Tuesday, April 18, 2006

Back on the rails

Day 11 - Tuesday
Total Account Value: $5502
Available Equity: $3592
Positions Opened: 4
Positions Closed: 0

It gladdens me to say that despite my nagging fears, I am not a raving idiot after all. Last week was a testing one - making bad decisions and reading countless opinions on the inevitable failure of short term traders made me feel like a loser. After stupidly admitting to my girlfriend's excitable mother that I owned a blog, I sheepishly refused to send her the link because I didn't want news of my losses to spread.

I spent the weekend relaxing and recharging, while also thinking deeply about market psychology and how a typical stock fares over the course of a trading day. While going with the crowd makes money, you need to pre-empt them to do it consistently. False signals were savaging me. A major aspect I was paying little attention to was market depth. Watching the buyers or sellers mount up is a great forewarning to what the price candlestick will do.

Opening prices and first hour phenomena are particularly interesting. It seems the floor is flooded with amateur traders who have placed their orders overnight. There are also many end-of-day or "weekly" (2 to 5 days) traders like me who are waiting to enter trades based on confirmation signals. The pros are waiting to confuse the masses and profit from their panic and fear, trading in the opposite direction with considerable volume. A slight direction change will cause nervous bulls to sell (if trend is to go long). End of day traders will wait, and if the panic increases, the tight stop losses of more resilient but careless bulls will be hit, sending prices lower. Once the pros have made a killing, they will exit and the trend will resume. Some stocks behave this way more than others, but the threat is minimised when the order book is strong.

Today I waited for Woolworths (WOW) to show strength before I went long, and was rewarded with a decent day's profit. I had my eye on the price, because the weekly chart showed a weakening downtrend (with decreasing volume), and the last day of trading finished strongly. This morning it gapped open above the 50 day SMA, allowing me to enter with confidence.

Suncorp-Metway (SUN) is a blue-chip stock that has been tracking sideways within an extremely tight range for about 50 days. It's difficult not to pay attention when volume increases steadily, as it means market sentiment is improving and it's only a matter of time before a breakout occurs. I picked the direction (upwards) as the MACD indicator had been rising consistently. Since the 20-day SMA had just started to turn up, a gap open signalled the beginning of a burst. I bought 700 Share CFDs, worked a tight stop loss and now I am up $175 in a day.

Last week's surviving shorts continued to fall and a tasty Easter interest payout made them even better. I am considering closing MIG tomorrow as its 7-day correction could soon come to an end. After losses last week I'd hate to press my luck. Come to think of it, I'm a little nervous about what the market will do this week. After some choppiness, the index chart points toward another week of stagnation before resuming bullishness. If the overseas indices crash again overnight, my longs are doomed. Therefore I will be extra conservative with my stop loss trailing.

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