One of the hardest things traders need to overcome is themselves! Why do I say that? Because it is often our your own emotions that sabotage your trading. There are a couple of keys that can help you to control your emotions and find more success in your trading.

1. Find a good basic system and stick with it (notice, I said a “good” system, not a “perfect” system). Traders are often looking for the next best or greatest thing and are hoping for that “Holy Grail” system of trading. This is an easy trap to fall into because of all the marketing hype out there. Even the very best systems are not perfect and are going to have periods of losses. This is just a fact of life. But, if your system has been back-tested and works relatively well in a variety of market conditions, one of the best things you can do is to stick with it! Don’t fall for the system that promises “easy money”, because, over time, that system is just an illusion. We can often get into the mindset of always looking for the best system and ignoring the fundamental trading rules that will give us good results over time.
2. Get a good routine and follow it. Consistency is the key here. What I mean by that is that you should treat trading as a profession, not just a hobby. In order to have a good routine, you should understand and decide what you are going to trade. In other words, specialize in a few things and get very good at those and leave the rest for someone else to do. Also, when you trade is very important and is also heavily influenced by the markets you trade. For example, if you trade Forex you may have more flexibility to trade at different times than if you trade stocks or options, which have specific exchange trading times. Also, where you trade is important – you should set up a place to trade, be organized, and free from distractions that might inhibit your trading. The overall message here is to take your routine seriously like if it was your only source of income and be very consistent with what, when, and where you trade.
3. The last key to controlling your emotions is to use good, consistent risk management. If we risk too much on any one trade or if we risk too much of our account on too many trades, it is easy to let our emotions get the better of us because we will have too much anxiety sometimes to make rational decisions. That will bring fear of losing into your trading and can cause you to make significant trading errors. The way to control this is to make sure that you use stop loss orders and that you make sure that your position sizing is appropriate to the size of account you have. I limit my risk to 1 percent per trade and no more that 3 percent overall at any one given time. This allows me to sleep good at night even if my trades go against me.

Being a successful trader largely comes down to controlling our emotions by being more disciplined – follow a good system, a good routine, and good risk management!

Last week there was an announcement that was made that a bi-partisan agreement had been reached on the budget that may keep the government from shutting down in the first quarter of next year, as it did earlier this year. Since no one from either party, except the people that crafted it, seems particularly happy with it, I believe that this is a clear indication that this may be a good one. I don’t need to know what’s in it, I just need to know that many people in Congress don’t like it, which tells me it didn’t go far enough to meet whatever agenda each side has. Let’s be honest, for the most part, our representatives in Congress are more interested in what will serve them the best and the longest, which is really focused around getting them re-elected. Because there is so much complaining, I believe that it could be a very good sign that something may actually be getting done that’s in the best interest of the country.

The potential for another government shutdown was created with the most recent temporary agreement that was to be revisited in the first quarter of next year; the thinking was that this would give them time to come up with a solution. Since the likelihood of any logical solution or agreement coming out of Congress seems like a long shot at best, this new agreement may be about all we can hope for.

It will be interesting to see the way that the markets react to this agreement going forward because another shutdown was weighing on the minds of traders and investors; it was another thing that could slow the economic recovery setting us back for a time as it did the last time. Since this may be one obstacle that is no longer in our way, will this lead us to extend the markets rally that we have seen over the past year? Understanding, of course, that the rally is more the result of government intervention in the economy, which leads directly to them manipulating the markets, keeping it fictitiously high. Will the removal of the threat of a government shutdown pave the way for extended stock gains?

