjoy!!

 

The Three Phases of a Trader's Education
Learn Jeffrey Kennedy's tips for becoming a consistently successful trader
March 12, 2012

By Elliott Wave International

You've probably heard talk about "market uncertainty" in the financial news recently. But when are the market trends ever certain? The constant uncertainties contribute to your frustrations as a trader, and you need to have a method for dealing with the ups and downs. Every successful trader has one.

Since 1999, Elliott Wave International's senior analyst and trading instructor Jeffrey Kennedy has produced hundreds of trading lessons exclusively for his subscribers. One of these lessons, "The Three Phases of a Trader's Education," gives you Jeffrey's tips on becoming a consistently successful trader.

Here it is; we hope you'll find it helpful.


The Three Phases of a Trader's Education:
Psychology, Money Management, Method
Aspiring traders typically go through three phases in this order:
  1. Methodology -- The first phase is that all-too-familiar quest for the Holy Grail -- a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.
  2. Money Management -- So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.
  3. Psychology -- The third phase is realizing how important psychology is -- not only personal psychology but also the psychology of crowds.
But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can't find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.

I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence -- fear of losing money and greed for more money.
Once the aspiring trader understands this psychology, it's easier to understand why it's important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.

Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.

When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I'm more than comfortable utilizing the same guidelines that many professional money managers use -- 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position.

Following this guideline not only helps to contain losses if one's trade decision is incorrect, but it also insures longevity. It's one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.

When aspiring traders grasp the importance of psychology and money management, they should then move to phase three -- determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn't the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.

14 Critical Lessons Every Trader Should Know
Read more of Jeffrey Kennedy's lessons in his 45-page eBook, The Best of Trader's Classroom. Find out why traders fail and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more when you download your FREE eBook today!
Don't miss your chance to improve your trading. Download your free eBook here.

Friday, March 09, 2012

Which Method Can Traders Use to Confirm an Elliott Wave Count?

Which Method Can Traders Use to Confirm an Elliott Wave Count?
Jeffrey Kennedy has developed a theory that guides his analysis
March 8, 2012

By Elliott Wave International

When you are watching a pattern develop on a chart, how can you be sure that your wave count is correct? The Elliott Wave Principle offers rules and guidelines that you can use to add confidence to your wave count.
Elliott Wave International's Senior Analyst Jeffrey Kennedy spent years designing his own technique to improve his accuracy. He came up with the Jeffrey Kennedy Channeling Technique, which he uses to confirm his wave counts. The following excerpt from Jeffrey's Trader's Classroom lessons, a regular feature of his Futures Junctures Service, offers an overview of his method.


My theory is simple: Five waves break down into three channels, and three waves need only one. The price movement in and out of these channels confirms each Elliott wave.

Base Channel

Figure 61 shows three separate five-wave patterns with three different channels drawn: the base channel, the acceleration channel and the deceleration channel.


 The base channel contains the origin of wave one, the end of wave two and the extreme of wave one (Figure 61A). Of the three channels, the base channel is most important, because it defines the trend. As long as prices stay within the base channel, we can safely consider the price action corrective. Over the years, I've discovered that most corrective wave patterns stay within one price channel (Figure 62). Only after prices have moved through the upper or lower boundary lines of this channel is an impulsive wave count suitable, which brings us to the acceleration channel.
Acceleration Channel
The acceleration channel encompasses wave three. Use the extreme of wave one, the most recent high and the bottom of wave two to draw this channel (Figure 61B). As wave three develops, you�ll need to redraw the acceleration channel to accommodate new highs.
Once prices break through the lower boundary line of the acceleration channel, we have confirmation that wave three is over and that wave four is unfolding. I have noticed that wave four will often end near the upper boundary line of the base channel or moderately within the parallel lines. If prices break through the lower boundary line of the base channel decisively, it means the trend is down, and you need to draw new channels.

Deceleration Channel

The deceleration channel contains wave four (Figure 61C). To draw the deceleration channel, simply connect the extremes of wave three and wave B with a trend line. Take a parallel of this line, and place it on the extreme of wave A. As I mentioned before, price action that stays within one price channel is often corrective. When prices break through the upper boundary line of this channel, you can expect a fifth-wave rally next.

In a nutshell, prices need to break out of the base channel to confirm the trend. Movement out of the acceleration channel confirms that wave four is in force, and penetration of the deceleration channel lines signals that wave five is under way.


14 Critical Lessons Every Trader Should Know
Since 1999, Jeffrey Kennedy has produced dozens of Trader's Classroom lessons exclusively for his subscribers. Now you can get "the best of the best" in these 14 lessons that offer the most critical information every trader should know.
Find out why traders fail, the three phases of a trader's education, and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more!
Don't miss your chance to improve your trading. Download your FREE 45-page eBook today!

Monday, March 05, 2012

R.N. Elliott Discovered the Wave Principle Over 70 Years Ago


R.N. Elliott Discovered the Wave Principle Over 70 Years Ago
This is your opportunity to learn the method that has stood the test of time 
March 2, 2012

By Elliott Wave International

In the 1930s, Ralph N. Elliott discovered that stock market prices tend to move in recurring patterns. He defined these patterns (or "waves") and explained how they combine to create larger versions of themselves. He called his discovery the Wave Principle.

After much research into R.N. Elliott's work, A.J. Frost and Robert Prechter published the 1978 text Elliott Wave Principle. This lesson captures a flavor of Elliott's fascinating approach to market analysis.

The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: "motive waves," and "corrective waves." Motive waves are composed of five sub-waves and move in the same direction as the trend of the next larger size. A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size. As the picture below shows, these two patterns form similar structures of larger sizes, or "degrees," as R.N. Elliott, the discoverer of the Wave Principle, called them.

The above pattern begins with waves 1, 2, 3, 4 and 5 that together form wave (1) -- a five-wave, motive structure that tells us that the trend at the next larger degree is also upward. If you were reading this in real-time, and the rest of the pattern was not visible, it would also warn you to watch for a three-wave correction.

Corrective wave (2) in the chart above is followed by waves (3), (4), and (5), to complete an impulsive sequence one degree larger labeled 1 (circled). This is followed by a three-wave correction of the same degree: wave 2 (circled) with subwaves (A)-(B)-(C). One way to think about corrective waves is that, because they move against the next larger trend, they lack the strength to unfold into a full five-wave move.

Learn the Elliott Wave Principle -- Free
If you're interested in learning Elliott wave analysis, but haven't yet gotten a copy of the book Elliott Wave Principle: Key to Market Behavior, check out EWI's online edition. Even if you already have the book, the online edition is a handy way to look something up when you don't have your book nearby.
Learn the method that successful investors have used for decades.