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Michael Michaud is the founder of Invest2Success.com (http://www.invest2success.com/) and the Invest2Success Blog (http://invest2success.blogspot.com/). He has been investing and trading in the financial markets since 1989. He founded Invest2Success.com to empower individual institutional... More
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  • Price Action And Potential Market Direction

    Chart Pattern Logic Emotion

    Chart Pattern Logic By NetPicks Trade Systems

    In my last post I wrote about Recognizing the Potential of Chart Patterns. In it I try to illustrate the importance of how a chart pattern is configured and which direction you should be looking for the market to move in next. There's another important concept I want to elaborate on from my original post about When do Candlestick Patterns Really Work? It's what you see next following the formation of any pattern - it's the "if, then, else" chart pattern logic.

    If, Then, Else

    Again, we should start off with a recap of what I stated on this aspect of chart patterns in my original post:

    "Once a pattern does form and you take your trade, you must know what you want to subsequently see. If you see a break of the H&S neckline for example and strong buying meets it, the chances then are elevated that you'll see at least a test of the right shoulder area. This is because with a break of the neckline, the expectation is that there is a strong probability of long liquidation entering the market. Knowing this can give you an edge even when the pattern fails."

    Exploring this further, there are key references prices created by the pattern, which can give a trader a much better idea of whether or not the pattern is likely to complete. In the example of the head and shoulders pattern, these are the initial swing low after the break, the neckline and the right shoulder high.

    Chart Pattern Logic Emotion

    A retest of the neckline that holds, followed by more selling and a break of the initial low, gives this pattern a much higher chance of completing. While a poke back through the neckline definitely isn't a good thing for a seller of this pattern, it doesn't necessarily mean that the pattern has completely failed so long as it fails to hold above the neckline for very long. A swing back though the neckline followed by a bounce when it retests the neckline from above and the pattern is seriously under threat. If price breaks above the right shoulder, then the pattern is likely dead.

    You can start to see that what happens next has the potential to change what's more likely to happen. Additionally, the location that you take your entry and place your stop can be crucial - to see the pattern out completely can require more than you think in terms of the size of a stop and so sizing your position properly can be crucial.

    Failing Chart Patterns

    The issue is that the eye is always drawn to patterns that have worked on a historical chart. But if you look more closely, you'll see that there are many potential patterns which ended up failing. This is because failed patterns frequently do the opposite to what is expected and therefore end up looking completely different at first glance.

    So it's important to understand how patterns should behave as they develop and the key reference prices that need to hold. In the very simplest form, we can start to understand this in terms of swing logic - i.e. higher highs, lower lows, lower highs, higher lows. For a pattern you also need to reference the breakout point, but let's consider this basic logic for now.

    Chart Patern Logic Emotion

    We can see that in terms of the initial swing high, the next major high as it looks at this point is a lower high. So the possibility of a reversal begins to increase in probability. It should be noted in this chart however, that the thrust higher preceding the first swing high is likely to mean a follow through of some kind. But the fact is that a lower low after the lower high would increase the chances of a reversal. In this particular scenario, the lower high is really not confirmed yet.

    Chart Patern Logic Emotion

    What happened here was that there was no lower low and the first swing high was broken by a couple of ticks. The same sort of logic then starts to apply to the opposite side of the move - the market needs to hold at least the major swing low of the series in question in order for there more upside to be the likely outcome.

    Chart Pattern Logic

    Emotion Or Logic Concept. When you consider price action and what it infers about the potential market direction, it's important to consider the possibilities of what the market could do next, what you need to see for your position to remain strong and what might begin to invalidate it. Understanding chart pattern logic more comprehensively than simply seeing a pattern and taking a trade can help a trader to increase their hit rate.

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  • This Weeks Free Stock Pick - Rubber Plastics
    Trinseo

    Trinseo S.A. (NYSE:TSE) reorganized their business into two new divisions as of January 1, 2015, and were quickly rewarded with strong earnings numbers in the first quarter of implementation. This reorg consisted of creating the Performance Materials segment, and the Basic Plastics & Feedstocks segment; which saw improved profitability, and accelerated growth for the company overall. This improved visibility and accelerate growth as made Trinseo the Zacks Bull of the Day.

    This Zacks Ranked #1 (Strong Buy) company is a global materials company and manufacturer of plastics, latex, and rubber. The company's technology is used by customers in industries such as home appliances, automotive, building and construction, carpet, consumer electronics, consumer goods, electrical lighting, medical, packaging, paper and paperboard, rubber goods and tires. Trinseo S.A. is based in Berwyn, Pennsylvania.