One thing that I find particularly interesting about the stock market right now is that when the end of the government manipulation is mentioned, it no longer shocks the markets into a downward spiral. In fact, there was a report that came out a week or two ago that stated that the government may be willing to begin to reduce the amount that they are manipulating the markets and the market was actually up on that day. Of course their manipulation is in the form of the $85 billion dollars per month that they are pumping into our financial system, which makes people feel good about the economy, but it is something that really isn’t there. In the past, when the Fed mentioned tapering off and reducing the amount that they pump into the economy, the markets were rocked and spiraled downward. But since this has not been the case recently, is this an indication that we are now okay with the government letting the so-called “free markets” be “free” to act how they are designed to act? Will this newfound confidence that we have in ourselves, in addition to the roadblock being removed around another potential shutdown, continue the current market rally well into next year? At this point, is there actually a reason to believe that anything could derail the market from moving forward?

We can analyze the markets all we want and come with as many opinions about what is going on as we can, but the bottom line is still that a large part of what the markets are based on is the emotions of it participants. When traders and investors feel good about the economy and generally what is going on in the world around them, the truth really doesn’t matter. All that matters is that they feel good so as long you can make enough people believe one thing, since perception is reality, the markets will react in the way that its participants generally feel about the world around them. At some point reality may set in. So while we should participate in as much of the rally as we are comfortable being in, we also need to be very mindful that it is fragile and could turn at any time. We need to be nimble and ready to move into cash at a moments notice.

One of the most important things we need to learn to do is read the charts. Becoming a good chart reader means you can look at any chart and see some specific things. These things include seeing the trend, support and resistance, and price patterns. By knowing these things on the chart, we can be prepared to identify some trading opportunities. This does not mean we know for sure what will happen, but it does give us an idea of what may be happening. If we know what might happen, we can be prepared to take advantage of it when confirmation is made.

In the chart above, there are several things we will point out:

1. At the letter “A” there are 2 arrows pointing downward. These two arrows are showing places on the chart where the price has experience a pull back. This type of price action happens all the time and is where the price movement is taking a break. This break in momentum will allow for good opportunities to enter a trade prior to the trend resuming. If we can identify this, we will be prepared for trading.
2. At point “B” you can see where price is being supported by the line “2” and line “1”. Line “1” is an upward moving support line where price has been bounce up off of. Knowing where support is located will give us opportunities to enter on the bounce up off this area. Line “2” is also showing this type of support.
3. At point “C” you can see where the old support line “1” acted as a new resistance line at point “C”. By identifying this as a resistance point ,we can look to sell our open trade or look to enter into short positions.
4. Point “3” shows a flag type of pattern where we would look to short after the bearish trend resumes. A bear flag like this is commonly seen along a longer trend and one where lots of traders will look for entries, so the patterns tend to work out well.

Obviously we are not illustrating all of the things that are happening on this chart, but we do want to point out the importance of being able to look at a chart and quickly place on it some of the most important information. If you can get good at this, you can take any chart and any time frame and quickly know the areas where you may be looking to trade. This doesn’t mean that you cannot, or should not, use technical indicators, it just means you need to realize the importance of reading the price action on the charts. If you can, first and foremost, trade the price movement, you can then add indicators to help you confirm what you are seeing on the charts.

Take some time to practice looking for the trends and support or resistance by drawing lines on the charts. As you become more proficient at this, you will become a better trader.

Next Wednesday, on Dec 18^th, the Federal Open Market Committee, or FOMC, announcement will be coming out at 2 P.M. EST. Why is this important? Well, this announcement could be the one from The Fed that might actually start the winding down or “tapering” back of the stimulus program, commonly referred to as Quantitative Easing 3 (QE3).

First of all, what is the FOMC? And then, what is Quantitative Easing? The FOMC is the Federal Open Market Committee and is a committee within the Federal Reserve System that is made up of seven Board of Governors, who are appointed by the President of the United States and confirmed by the Senate for 14-year terms. The Chairman of the Board of Governors, who is currently Ben Bernanke, is appointed from within the board for terms of 4 years at a time. George W. Bush first appointed Ben Bernanke and President Barak Obama reappointed him for another 4-year term. In addition to the 7 Board of Governors, the FOMC is made up of 5 additional members, chosen from the 12 Federal Reserve Bank Presidents on an annual rotating basis. This Committee meets six times per year, which brings us to next week’s meeting. At the conclusion of the meeting, there is a statement that is released which announces the current thinking of the FOMC and the current actions and potential future actions the FOMC is planning to take. Lately, most of the attention given to The Fed has been centered on the FOMC’s stimulus programs, Quantitative Easing.

