Looking at Inverted Charts and Psychology

One thing that I have often been guilty of when trading is focusing on all the bullish aspects of a chart when I am long, and concentrating on all bearish aspects of a chart when I am short. I do not do this intentionally; it happens to me, and most other traders, subliminally.

But maybe Mark Douglas, author of "Trading in the Zone" can explain it better than I can:

"When we expect to be right, any information that doesn't confirm our version of the truth automatically becomes threatening. Any information that has the potential to be threatening has the potential to be blocked, distorted, or diminished in significance..."

Because of this fact, I try to look at my charts from the opposite perspective, and I do this by looking charts upside down. For example, when I trade the TSX, I can look at two ETFs, one that does twice the performance of the TSX, and the other that does twice the inverse of the TSX:

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These charts are basically mirror images of each other. When one chart is overbought, the other is oversold, and so on. Currently I am long the TSX, but I will also keep an eye on the short TSX fund just to see things in another perspective.

I will ask myself if I would be satisfied holding the short fund right now. I will try to look and see if there is anything positive about the short fund. If so, then perhaps holding the long fund may not be such a good idea.

36 Rules for Trading Success

I have recently been reading a book called "How to Make Profits in Commodities" by WD Gann. So far, this book has been a really tough read, and it's been hard to extract much meaningful information from it.

I may discuss more about this book in a review at a later date. In the meantime, here are the main points of the book that I was able to extract:



The 24 rules:

1. Never risk one tenth of capital in one trade.
2. Always use stop loss orders.
3. Never overtrade.
4. Never let a profit run into a loss. (move stops up)
5. Do not buck the trend. (refer to my trading with the trend section)
6. When in doubt, get our or don't get in.
7. Trade only active stocks.
8. Equal distribution of risk in 4 or 5 stocks.
9. Trade market order.
10. Do not close your trades without a good reason.
11. Accumulate a surplus
12. Never buy just to get a dividend.
13. Never average a loss. (this is key)
14. Never get out/in of the market because of impatience or anxiety.
15. Avoid taking small profits and big losses. (easier said than done)
16. Never cancel a stop loss order after you placed it.
17. Avoid getting in and out of the market too often.
18. Be just as willing to sell short as you are to buy.
19. Never buy/sell just because the price is low/high.
20. Wait till the stock is very active and has crossed resistance levels before pyramiding.
21. Select stocks with small volume of shares outstanding to pyramid on the buying side.
22. Never hedge one stock by another.
23. Trade with a plan and do not get out without a definite indication of a change in trend.
24. Avoid increasing trading size after a long period of success.



The 12 rules:

1. Determine the trend
2. Buy at single, double and triple bottoms
3. Buy and sell on percentages
4. Buy and sell on 3 weeks' advance or decline
5. Market moves in sections/waves
6. Buy or sell on 5 to 7 point moves
7. Study volume to determine change in trend
8. Study time factor and time periods to determine change in trend.
9. Buy on higher tops and bottoms
10. A change in trend often occurs just before or after holidays.
11. Buy on a second reaction at a higher bottom.
12. Price gains in fast moves does not last very long.

Some Very Basic Elliott Wave Analysis for Gold

So, this is the first post where I'll be talking about Elliott Wave Theory. The reason it's the first time is because I'm not an expert on this topic, and there are probably other sites that can talk about it with much more expertise than me, to be frank.

Nonetheless, I do feel qualified to make the statement that gold stocks almost always correct in three waves. Corrections usually begin with one sharp thrust down, followed by a counter trend relief rally, and then a finally third wave down.

Below is a daily chart of the HUI, a gold stocks index:



One lesson that I have learned from the above chart, and, by the way, I've had to learn this lesson the hard way, is that it is often a mistake to try to dive into gold stocks on the B Waves. It is much safer to start loading up after the C wave has exhausted itself.

If the past repeats itself, or at least rhymes, then we should be due for a rather large upward thrust starting now. In my opinion, we have just completed Wave C, and, if you look at the above chart, that seems to give the green light for the gold stocks bulls.

An Island Reversal in The Gold Stocks Chart

So, this week was an excellent week for gold stocks. The XAU was up almost 8% for the week, Gold Bullion tacked on about 12 bucks, and, as forecasted on August 19th, the Euro rose while the US Dollar fell.

Gold stocks were so strong that one index I follow, the S&P/TSX Global Gold Index, formed a powerful morning star formation. I explain why this pattern is so reliable and profitable here. You really do have to look at the chart carefully, or else the pattern can slip by you.


In the above daily candle chart, you can see that every island that has formed so far, has led to a major change of trend. Although this island reversal we have just experienced does not guarantee a change of trend, I think it puts the odds strongly in our favour.

One other thing to note, these island reversals would never be visible on the XAU or HUI charts, since gaps rarely appear on these charts. To see these patterns, it is better to look an ETF, such as XGD, or GDX.