A Picture is Worth a Thousand Words
A Picture is Worth a Thousand Words
Speculating in financial markets entails continuous observation, and extrapolation of price graphs, thus visual imagery is a powerful teaching tool when conveying trading concepts in the technical realm. When we think of effective presentations, aside from good descriptive verbal delivery, these are usually done with PowerPoint slides. Often, images can complement and fully capture the essence of what is being expressed.
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When I'm teaching, a large portion of the lecture time is spent reviewing price charts. I do this because I believe the more times I show a pattern, the easier students can conceptualize the trading strategy I'm trying to communicate. Along the same lines, I encourage students to begin putting together what I call a "playbook." Since I know there are many readers outside of the US, a little background is probably in order: The term playbook comes from American football and is the diagram of a team's strategies done with a series of X's and O's. Every team member has a copy of this playbook and is expected to commit it to memory. There are team meetings dedicated to reviewing these strategies, and on the field, execution of these tactics is repeated as often as required until a high level of proficiency is attained. These strategies will differ depending on the opponent's strengths or weaknesses and specific situations in live playing conditions. You can see what a playbook may look like in the example below:
Figure 1
In the trading arena, having a playbook is crucial. Some folks refer to this as a trading plan, however, a playbook is one of the core components of the plan that is very specific. Generally, when I see a trading plan, it is too vague; full of concepts, but little in the way of detailed setups. A playbook, however, serves to delineate triggers and characteristics of the tactic. Repeated viewings of a precise strategy can assist a trader in the memorization of specific price patterns.
Another key component to crafting a playbook is labeling every tactic so as to personalize it. Below are two visual examples of what I label the "mean reversion" setup. The yellow areas are the buy and sell zones.
Figure 2
Figure 3
The setup consists of waiting for price to pierce one of the bands and then locating a strong level of supply for a short entry on the upper band, or demand for a long entry on the lower band. There are other nuances which I will not reveal here, but it is quite a simple setup. The logic behind this strategy is that when the market has extended too far away from its mean (average price), the probabilities of "reverting," or coming back to the mean, are very high. Seeing this setup over and over, and essentially mastering it visually, is only the first step. Executing the trade is the second and most important step, and that's an entirely different matter.
The two charts below are of another setup I call "trend pivots." The highlighted areas are the buy and sell zones.
Figure 4
Figure 5
This is a trend strategy in which entries are taken on retracements into cluster zones in the direction of the dominant trend. Spotting a strong trending environment on an intraday time frame is a key element in the implementation of this strategy. In addition, awareness of the proximity of the longer time frame supply and demand levels is also important. The last point addresses the potential risk-to-reward of entering a trade when the trend is established. If there is a large distance away from an important support or resistance level, then chances are the trend can continue. If that distance is too close, however, the chances of a reversal increase and the trade should not be taken as the reward has diminished significantly.
In class I promote that students take screen shots of specific strategies, along with explicit entry and exit rules and put them in some type of file, whether it's an old-fashioned binder or a computer file. This is to be labeled "The Playbook" and reviewed every morning before the opening.
In conclusion: Having a viable set of strategies is paramount for anyone who wants to succeed in this business. Moreover, knowing what those setups look like on a price chart is a critical part of that process. As the adage goes, "A picture is worth a thousand words," and perhaps thousands of dollars for those of you that have a playbook and can execute.
Until next time, I hope everyone has a profitable week.
-Gabe Velazquez
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About Gabe Velazquez
Gabe got his start in the markets as a broker trainee for Paine Webber, a mere 3 months before the market crash of 1987. That experience brought to light the importance risk management plays in trading and investing. In fact, it's greatly influenced the way he trades today. He spent 15 years as a stock and commodities broker, conducting technical analysis seminars through-out Southern California. After many years of managing other people's money, Gabe now concentrates full time on trading his own portfolio and teaching. He currently holds a series 7, 63, 9 and 10 (securities and options principals license.)
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