So, what is Quantitative Easing? Quantitative Easing (QE) is the monetary policy used by The Fed to stimulate the national economy after the financial crisis in late 2008, early 2009. The Fed implemented quantitative easing by buying financial assets from commercial banks and other private institutions, thus increasing the monetary base. This is distinguished from the more usual policy of buying or selling government bonds in order to keep market interest rates at a specified target value. The Fed and other central banks tend to use quantitative easing when interest rates are already at low levels and this alone has failed to produce the desired effect. The major risk of quantitative easing is that, although more money is floating around, there is still a fixed amount of goods for sale. Under normal conditions, this will eventually lead to higher prices or inflation. Since the Financial Crisis of 2008, The Fed has undertaken three separate asset buying programs referred to as QE1, QE2, and, most recently, QE3.

The latest program, implemented in September, 2012, called QE3, was instituted to buy up to $85 billion mortgage-backed securities per month, until which time the employment and the economy improved.

This brings us to next week’s FOMC announcement, will The Fed begin “tapering” QE3 back as they have talked about doing or lay out a credible plan for doing so? The uncertainly of the current actions has created nervousness in the markets. What is the reason for the market’s concern? Well, the main purpose of the Quantitative Easing programs was to stimulate the economy by lowering interest rates. Lower interest rates have also stimulated the stock market because stocks have become more favorable than other investments such as fixed income bonds. As The Fed pulls back on the stimulus program, interest rates will naturally rise and this could negatively impact the stock market, which is why stock investors are obviously nervous.

So stay tuned for the official announcement on Wednesday! It could have big implications for The Fed actions going into 2014.

Today we are going to look at how we might use the stochastic indicator to help us identify the overbought or oversold condition of the currency pair we are looking to trade. Knowing if a currency pair is overbought or oversold can give us additional evidence that the price might be ready to move in the opposite direction. Let’s first identify what overbought and oversold really means.

1. Overbought: This is a condition where the currency pair has gone through a period of buying that caused the price to move up. This buying generally pushes the price to a level where it is likely to experience some level of resistance causing it to drop back down.
2. Oversold: This is a condition where the currency pair has gone through a period of selling that caused the price to go down. This selling generally pushes the price to a level where it is likely to experience some level of support causing it to move back up again.

Warning! Just because an indicator, stochastic, or otherwise, indicates that the price is overbought or oversold, it does not mean that the price will immediately reverse direction. In other words, something that is showing an overbought condition can continue to move higher, while something that is showing an oversold condition can continue to go down. We need to remember that price is king and no matter what an indicator shows, the price will do what it wants to do. If we remember this, and focus on the price, then an indicator like Stochastic can be a useful tool.

Now that we got that out of the way, take a look at the chart below that illustrates some of these points.

First of all, take a look at the 2 red arrows. The top arrow represents the level of 80 – this is where the price movement would be considered overbought. The bottom arrow represents the level of 20 – this is where the price movement would be considered oversold. Notice how the Stochastic line is near the upper level and has been for some time. The letter “a” shows the area where the indicator had moved above the 80 level and would be considered overbought. You should also notice that the price continued to move higher, even after the Stochastic indicator showed above the 80 level. This is one of the issues some traders will have with this indicator. They will automatically want to sell once the Stochastic line moves above 80. This would be a mistake, as the price continued to move higher. If you look to the left of the letter “b”, you can see where the indicator line was below 20. This would indicate an oversold condition, suggesting to buy the currency pair. In this case, the price responded the way we would like it to.

Using this indicator can be a good way to visualize when the price may be ready to move higher or lower. The key to successfully using this indicator is to wait for the price action to confirm what the indicator is suggesting. Take some time to review this tool to see if it might help you in making the charts a bit clearer for you to trade.

