In part 1 we said that we could evaluate whether a Market was a Bull or Bear depending on the:
In Part 2, we’ll cover the explanation of “Market Character.” Just what on earth is “Market Character”, you ask? If you’ve followed any of my programs, you know that I’m always analogizing the Market to nature, or some other everyday organism….because that’s exactly what it is.Â
Market Character is really the “personality” of the Market in question. Look, we already know that Bull Markets are generally quiet, trending creatures. We’ve seen this again and again, where markets seem to quietly grind higher day after day. The movements are very predictable and very linear; Bull Markets are generally a market technician’s dream, as everything that they predict comes true. During Bull Markets, past performance really does equate to future success as the current price action mimics what has been seen in the past. So the first thing of “character” that we’ll notice in a Bear Market is that the price action becomes much more unpredictable and non-linear.Â
The second thing that we’ll notice about Bear Market “character” is related to the first point; the intraday range of the price action is much larger. We can measure this through indicators such as the ATR, or “Average True Range“; during a Bull Market, we’ll often see a very quiet ATR of around “10” on the S&P500, or 100 points on the Dow. During Bear Markets, we’ll usually see the Average True Range in excess of 70 points on the S&P’s, or 500 points on the Dow.Â
One of the most obvious character elements of a Bear Market is that the price is going down over time; we’ll get to that point in one of the next installments of this article. But did you know that the majority of the days in a Bear Market will still show a positive close? Yes, most of the individual candlesticks during a Bear Market will show a higher close, or a white/green candlestick…however your charting program is set up. The true character of a Bear, however, is that when distribution periods show up, they are extremely strong and powerful. This means that most of the time, Bear Markets areÂ indistinguishableÂ from Bull Markets except for periods of heavy distribution, aka “sell-offs.”
And that is one of the reasons why they are so difficult to trade, because every rally looks like the beginning of a new Bull Market. In fact, rallies during Bear Markets are especially intense and violent, often jumping 10-20% in value off of the bottom, leading everyone to believe that the Bull is back, when in fact it’s just become a higher level to short from. Most of the time, these rallies take the form of an ascending wedge pattern:
Â The last thing that we’ll note about Bear Markets’ Character is their duration; a cyclical Bear is normally much shorter than the Bull Market that spawned it. Bull Markets tend to “grind” higher, and Bears take no prisoners on the way down. The majority of the damage is done in just a few months, although they will typically take about 18 – 24 months to finally bottom out and start pushing higher again. The true end of the Bear Market is usually marked by an extreme rally, as too many traders waited far too long to jump on the Bear, and the new uptrend forces them to cover their short positions en masse.Â
In Part 3, we’ll discuss some of the standard “signals” that we’ll find on charts to warn us of the approaching Bear, or confirm the fact that we’re in one.Â
What did we just see last week? Was it the start of the 2012 Bear Market, or was it just a really deep pullback in the middle of the cyclical Bull Market that we’ve been in since March 2009? Chances are, if you listen to ten Market pundits, then you’ll get ten different opinions. And that’s not really the point, anyway; listening to others will give you a bias, and you’ll just end up following the herd over the edge yet again. What we believe at here at Trading Concepts is to give you the knowledge so that you can tune out the noise and make your own investing decisions.Â
I think the best way that we can objectively judge whether a Market is in a Bear Market or not is based on three different types of criteria:Â
Most traders focus on the usual signals that everyone else sees, which does not really provide you with much “edge.” Â What you should really be looking for is a set of objective, identifiable criteria that can allow you to confidently go against the grain, if need be, based on the strength of your analysis. Identifying the Bear is like anything else in trading; your objective is to stack up as many edges as possible to place the odds more in your favor then the rest of the herd that’s just watching CNBC.Â
In part 2, I’ll go over “Market Character” so you can begin to identify what makes a Bear different from a Bull.Â
As you probably know, 90% of all traders generally fail.Â And believe me when I say itâ€™s not because the markets are so difficult to understand and grasp.Â Let me tell you the real reasons why most traders fail.
The plain simple truth is; it’s all about discipline and the will to follow a good trading plan. More than 90% of traders can’t or won’t do this â€“ and guess which side of the winner/loser divide they fall into!
You see, despite their best intentions, most traders panic or trade aimlessly. Emotions take over. They wind up being their own worst enemies despite their best efforts to remain calm, cool and collective.
Here are a few facts that distinguish the professional traders (those traders actually making a living from their trading) from the amateur traders who either blow out their account or do no better than tread water.
The professional trader knows his market…and has a plan for every trading day. Very few traders can successfully trade on gut feelings. Think of the very few elite professional athletes who make complex skills look real simple (i.e. Michael Jordan, Tiger Woods, Wayne Gretzky) — those are the only guys who can trade intuitively and it takes many, manyÂ yearsÂ to be able to trade like that.
So, please don’t try to trade on gut feelings because the odds are better than 99% that it’s not going to work for you, at least not at this point in your trading career!
There’s one more thing about professional traders:
They always manage their losses. They know the profits will take care of themselves.
In contrast, the amateur trader generally doesn’t understand his chosen market (if he even has one), he doesn’t have (or stick to) a real trading plan, and he focuses on profits and all the great things he’s going to buy with his prospective profits. Losses are something he fears and as a result he incurs a whole lot of them (normally enough to wipe out the profitsâ€¦and then some).
Amateur traders fail because they approach the market with the same trading plan, or worse, no trading plan whatsoever. They’re always in an internal battle. They maintain blind faith in a fixed trading plan that isn’t working with the following excuses …
They typically never learn from their mistakes and when they change, it’s normally under enormous stress that ultimately teaches them nothing. Â Amateur traders generally burn out at the boiling point over and over. Unfortunately amateur traders never really realize that the aim of professional trading is to avoidÂ that boiling point in the first place — not “steel” yourself to keep fighting through it!
