USING FUNDAMENTAL AND TECHNICAL ANALYSIS

USING FUNDAMENTAL AND TECHNICAL ANALYSIS


In some ways, day trading is easy. Open up an account with a brokerage firm and off you go, buying and selling securities! But how are you going to know when to buy and when to sell? That’s not a simple matter. Most day traders fail, because it’s easy to place the order, but hard to know if the order is the right one.

Traders use different research systems to evaluate the market. They have access to tools that can help them figure out when a security is likely to go up in price and when it is likely to go down.

Research systems fall into two categories: fundamental and technical. Fundamental research looks at the specific factors that affect a security’s  value. What’s the relationship between the trade deficit and futures on two-year treasury notes? What’s the prediction for summer rainfall in Iowa, and how will that affect December corn futures? How dependent is a company on new products to generate earnings growth?

Technical research, on the other hand, looks at the supply and demand for the security itself. Are people buying more and more shares? Is the price going up as they buy more, or does the price go up just a little bit? Does it seem like everyone who is likely to buy has already bought, and what does that mean for the future price?

Anyone with a surefire system has already made a fortune and retired to a private island in a tropical climate. He or she is too busy enjoying drinks with umbrellas in them to share that surefire trading system with you.

Research Techniques Used in Day Trading

Day traders need to make decisions fast, and they need to have a framework or doing so. That’s why they rely on research. But what kind? Most day traders rely heavily on technical research, which is an analysis of charts formed by price patterns to measure the relative supply and demand for the security. But some use fundamental analysis to help inform their decisions, too.

What direction is your research?

Securities are affected by matters specific to each type and by huge global macroeconomic factors that affect every security in different ways. Some traders prefer to think of the big picture first, whereas others start small. And some use a combination of the two approaches. Neither is better; each is simply a different perspective on what’s happening in the markets.

Top-down research

With a top-down approach, the trader looks at the big economic factors: interest rates, exchange rates, government policies, and the like. How will these things affect a particular sector or security? Is this a good time to buy stocks or short interest rate futures? The top-down approach can help evaluate the prices in big market sectors, and it can also help determine what factors are affecting trading in a subsector. You don’t have to trade stock market index futures to know that the outlook for the overall stock market will have an effect on the trading of any specific company’s stock.

Bottom-up research

Bottom-up analysis looks at the specific performance of the asset. It looks at the company’s prospects and then works backward to figure out how it will get there. What has to happen for a company’s stock price to go up 20 percent? What earnings does it have to report, what types of buyers have to materialize, and what else has to happen in the economy?

Fundamental research

Day traders do very little fundamental research. Sure, they know that demand for ethanol affects corn prices, but they really want to know what the price will do right now relative to where the price was a few minutes ago. How a proposed farm bill might affect ethanol prices in six years doesn’t figure into day trade, though. Knowing a little bit about the fundamentals — those basic facts that affect the supply and demand for a security in all markets — can help the day trader respond better to news events. It can also give you a better feel for when swing trading will generate a better profit than closing out every night. But knowing a lot can drag a day trader down.

Fundamental analysis can actually hurt you in day trading, because you may start making decisions for the wrong reasons. If you know too much about the fundamentals, you might start considering long-term outlooks instead of short-term activity. For example, many people buy Standard & Poor’s (S&P) 500 Index mutual funds for their retirement accounts because they believe that in the long run, the market will go up. That does not mean that people should trade eMini S&P futures or an S&P exchange-traded fund today, because there can be a lot of zigzagging between right now and the arrival of the long-run price appreciation.

Fundamental research falls into two main categories: top-down and bottom-up. As I mentioned earlier, top-down starts with broad economic considerations and then looks at how those will affect a specific security. Bottom-up looks at specific securities and then determines whether those are good buys or sells right now.

If you love the very idea of fundamental research, then day trading is probably not for you. Day trading requires quick responses to price changes, not a careful understanding of accounting methods and business trends. A little fundamental analysis can be helpful in day trading, but a lot can slow you down.