A common question that I get asked around this time of year, every year, is if it is a good idea to trade during the holidays through the end of the year. The answer can be a little difficult because it depends upon what the volume levels of various markets are, along with what specific markets you’re trading and what region of the world you reside in.

Generally speaking, as we approach the end of the year more and more traders leave the market to do whatever it is that they do for the holidays whether it is to travel or it just take a break from trading. It seems to me that over the past several years, the better the market as a whole has performed throughout the year, the more traders leave the market. I have been told over the years by traders that when they have a successful year they like to take a break until the first full business week of the next year, which in this case will be the week of January 6, 2014. It is a good time to enjoy their personal lives and travel or just to be away from the market. This makes allot of sense for a few different reasons because the market can be a little volatile around this time of year.

The closer it gets to the end of the year the more volatile the markets can get because as more and more traders leave the market there is less and less liquidity so the price action of stocks, ETFs and the Forex pairs can act in an exaggerated way. Often times, you will see very small candles on various time frames commonly jumping from one price level to another. It is common knowledge that a sideways market can be one of the most dangerous types of markets to be in, but a thinly traded market can be just as dangerous. More experienced traders can typically handle this since they have likely been trough these types of markets in the past, but newer, less-experienced traders should be very careful because if you do make a trade and the price action lurches in the opposite direction of your trade, it can take a very long time to recover if it does recover anytime in the near future. You could be in a trade with a negative position going forward into the first quarter of the New Year for quite some time.

I remember back around 2006 and 2007 trading in the Forex market near the end of the year and the price action would reach a given price level and just sit there for extended periods of time which, is almost unheard of during times when there is normal liquidity. The price action would lurch up and down gapping to a given price level just sitting there and then gapping again to another price level, but often times it never really went anywhere to speak of and it seems as though it rarely went far enough to make it worth trading. Over the past few years, I have noticed much more Forex liquidity and much more smoothly moving price action, so it does seem as though there has been a less erratically moving market.

The stock market may tend to contract too as volume reduces. Last year the ATR and volume reduced by approximately 25% as the end of the year approached; I would expect about the same thing to happen this year as well. I may be a little too conservative, but I’m likely going to stay in cash from the close of trading on Friday, December 20, 2013, until the open of the first full week of trading on Monday, January 6, 2014. There is no reason for me to believe that there will be any more liquidity in the market this year than there has in years past, so I will take the time to analyze what has worked for me this trading year and what didn’t, leading me to a logical conclusion of what I will focus on in 2014.

So today we are asking the question, “Is it time to buy silver?” Of course we don’t ever really know for sure, but, as we look at the recent price action, we might see why we are asking this question. Take a look at the chart below to see what we are looking at.

In the above chart we are looking at the weekly time period of the silver. With this time period we are seeing that the price is currently at a level of old resistance and new support. This might indicate that the price is at a point where it might want to go back up again. As we look at the daily chart below, we can see additional evidence that the price might want to go back up.

In this chart you will see a closer look at the current support area. This is what we will look at carefully to see if there is evidence of bullish movement. The key is to avoid the urge to enter prior to confirmation of a bullish move back up. If we get into a trade prematurely, we risk the possibility of the price moving against us quickly. We obviously want to avoid getting in too early so we will look for the evidence that the move is real.

As we zoom in on the daily candles, we can begin to see the areas we need to move above in order to confirm the price action is moving back up again. Currently, we have two points of interest that need to be broken, first the down trend line, which is the first barrier, followed by the 40-period simple moving average, which is the final barrier. Once these two areas are broken, we can clearly say that the downward trend is being reversed. An entry at this point would be based on the evidence seen on the chart. You can also look a placing a buy stop entry order at a level above the 40-period simple moving average in order to enter. Just be careful that you don’t place it then forget you set it, as prices and patterns may change.

So although we don’t know exactly if or when the chart of silver will begin to move up again, it is clear that there are signs that the price may be sitting near a level where it could reverse. As with any trades, we will watch patiently for the setups to occur so we can enter when the evidence has presented itself.

