Steve Palmquist.Author of ‘The Timely Trades Letter’. ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns.
Many traders use indicators to determine when to enter and exit trades. Most charting software includes dozens of different indicators that can be displayed on the charts. Popular indicators such as the Stochastic, and MACD, are frequently discussed when traders get together. I have listened to a number of these discussions, the interesting thing is that people typically explain why they use a particular indicator by citing an number of examples of when it has worked for them. When they do, another trader will typically say something like, ‘well it did not work for me, so I use the XYZ indicator which is much more reliable’. When I ask the second trader why his XYZ indicator is more reliable, the explanation usually involves a few more examples of good trades. Examples do not prove anything. It is possible to flip a coin and have it come up heads five times in a row. Few traders would observe this and then think that when you flip a coin it always comes up heads. Yet for some reason people will read an article about an indicator that shows four or five examples of good trades it produced, and then they will go and risk their money trading the technique. They typically trade the new technique until it produces several losses in a row, and then they start looking for another article, that describes a ‘better’ technique, and the process repeats itself in an endless search for a better trading system.
Trading should be data driven, not based on emotion, wishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. Traders need to extensively test several trading systems, and based on the results of that testing they develop a toolbox of different trading techniques that have shown effective results. They are not trading based on hunches they are using data driven techniques to defelop effective trading tools and understand the specific market environments in which they work. Data driven traders first check the current market conditions, and then pull out the tools that have shown interesting test results in those market environments. The testing process helps traders understand how stocks usually behave after forming a specific pattern. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

Steve Palmquist.Author of ‘The Timely Trades Letter’. ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. New traders are often focused on what happens after they sell, or what happened to positions they did not take, or what happened if they would have ignored the the trading systems rules. This sort of focus develops bad habits that eventually cause problems. I want tools that are repeatable, I want tools that work more often than they fail, and then I just focus on using those tools in specific market environments where they have worked well. There is no technique that leads to profits on every trade. I have seen the adds for systems that work ’98% of the time’, but the guy selling them is the one making the money. Trading is a statistical business, and traders find tools that have a good percentage of success and use them in appropriate market conditions. Traders make their money by testing and analyzing tools and techniques in order to learn what actually works, and what just sounds good but does not lead to profits. A few examples can be very misleading, traders test their potential trading tools over many different trades in different types of market conditions. Trading an untested system is taking unknown risks and often just churns the account. Extensive testing has led to several practical trading techniques based on the Bollinger Bands. I have found that in most cases I am ahead in the long run to avoid trading when the market is extended above the upper Band. As indicated by the testing data shared in ‘How to Take Money From the Markets’, it is generally best to not initiate new positions when the market is extended above the upper Band. You can also see from just glancing at a two year chart of the NASDAQ that when the market becomes extended above the upper Band it most often pulls back, or trades sideways, for a few days in order to get back below the band. Trading should be data driven, not based on emotion, wishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks. Taking unknown risks can lead to disaster…

Steve Palmquist.Author of ‘The Timely Trades Letter’. ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. Trading is about risk management. In order to understand what the risks are traders need to understand exactly how and when their trading patterns work. Testing different tools, and understanding how each trading tool performs in different market conditions, is one way to get a clearer picture of what is an effective trading tool and how to use it. Identifying and developing trading systems with an edge is a lot of work. Making the trades is the easy part. Too many traders skip the analysis part and end up losing money because they have not put in the effort to develop trading tools that provide an edge. Trading some technique without having carefully tested and analyzed it generally leads to disappointment. The traders job is not to focus on making trades, but instead to focus on what types of patterns should be traded; and in which types of market conditions each trading tool works best. Trading should be data driven, not based on emotion, wishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.