Technical analysis

Information about the price, time, and volume of a security’s trading can be plotted on a chart. The plots form patterns that can be analyzed to show what happened. How did the supply and demand for a security change, and why? And what does that mean for future supply and demand? Technical analysis is based on the premise that securities prices move in trends, and that those trends repeat themselves over time. Therefore, a trader who can recognize a trend on the charts can determine where prices are most likely to go until some unforeseen event comes along that creates a new trend.

The basic element of technical analysis is a bar, which shows you the high, low, open, and closing price of a security for a given day. It looks like figure.

In most markets, every day generates a new bar (many traders talk about bars instead of days, and they aren’t talking about where they go after work). A collection of bars, with all their different high, low, open, and close points, is put together into a larger chart. Often, a plot of the volume for each bar runs underneath, with the result looking like figure.


Many patterns formed in the charts are associated with future price moves. Technical analysts thus spend a lot of time looking at the charts to see if they can predict what will happen. Many software packages send traders signals when certain technical patterns occur, so that the traders can place orders accordingly.

Technical analysis is a way to measure the supply and demand in the market. It’s a tool for analyzing the markets, not predicting them. If it were that easy, everyone would be able to make money in the markets.

Price changes

Market observers debate market efficiency all the time. In an efficient market, all information about a security is already included in the security’s price, so there’s no point to doing any research at all. Few market participants are willing to go that far, but they concede the point that the price is the single most important summary of information about a company. That means that technical analysis, looking at how the price changes over time, is a way of learning about whether a security’s prospects are improving or getting worse.

Volume changes

The basic bar shows how price changed during the day, but adding volume information tells the other part of the story: how much of a security was demanded at that price. If demand is going up, then more people want the security, so they are willing to pay more for it. The price tells traders what the market knows; the volume tells them how many people in the market know it.

How to Use Technical Analysis

Technical analysis helps day traders identify changes in the supply and demand for a security that may lead to profitable price changes ahead. It gives traders a way to talk about and think about the market so that they can be more effective.

Charts are generated by most brokerage firm quote systems, sometimes with the help of additional software that automatically marks the chart with trendlines. That’s because a technical trader is looking for those trendlines. Is the security going up in price, and is that trend going to continue? That’s the information that a trader needs before placing an order to buy or sell.

One interesting aspect of technical analysis is that the basics hold no matter what market you are looking at. Technical analysis can help you monitor trends in the stock market, the bond market, the commodity market, and the currency market. Anywhere people try to match their supply and their demand to make a market, technical analysis can be used to show how well they’re doing it.

Finding trends

A technical analyst usually starts off by looking at a chart and drawing lines that show the overall direction of the price bars for the period in question.Rather than plot the graph on paper or print out the screen, she probably uses software to draw the lines. Figure shows what this basic analysis looks like.


With the basic trendlines in place, the trader can start thinking about how the trends have played out so far and what might happen next.

Here’s the thing about trends: Sometimes it’s good to follow, and sometimes it’s good to deviate. Remember when you were a kid, and you wanted to do something that all your friends were doing? And your mother would invariably say, “If all your friends jumped off of a bridge, would you have to jump off, too?”

Well, Mom, guess what? If the bridge was on fire, if the escape routes were blocked by angry mobs, if the water were just a few feet down, yes, I just might jump off the bridge like everyone else. Likewise, if someone was paying us good money to jump, and I knew I wasn’t likely to get hurt on the way down, I’d be over the railing in a flash. Sometimes it’s good to be a follower.

But if my friends were idiots, if there were no fire and no angry mob, and if I couldn’t swim, I might not be so hasty.

Trend following is like those mythical childhood friends on that mythical hometown bridge. Sometimes, you should join the crowd. Other times, it’s best to deviate.

Draw those trendlines!