    The reorg enabled Trinseo to see increased sales volume across all segments. Further, the company witnessed higher margins in polycarbonate, Performance Plastics, and "improved performance in styrene monomer, styrenic polymers, and at Americas Styrenics driven by first quarter industry restocking and overall stronger market conditions ahead of planned outages," according to management.

    Increasing Estimates

    The graph below shows the historic and future EPS estimates for Trinseo.

    Over the past 7 days, estimates for have increased for Q2 15, Q3 15, FY 15, and FY 16; Q2 15 jumped from $0.86 to $1.45, Q3 15 rose from $0.63 to $0.78, FY 15 leaped up from $2.79 to $3.88, and FY 16 increased from $3.01 to $3.44.

    Looking Ahead

    According to Chris Pappas, President and CEO, "We expect continued strong performance with higher Adjusted EBITDA and EPS in the second quarter versus the first quarter. The Basic Plastics & Feedsotcks division should see similar performance, quarter over quarter, while there will be some headwinds in the Performance Materials division from a second quarter planned outage in Synthetic Rubber as well as from increasing raw materials costs and price lag effects."

    Bottom Line

    After management decided to reorganize their business they posted their first beat of the Zacks Consensus Earnings Estimate. Further, the new model enables investors to better view each segment and the overall impact on the business, which has improved investor confidence in the company.

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    May 18 7:12 PM | Link | Comment!
  • Trading Profitably Is All In Your Head
    Mind Map Guidelines

    Mental Maps, Models, and Trading Success by Dr. Van Tharp Trading Education Institute

    In my professional career I have two loves. The first has to do with modeling. How do people do what they do? How can I figure out how and why some people perform so far above the crowd? And equally important, how can I teach other people to do that? As I've said often, I am a Neurolinguistic Programming Modeler.

    My second love is transformation. Our company mission is transformation through a trading metaphor and my life's work is about making people happier and more evolved as human beings. So the question I really ask is what do certain people do to become both peak performers and exceptional human beings and how can I add those elements to the models use. Let's take a closer look at modeling.

    As one of the early pioneers in Neurolinguistic Programming (NYSEMKT:NLP), David Gordon described modeling as a process of creating useful maps of human ability. So let's talk about the idea of mental maps first. In 1931, Alfred Korzybski presented a paper at the American Association for the Advancement of Science in New Orleans in which he made the most famous statement, "The map is not the territory." He later expanded upon this in his famous book Science and Sanity (1944). Korzybski's purpose was to help people put more precision into language and make their language more exact so that the world within would more closely (sort of) resemble the external world. In other words, he wanted to help make science more exact.

    Korzybski's key principle also became a fundamental presupposition of NLP: The map is not the territory. First, you have a sensory experience - not a sensory experience of the energy that is out there in the world but rather your sense receptors translate and interpret the energy. For example, you see colors because your eyes have cone cells that translate red, green and blue images and then your brain mixes those colors together. The "real world" as we understand it doesn't have red, green, and blue. Instead, it has light waves at different frequencies and why our brain re-Represents the information to you as various colors. But colors are an interpretation of different wave lengths of light.

    But it gets even more complex. What is the "real" world? Well we really have no idea but a good guess is that it is full of "particles and energy and consciousness." That's what my map tells me anyway. And the "real" world only exists because "my map" tells me it is out there.

    So what is this map that we make to represent the world? Actually, we have many maps and they are really composed of information - or to use a better word, distinctions. Gregory Bateson so famously put it in term of modeling - "What is the distinction that makes the difference?"

    I recently watched a video course on modeling by David Gordon who stated that to make useful maps we need a set of distinctions (i.e., rules and guidelines) to make the map making process easy for us. In other words, you even need a model to model others to figure out what their internal maps might be like. What distinctions does Gordon say you need in your modeling map?

    First, he says that you need the beliefs that drive the thing you want to model.

    Second, you need the strategies (a set of internal process and external behaviors) that produce the ability you want to model. There are also probably secondary strategies that come into play when the primary strategy is ineffective.

    Third, you need the mental states that 1) sustain the process of doing what is done and 2) the feelings (or states) that signal whether or not you are on track.

    Beliefs Mental Strategy Mental State

    After reviewing David Gordon's course, I thought I might try using his mapping process (set of distinctions). Now by this point, I believe I know a lot about successful trading so I decided to model my own knowledge base of the trading process (the 12 tasks of trading).