Take some time to look at the chart of silver to see for yourself the upcoming possibilities that could happen in the near future. If the price of silver returns to the prior highs of around $50, we are currently looking at an increase of nearly 250%. This is well worth the time to prepare for another run up in silver in the futures. Again, no guarantees that this will happen, but if it does we will want to be prepared.

How can price action patterns and indicators predict a market reversal? Last week we talked about price patterns as a possible indication of a market trend change, with examples of double or triple tops or head and shoulder patterns. Another good way to determine a possible change in market direction is to look for Divergence. What is Divergence? The textbook definition of Divergence is as follows: In technical analysis, Divergence is considered either positive or negative, both of which are possible signals of major shifts in the direction of the price. Positive, or Bullish Divergence, as it is commonly referred to, occurs when the price of a security makes a new low while the indicator starts to climb upward setting new highs. Negative Divergence, commonly referred to as Bearish Divergence, happens when the price of the security makes new highs, but the indicator fails to do the same and, instead, closes lower than the previous high. Using divergence, traders can make transaction decisions when divergence is observed, where the price of a stock and a set of relevant indicators, such as the Stochastics, Relative Strength Index (RSI), for example, are moving in opposite directions. Therefore, divergence occurs when the price action makes a new high or low in the direction of the trend while the technical indicator used starts to move in the opposite direction. Bullish Divergence occurs in a down trending market when the price is hitting lower lows, while, at the same time, a technical oscillator, like Stochastics, RSI or MACD, is producing higher lows. When we see Bullish Divergence, this could be a strong indicator of a possible market bottom and a signal to look for a possible trend reversal. See the figure below for an example of Bearish Divergence.

EXAMPLE OF BULLISH DIVERGENCE

If we look at a chart of the Standard and Poor’s 500 there is a strong Bullish Divergence signal that occurs right around the beginning of June, 2012. Notice that in a downtrend the price had hit a new swing low of 1266.74 on June 4^th. Also note, at the same time the market was hitting its new swing low, the stochastics indicator is moving higher. Also, since this Bullish Divergence pattern showed on the charts as of June 4, 2012, the Standard and Poor’s 500 started to move up immediately in a bullish direction by more than 150 points. The Bullish Divergence in this case indicated the bottom of the market and a change in momentum from the bear market to a bull market.

EXAMPLE OF CURRENT BEARISH DIVERGENCE

If we look to the current markets, note the chart below of the SP-500, over the last few days has been clearly moving upward, setting higher highs and higher lows. At the same time, notice the Stochastics Indicator has been pulling back of the same period, setting lower highs, setting up Bearish Divergence, and the market is starting to fall off.

So, are we in for a market correction? Well, according to the definition of Divergence we are clearly seeing weakness in the current up trend. Whether this continues into a full market correction or not, we will just have to wait and see. Also note the Head and Shoulders pattern that is setting up. If we get that to finish and break below the neckline in the next couple of days, LOOK OUT BELOW!

Since the stock market has been so flat lately it seems as though it is getting ready to make a big move – the only question is which way that move will be. The S&P 500 has been trading in a very narrow range over the past few weeks, which seems to be creating a lot of tension in the price action. Just by looking at the charts, it appears as though, when it does finally make a move, it may make it very quickly, jumping or dropping big in just one day or maybe over the course of a few days. In either case, it appears as though it is getting ready to do something.

Maybe this is the calm before the storm or maybe a lot of traders and investors are just taking a “wait and see” attitude hoping that the other guys will make a move moving the market so they can react to whichever way it goes. Whatever the reason is it seems as though it’s like a sprinter on the starting block just waiting for the gun to fire to start a race.