The most basic trendline is a line that shows the general direction of the trend. And that’s a good start, but it doesn’t tell you all you need to know. The next step is to take out your ruler, or set your software, to find the trendlines that connect the highs and the lows. That will create a channel that tells you the support level — the trendline for the lows — and the resistance level — the trendline for the highs. Unless something happens to change the trend, securities tend to move within the channel, so extending the line into the future can give you a sense of where the security is likely to trade. Figure shows you an example.


When a security hits its support level, it is usually seen as relatively cheap — so that’s a good time to buy. When a security hits its resistance level, it is usually seen as relatively expensive, so that’s a good time to sell. Some day traders find that simply moving between buying at the support and selling at the resistance can be a profitable strategy, at least until something happens that changes those two levels.

Calculating indicators

In addition to drawing lines, technical analysts use their calculators — or have their software make calculations — to come up with different indicators. These are numbers that are used to gauge performance. The following is a list of some common indicators, with definitions.

Pivot points

A pivot point is the average of the high, low, and close price for the day. If the next day’s price closes above the pivot point, that sets a new support level, and if the next day’s price is below the pivot point, that sets a new resistance level. Hence, calculating pivot points and how they change might indicate new upper and lower stops for your trading.

For markets that are open more or less continuously, such as foreign exchange, the close price is set arbitrarily. The usual custom in the United States is to use the price at 4:00 p.m. Eastern time, which is the closing time for the New York Stock Exchange.

Moving averages

Looking at all those little high-low-open-close lines on a chart will give your bifocals a workout. To make the trend easier to spot, traders calculate a moving average. It’s calculated by averaging the closing prices for a given time period. Some traders prefer to look at the last 5 days, some at the last 60 days. Every day, the latest price is added, and the oldest price is dropped to make that day’s calculation. Given the wonders of modern computing technology, it’s easy to pull up moving averages for almost any time period you want. The average for each day is then plotted against the price chart to show how the trend is changing over time. Shows an example of a 10-day moving average chart.


Traders use the moving average line to look for crossovers, convergences, and divergences. A crossover occurs whenever the price crosses the moving average line. Usually, it’s a good idea to buy when the price crosses above the moving average line and to sell when the price crosses below it.

To use convergence and divergence in analysis, the trader looks at moving averages from different time periods, such as 5 days, 10 days, and 20 days. Shows what it looks like.


When two or three of the moving average lines converge (come together), that means that the trend may be ending. That often makes it a good time to buy if the trend has been down — and a good time to sell if the trend has been up. If two or three of the moving average lines split up and diverge, that means that the trend is likely to continue. That means that it’s probably a good time to buy if the trend is up and sell if the trend is down.

A moving average is a lagging indicator. It sums up trading activity in the last 5, 10, 30, or 60 days. That means that the line will smooth out changes in the trend that may affect future prices.

Trends move in phases

Price trends tend to move in cycles that can be seen on the charts or observed in market behavior. Knowing the phases of a trend can help you better evaluate what’s happening. Here is a summary of some phases of a trend:
  • Accumulation: This is the first part of the trend, where traders get excited about a security and its prospects. They start new positions or add to existing ones.
  • Main phase (also called continuation): Here, the trend moves along nicely, with no unusual price action. The highs get higher on an uptrend, and the lows get lower on a downtrend. A trader might make money, but not big money, following the trend here.
  • Consolidation (also called congestion): This is a sideways market. The security stays within the trend, but without hitting higher highs or lower lows. It just stays within the trading range. A consolidation phase is good for scalpers, who make a large volume of trades in search of very small profits. It can be boring for everyone else.
  • Retracement (also called correction or pullback): This is a secondary trend, a short-term pullback away from the main trend to the support level. Retracements create buying opportunities, but they can also kill day traders who are following the trend.
  • Distribution: In the distribution phase, traders don’t think that the security can go up in price any more. Hence, they tend to sell in large volume.
  • Reversal: This is the point where the trend changes. It’s time to sell if you had been following an uptrend and buy if you had been following a downtrend. Many reversals follow classic patterns.
Those ever-changing trends

Although technical traders look to follow trends, they also look for situations where the trend changes so that they can find new profit opportunities. In general, day traders are going to follow trends, and swing traders — those who hold securities for a few days or even weeks — are going to be more interested in identifying changes that may play out over time.