So, how do amateur tradersÂ break out from this vicious syndrome?Â And how do they transform themselves into professional traders?
Well, a very determined few may eventually make it on their own through sheer will power, but not many. Â The others may try to ride on a successful trader’s coat-tails (i.e. join a professional â€˜Trading Roomâ€™, etc.) until they’ve mastered their own winning trading skills.Â And those that truly want to â€˜learn how to become successful professional tradersâ€™ find a mentor and learn side-by-side from them.
You’re welcome to make it on your own, of course. I truly applaud each and every one of you that tries to stick it out and learn on your own without any help from anyone else, I really do. But do be aware that your chances of failure are a whole lot higher when you try to trade alone and you choose not to learn from anyone else.
I absolutely know for a fact that your chances of ultimate trading success are far greater if you use a mentor instead of trying to do it alone.
All traders can make money in the markets, thereâ€™s no doubt about that â€“ even with different trading concepts, different systems and methodologies, and some taking the opposite sides of the same tradesâ€¦BUT only when they all use trading methods and systems with 10 Common Characteristics. Â In other words, whichever trading method(s) you ultimately use in your trading, they must possess ALL of the 10 characteristics outlined below:
Here are five more qualities that are just as important, and in some cases more important than the ones just listed.
Trading formulas come in a myriad of sizes and shapes, but I have crafted this formula to be all encompassing, and it seems to suffice nicely.Â Iâ€™ll give you the equation, and thenÂ we can discuss it:
(Trading Knowledge X Practice) + Persistence + Consistency = Success
My hobby (my passion) is playing chess, and I had the privilege of playing postal chess (sending chess moves through the mail) with the United States Champion, Sammy Reshevsky. While I never came close to winning a game, I did glean insights into his success. For one, I observed that he took the knowledge that he had acquired and practiced over and over and over. He would review his games, and if he made a rare mistake, he would identify the issue, make adjustments, and then return to the chess board. For the trader itâ€™s the same, and hence the first part of the formula is to constantly sharpen your knowledge by multiplying it with much practice. Knowledge is most important, and practice is the key to using that knowledge correctly.
Now we take your trading knowledge, which you are multiplying by practice, and add to this the next part of the formula:Â persistence.Â Persistence is the cornerstone of your trading competitive drive, it is your motivation for doing what you are doing, and for having the unshakeable vision that you will be doing this for the rest of your trading life. Itâ€™s your assurance that thisÂ training will sustain you, and it isÂ your preparation to meetÂ trading opportunitiesÂ favorably. Also, itâ€™s not allowing yesterdayâ€™s trading loss to break your concentration or your mental processing, or to make you think that you must jump back into the market quickly (even withoutÂ a proper setup) justÂ because you foolishly have the notion that you must get your money back instantly. Instead, persistenceÂ molds behavior, and givesÂ the boldnessÂ to continue learning the markets and to learn them correctly.
Consistency, the third component of the formula, a byproduct of knowledge and persistence, encourages the trader with trading performance,Â builds strengths, completes the equation, and yields a sum total of trading success.
So focus on this formula, use itÂ for introspection of your ownÂ personal progress, and you should learn to build a career that will be gratifying andÂ profitably rewarding for yourÂ trading lifetime to come.
Traders often ask me â€œWhatâ€™s your favorite oscillator?â€, and I usually hedge, and hem and haw around the answer, because in general, I use very few indicators. I lean more toward the pure price action side ofÂ charting. However, there is one oscillator that trulyÂ caught my attention: itâ€™s called the Coppock Indicator, and I often share it with people when they ask.
During a year whenÂ the US landedÂ its first rocket on the moon, and the first Wal-Mart opened, Edwin Coppock developed his Coppock Oscillator. Designed for the S&P 500 index, this â€œguideâ€ or â€œcurveâ€, much to my amazement, has been faithfully identifying and signaling the start, and end, of bull market runs, and itâ€™s been doing it for decades passed! I found that it has also been applied to similar stock indexes, like the Dow Jones Industrial Average as an example.Â So what makes up this indicator that I appreciate so much?
This trend-following, averages-based oscillator is designed for use on a monthly time scale only.Â Using a ten-month smoothing of the averaged eleven-month rate and fourteen-month rate of change in the S&P 500, this oscillator will reverse direction when the momentum in the stock market runs out of gas. If you wanted to diagram it, this is what it would look like
WMA  of (ROC  + ROC )
If you are looking for a buy signal, this is generated when the indicator is below zero, and turns up from a trough. If you want to know when it is time to take your money â€œoff the tableâ€, look for a double top without the curve falling to zero between the tops. This shows a very strong market that has not partaken of any normal market corrections, andÂ broadcasts â€œtrouble is just around the corner.â€
If you think the Coppock Indicator might not be all that itâ€™s cracked up to be, thenÂ just take a look at some of the statistics that I uncovered.Â This â€œdouble topâ€ has occurred six times in the past eight years, and the indicator nailed it every time:Â October 1929, -86%, May 1946, -39%, February 1969, -36%, January 1973, -48%, September 1987, -33%, and April 1998, -18%.Â In 2007, the curve told us that there was trouble on the horizon, and sure enough, by late 2008 the S&P was off over 47% from the highs seen during 2007.
So if you and I should ever be talking, and the word â€œoscillatorâ€ comes up in our discussion, be prepared for my dissertation on Mr. Coppock. He might just be worth a little additional research.
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