    For any modeling process, you need to get the beliefs first and I'll focus on that area in the remainder of this article.1 In the beliefs section for a model, you need "the criterion that drives the behavior or strategy." You also need a definition (description) of the behavior that drives the criterion along with three examples. And finally, you need evidence to know that the criterion has been met.

    I started by asking myself about trading success and tried to determine the criterion that I believe drives the whole process. I came up with "follow the rules and make sure you don't make any mistakes." In fact, I was really proud of that one because I think most traders think other criteria drive trading success yet following rules without making mistakes is the most vital belief.

    Next, you need about three examples to describe or define the criterion. That was easy because I believe there are three types of traders and each approaches this criterion differently - if they know about it.

    Example 1, the mechanical trader - The mechanical trader will know that he has followed the rules when he doesn't interfere in any way with the operation of the system. The rules are all mechanical, so following them is simple - just let the system run and don't stop any trades from being taken. This doesn't mean or imply that the rules for the system are necessarily good; it just means that they are followed.

    Example 2, the rules based discretionary trader - This trader also has a set of written rules that must be followed and he might allow himself some discretion in interpreting them. Since the rules are clear and written down, however, following them should be easy. For example, one rule might be to never take a trade unless the potential reward is three times as big as the potential risk. His discretion would come into play in determining what the potential reward might be while risk would be defined by his initial stop. With written rules, it's fairly easy to determine whether or not the rules were followed.

    Example 3, the completely discretionary (no rules) trader - This person has no rules and in my opinion, everything he does is a mistake. So again the definition is pretty clear.

    Now the next step is to ask people about how they make sure they follow the rules and don't make any mistakes. There are three specific tasks of trading designed to help here.

    First, in the daily self-analysis, you determine that all of your parts who might be involved in the trading process are aligned. If one part is not in agreement, you must do a parts negotiation to get that part into alignment before you start trading. (We cover the tasks of trading and this process in our Peak Performance 101 workshop.) If you don't complete a daily self-analysis each day before you trade, you could make lots of mistakes repeatedly simply because one of your parts might constantly sabotage the process.

    The next task to help you follow your rules is called mental rehearsal - which every professional athlete now does in some form for peak performance. Here you ask yourself, "What might occur today that might prevent me from following my rules?" then generate 1-2 solutions for each, and rehearse those solutions. One of the most common disruptions happens when something shifts your focused mental state into a non-optimal mental state (perhaps information from "talking heads" on the television). In Peak 101 and in the Peak Performance Home Study Course, we teach numerous methods to change your mental state. If you believe your mental state could get shifted, you would mentally rehearse one of these techniques so you can shift quickly back to an optimal state in case it were to happen. After you rehearse an item enough times, the solution becomes automatic, that is your unconscious mind will just do it under the appropriate conditions. (In addition to these daily mental rehearsals, making up a more global or comprehensive scenario list and developing solutions for each is called a worst case contingency plan and this should be a key part of your trading business plan.)

    The final trading task to help prevent mistakes is your daily debriefing which happens after your trading is complete. Here you ask yourself, "Did I make any mistakes today?" If you didn't make any mistakes (i.e., you followed your rules), then pat yourself on the back. If you lost money and followed your rules that day, then pat yourself on the back twice. If you did make a mistake, record the details in your mistake log, then determine the conditions for the cause of the mistake and mentally rehearse the proper response to those conditions. This is a very powerful process and can help you improve your rule following efficiency. For you perfectionists, don't aim for 95% profitable trades but rather aim for achieving 95% efficiency in your trading - less than one mistake in 20 trades.

    So what else would we need for the model at this point? Actually, you would need a lot. First you would have to "chunk down" to look at each of the three tasks in more detail. (Much more specific information for each task's beliefs, mental states, and mental strategy is well covered in our workshops.) You would also have to "chunk up" and ask "What else is missing?"

    Here are a few of the other models you would have to develop.

    The other nine important tasks of trading,

    How to generate effective trading rules,

    How the rules might differ in different market types,

    Understanding trading objectives and that you achieve your objectives through position sizing,

    Understanding self-sabotage and how to prevent it.

    After you discovered all of the missing pieces, you'd have to model each of those. Now if you were to go through this process fully, you would probably be very impressed with yourself. You would have come up with something very useful, something very helpful. Some of these additional models might be covered in subsequent articles. If you'd like the answers now, however, then I'd suggest you read Trading Beyond the Matrix which covers all of the models for trading success - and gives away the essence of my Super Trader program.

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    May 17 7:03 PM | Link | Comment!
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