Momentum

Following the trend is great, but if the trend is moving quickly, you want to know so that you can get ahead of it. If the rate of change on the trend is going up, then rising prices are likely to occur.

To calculate momentum, take today’s closing price for a security, divide that by the closing price ten days ago, and then multiply by 100. This gives you a momentum indicator. If the price didn’t go anywhere, the momentum indicator will be 100. If the price went up, the indicator will be greater than 100.

And if it went down, it will be less than 100. In technical analysis, trends are usually expected to continue, so a security with a momentum indicator above 100 is expected to keep going up, all else being equal.

But it’s that “all else being equal” that’s the sticky part. Technical analysts usually track momentum indicators over time to see if the positive momentum is, itself, a trend. In fact, momentum indicators are a good confirmation of the underlying trend. 

Momentum is a leading technical indicator. It tells you what is likely to happen in the future, not what has happened in the past.

Momentum trading is usually done with some attention to the fundamentals. When key business fundamentals such as sales or profits are accelerating at the same time that the security is going up in price, the momentum is likely to continue for some time.

Finding breakouts

A breakout occurs when a security price passes through and stays above — or below — the resistance or support line, which creates a new trend with new support and resistance levels. A one-time breakout may just be an anomaly, what technicians sometimes call a false breakout, but pay attention to two or more breakouts. Figure Shows what breakouts look like.


When a true breakout occurs, a new trend starts. That means an upward breakout will be accompanied by rising prices, and a downward breakout will be accompanied by falling prices.

With a false breakout, some traders buy or sell thinking that the trend will continue, see that it doesn’t, and then turn around and reverse their positions at a loss.

A false breakout can cause those misled traders to wreak havoc for a day or two of trading. This is where the ability to size up the intelligence of the other traders in the market can come in handy.

Good technical analysts look at several different indicators in order to see whether a change in trend is real or just one of those things that goes away quickly as the old trend resumes.

Reading the Charts

How long does it take to find the trend? How long does it take for the trend to play out? When do you act on it? Do you have minutes, hours, or days to act?

Because markets tend to move in cycles, technical analysts look for patterns in the price charts that give them an indication of how long any particular trend may last. In this section, I show you some of the common patterns that day traders look for when they do technical analysis. Alas, some are only obvious in hindsight, but knowing what the patterns mean can help you make better forecasts of where a security price should go.

This is just an introduction to some of the better-known (and cleverly named) patterns. Technical analysts look for many others, and you really need a book on the subject to understand them all. Check out the appendix for more information on technical analysis so that you can get a feel for how you can apply it to your trading style.

Waving your pennants and flags

Pennants and flags are chart patterns that show retracements, which are short-term deviations from the main trend. With a retracement, there’s no breakout from the support or resistance level, but the security isn’t following the trend, either.

Figure Shows a pennant. Notice how the support and resistance lines of the pennant (which occur within the support and resistance lines of a much larger trend) converge almost to a point.


Figure, by contrast, is a flag. The main difference between a flag and a pennant is that the flag’s support and resistance lines are parallel.


Pennants and flags are usually found in the middle of the main phase of a trend, and they seem to last for two weeks before going back to the trendline. They are almost always accompanied by falling volume. In fact, if the trading volume isn’t falling, you are probably looking at a reversal — a change in trend — rather than a retracement.

Not just for the shower: head and shoulders

The head and shoulders formation is a series of three peaks within a price chart. The peaks on the left and right (the shoulders) should be relatively smaller than the peak in the center (the head). The shoulders connect at a price known as the neckline, and once the right shoulder formation is reached, the price plunges down.

