Trade On Confirmation, Not Speculation
Trade On Confirmation, Not Speculation
One of my mentors over the years had a phrase – “Always trade on confirmation, not speculation”. But it wasn’t until recently that I fully understood what it meant.
Sure, it means using your trading rules mechanically and trading only when you get a confirmed signal, not using your “gut instinct” (which can be a killer in the markets). But as I soon found out, it is much much more than that.
Before we go on, I should note this article is a little more advanced, and it is best if you have a knowledge of support and resistance levels before reading.
I was reading a review of Gil Morales and William O’Neil’s “How To Make Money Selling Stocks Short”, and it explained how investors can buy at support levels and sell at resistance levels – but it only really works in a confirmed trend. For instance if we have a confirmed bull or up trend, we could buy stock at solid support levels. If we had a confirmed bear or down trend, we could sell stock at solid resistance levels.
I had never had much success buying support or selling resistance, until I read that – and it changed my trading forever. Regular readers will already know how to confirm a trend – we can use Dow Theory or Trend Lines (preferably on a weekly chart to confirm a solid trend) that can determine a trend change or continuation. And once we’ve done that, any support we encounter is a buying signal (or resistance for selling).
Let me give you an example of what I mean:
Let’s say we want to buy shares in Commonwealth Bank Australia (CBA). It confirms a tidy Dow Theory Entry on a weekly chart, giving us a confirmed Bull Trend, and we enter the stock. But we want to increase our holdings – and to do so, every time the stock now meets support we buy more. And we keep doing so until we get a confirmed Bear Trend.
As always, I find a picture speaks a thousand words, so click the pictures to enlarge:
Notice I got the confirmation of the trend on a weekly chart (because the larger the timeframe, the stronger the signal), but then added to my positions on a daily chart (to fine tune my entries).
You will probably already have figured out by now that it doesn’t matter what entry or exit technique you use once you’ve determined the trend – it could be buying support, daily trend lines, continuation patterns, A-B-C corrections, you name it. So long as you trade in the direction of the confirmed trend, or in other words, “trade on confirmation, not speculation”.
Learning new things is one of the fun parts of trading and investing – plus we get to make money and increase our wealth. Three things that make me happy, and I hope make you happy too.
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July 2, 2009
Tags: Enter and Exit Posted in: Articles On Building Wealth
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