Now you have to look at the tools that you can use to check out the stocks in your first folder. You can get a lot of free information online or you can subscribe to a charting service.
I usually look at the last 3 to 6 months to see what stocks I should be interested in. I can then see which stocks look like they are a long prospect, and which are good for shorting, that is, I can see the current trend and how well behaved the stock has been in pattern terms. Stocks which go both up and down can be profitable too; you just have to be careful how you read them. I put these all into the first folder.
You need to become familiar with the charts, so familiar in fact, that you don’t have to spend much time looking at each, but you can spot the trends quickly to see if it’s going the way we want. You’ll find that comes better with practice, but first of all, you will have to take some time to sort through.
Setups are various configurations of candles, or bars, which you can learn to recognize, and which have certain outcomes in the majority of cases. They are specific configurations that can be interpreted as a particular market psychology, and you have to count on traders responding in the normal way.
For instance, you may trade on the basis that a price has tested support, and held. Usually, there is a burst of buying when traders see this, and identifying the setup allows you get in earlier, in anticipation of rising prices. This is the success of setup trading – the highest gains can be made by getting in early on the move, and, unlike trend following, with setups you get in at the start.
Of course, setups don’t work all the time – nothing does – so you have to watch your stops in case it doesn’t work. If it does work, you can keep raising your stop to lock in your profit.
Your Eye Is Your Best Tool
In discussions of all the ways that you can monitor the markets to improve your trading, you should never overlook your best tool, which is your eye combined with practice and common sense. I think that sometimes people get lost trying to overanalyse their way to a perfect system or tool, and sometimes should just stand back and get back to some basics. Of course, that’s not what you wanted to hear if you’re looking for one of those ‘black box’ systems that will just churn out winning trades, and if so you are in the wrong place and with the wrong teacher, so you should go and spend your thousands somewhere else. In all probability you will spend that money and not get any more winning trades than you would by just looking at the charts, there is no substitute for ap-plying your own psychology to try and determine the market psychology. What I want you to do is learn how to think for yourself and pick your own trades, and that is a skill that will stay with you forever.
For instance, your eye is invaluable when you come to drawing lines on a chart, which you need to do to check on trends, and find breakout points.
Using The Tools That We All Use Effectively
You should know that I only emphasise the basic tools, and in fact all the indicators I use don’t require expensive software. You can probably just use your broker’s online services for the data I will tell you to look at. The secret, if it is a secret, is to under-stand and use these tools effectively.