The head and shoulders is one of the most bearish technical patterns, and it looks like Figure.


The head and shoulders formation seems to result from traders holding out for a last high after a security has had a long price run. At some point, though, the trend changes, because nothing grows forever. And when the trend changes, the prices fall. An upside-down head and shoulders sometimes appears at the end of a downtrend, and it signals that the security is about to increase in price.

Drinking from a cup and handle

When a security hits a peak in price and falls, sometimes because of bad news, it can stay low for a while. But eventually, the bad news works itself out, the underlying fundamentals improve, and it becomes time to buy again. The technical analyst sees this play out in a cup and handle formation, and Figure Shows you what it looks like.

The handle forms as those who bought at the old high and who felt burned by the decline take their money and get out. But other traders, who do not have the same history with the security, recognize that the price will probably resume going up now that those old sellers are out of the market.

A cup and handle formation generally shows up over a long period of trading — sometimes as long as a year — so, many subtrends will occur during that time. A day trader will likely care more about those day-to-day changes than the underlying trend taking place. Still, if you see that cup formation and the hint of a handle, it’s a sign that the security will probably start to rise in price.


Mind the gap

Gaps are breaks in prices that show up all the time, usually when some news event takes place between trading sessions that causes an adjustment in prices and volume. Whether it’s an acquisition, a product line disappointment, or a war that broke out overnight, the news is significant enough to change the trend, and that’s why traders pay attention when they see gaps.

A gap is a break between two bars, and Figure shows what one looks like:


Gaps are usually great signals. If a security gaps up at the open, that usually means that a strong uptrend is beginning, so it’s time to buy. Likewise, if it gaps down, that’s often the start of a downtrend, so it’s better to sell.

Day traders can get sucked into a gap, a situation known as a gap and crap (or gap and trap, if you prefer more genteel language). When the security goes up in price, many traders view that as a great time to sell, so the day trader who buys on the gap up immediately gets slammed by all the selling pressure. Some day traders prefer to wait at least 30 minutes before trading on an opening gap, while others rely on their knowledge of the buyers and sellers in a given market to decide what to do.

Grab your pitchforks!

A pitchfork is sometimes called an Andrews pitchfork after Alan Andrews, the technical analyst who popularized it. It identifies long-run support and resistance levels for subtrends by creating a channel around the main trendline. Figure Shows what it looks like.


The upper fork shows the resistance level for upward subtrends, and the lower fork shows the support level for lower subtrends. The middle line forms a support and a resistance line, depending on which side of it trading takes place. If the price crosses above the mid-line, it can be expected to go no higher than the highest line. Likewise, if it crosses below the mid-line, it can be expected to go no lower than the lowest line.

Different Approaches to Technical Analysis

Technical analysts tend to group themselves under different schools of thought. Each approaches the charts differently and uses them to glean different information about how securities prices are likely to perform. In this section, I offer an introduction to a few of these approaches. If one strikes your fancy, you can look in the Appendix for resources to help you learn more.

Dow Theory

The Dow Theory was developed by Charles Dow, the founder of The Wall Street Journal. The theory and the market indexes that are part of it helped sell newspapers; they also helped people make money in the markets. It’s the basis for the traditional technical analysis described in this chapter. Dow believed that securities move in trends; that the trends form patterns that traders can identify; and that those trends remain in place until some major event takes place that changes them. Further, trends in the Dow Jones Industrial Average and the Dow Jones Transportation Average can predict overall market performance.

Not all technicians believe that the Dow Jones Industrial Average and Dow Jones Transportation Average are primary indicators in the modern economy, but they rely on the Dow Theory for their analysis, and they still read the Journal.

Fibonacci numbers and the Elliott Wave

Remember back when you had to take standardized tests, you’d often have to figure the next number in a series? Well, here’s such a test. What’s the next number in this series?