I have stated in the past that over the last year, in approximately the end of the 3^rd week to the beginning of the 4^th week of many months, we seem to see a pullback or a small correction followed by another relatively strong upward move. The upward moves have been at least as strong as the downward moves and, in most cases, the upward move is a little stronger, which has been propelling the S&P 500 to greater and greater heights. The market showed signs of weakness two times in November, but it did recover, continuing to rise slightly each time without really going anywhere substantial or at least it isn’t going anywhere quickly. This may be one of the reasons that I keep waiting to see a big move that seemingly comes from nowhere. Maybe it will be some unexpected current event or a very big surprise in the upcoming economic data, but it just seems like it is willing and able to make a big move, it just needs a catalyst.

It is definitely not uncommon for the market to end a year with a rally. In fact, there have been studies done which state that if you are only invested in the stock market for a few weeks out of every year towards the end of the year you will be able to capture a very large percentage of the total move that the market makes in most years. Since the government’s manipulation has pushed the stock market up so much this year it is hard to believe that it will rally further by the end of the year, but it is certainly possible that it could. It is also possible that so many traders and investors have produced such good results so far this year that they are willing to take extended time off as the end of the year approaches, thereby reducing the liquidity in the markets for those who continue to participate.

If I was going to bet on a market direction, which in a way I am, I am going to bet that the market comes down and I believe that at some point, in the not too distant future, it will come down with authority. I have not believed that there has been much substance to the upward moves that we have seen this year and I really do not believe that anything has dramatically changed leading to any reason for a continued rally. In the first quarter of next year we will need to deal with another debt ceiling issue and the government will run out of money again but it may be possible that both of those issues are far enough into next year so that investors and traders forget about them until after this year ends. This may mean that there could be some stability for the rest of this year but I believe that the market is just waiting for a catalyst, it is waiting for a reason to drop, and when it does, it will be a substantial enough of a drop that it provides us with excellent buying opportunities, which will allow us to set ourselves up for a very good 2014 trading year. Long-term investors will simply give back part of what they gained this year and then gain some of it back. But, if traders are smart and patient, I believe that we can set ourselves up for a good amount of profit after a pretty good drop in prices.

When looking for a trading system to implement, there are two basic types. There are the trending types of systems and the ranging types of systems. A trending system is one where you are looking to first identify the trend or the direction that the price action is moving, then enter a trade once the momentum begins to move back in the direction of the trend. A ranging system is one where you would be looking for the price action to be in a sideways, non-trending movement. With a ranging market you would be looking to trade as the price bounces up and down, in-between the upper level of resistance and the lower level support. Take a look at both of these types of market conditions below.

Trending Markets 

With a trending system you would look to the trend to identify if you were going to be buying or selling the pair. In this case we would be looking to buy as the trend is up. The other things trend traders do is to look for the area of support or resistance as the place where they will be entering into their trades. In this example, where the trend is up, we would wait for the price to pull back to support in order to look for the entry. If the trend were down, we would be looking for a move back up to the resistance area to look where we might want to short the pair.

Ranging Markets

In this chart above you can see an example of a pair that is moving sideways. I have outlined the support and resistance areas with the red and green line. Likewise, with a ranging market, we would be looking to trade as the price bounced up and down off of these areas for our entry.

Of course there are many different ways to trade these two and many different indicators that we can use to help with our entries, but when it comes down to it, most systems are going to look at these two types of entries.

Another type of entry system that works on both trending markets and sideways markets is the breakout trades. This can be in the form of price patterns such as flag, triangles, double tops, Head and Shoulders or in just defining support and resistance on the chart and looking for the price to move beyond them.

A breakout trade is one in which the support and resistance areas have been defined by lines drawn on the chart and where the entry happens as the price moves above or below these lines. Knowing where to draw these lines is an important part of trading breakouts. If we draw them too close we end up getting filled and then whipped out of the trade or if they are too far away, we end up getting filled at a price that is too far from the breakout and the price may retrace a bit.

Regardless of what type of entries you are looking for, you will find that they are likely to fit into either the category of a trend trade or a range trade. Take some time to look at what you are trading and how you might improve your trading by identifying the type of entries you are looking for.