   0, 1, 1, 2, 3, 5, 8, 13, 21

If you answered 34, you’re right! The series is known as the Fibonacci numbers, sometimes called the Fibonacci series or just the Fibs. It’s found by adding together the preceding two numbers in the series, starting with the first two digits on the number line. 0 + 1 = 1; 1 + 1 = 2; 1 + 2 = 3; and so on into infinity. Furthermore, once the series gets well into the double digits, the ratio of one number to the one next to it settles at .618, a number known as the Golden Proportion; this means that the ratio of the smaller and the larger of two numbers is the same as the ratio of the larger number to the sum of the two numbers. In nature, this is the proportion of a perfect spiral, like that found on a pinecone and a pineapple.

Ralph Elliott was a trader who believed that over the long run, the market moved in waves described by the Fibonacci series. For example, Elliott believed that a bull market would be characterized by three down waves and five up waves. Furthermore, he believed that support and resistance levels would be found 61.8 percent above lows and below highs. If a security falls 61.8 percent from a high, that would be good time to buy, under the Elliott Wave system.

Elliott believed that these waves ranged from centuries to minutes, so traders and investors both use the system to identify the market trends that suit their timeframes. Others — including me — think it’s highly unlikely that the human activity in the stock market would follow the same natural order as the ratio of the spiral on a mollusk shell.

Japanese Candlestick charting

Candlestick charts were developed by traders in the Japanese rice futures markets in the 18th century, and they’ve carried through into the present. The basic charts are similar to the high-low-close-open bars, but they are shaped a little differently to carry more information. Figure shows an example:


The length of the rectangle (the so-called candle, also known as the body) between the open and the close price gives a sense of how much volatility the security has, especially relative to the high and low prices above and below the rectangle (the so-called wick, also known as the shadow). The shapes and colors create different patterns that traders can use to discern the direction of future prices. (Most technical analysis packages will color the candlesticks green on up days and red on down days, to make finding trends even easier.)

The Gann system

William Gann supposedly made 50 million dollars in the stock and commodities markets in the first half of the 20th century using a system that he may or may not have taught to others before his death. There’s a lot of mystery and mythology about the Gann system; some traders rely on what they perceive to be his method, whereas others dismiss it, in part because Gann relied on astrology to build his forecasts.

The Gann system, as it is defined nowadays, looks at the relationship between price and time. If a security moves one point in one day, that’s a 1 × 1 Gann angle, and that’s normal trading. If a security moves two points in one day, it would be said to create a 2 × 1 Gann angle, which is bullish. An angle of less than 1 × 1 would be bearish.

Furthermore, Gann recognized that the market would move back and forth while in a general upward or downward cycle, but some of those fluctuations were more positive than others. Just as the system looks for price movements over time with even proportions (1 × 1, 2 × 1, and so on), it also looks for orderly retracements. When a security moves back 50 percent, say from a low of $20 to a high of $40 and then back to $30, it would be a good time to buy under the Gann system.

Many traders swear by the 50 percent retracement guide — even those who think that Gann is otherwise a crazy system. This may be the origin of one hoary trading chestnut: buy whenever a price dips, because it’s likely to be heading on its way back up.

Pitfalls of Technical Analysis

A lot of people make a lot of money selling services to day traders. They produce videos, organize seminars, and (ahem) write books to tell you how to be a success. But in the financial world, success is a combination of luck, skill, and smarts.

Before you commit wholeheartedly to any particular school of research, and before you plunk down a lot of money for some “proven” system demonstrated on an infomercial, think about who are you are and what you are trying to do. Despite all the books and all the seminars and all the business school debates, every form of research has its drawbacks. Keep them in mind as you develop your day-trading business plan.

If it’s obvious, there’s no opportunity

Many day trading systems work much of the time. For example, a security gaps up, meaning that due to positive news or high demand, the price jumps from one trade to the next. This is good, and the security is likely to keep going up. So you buy the security, you make money. Bingo! But here’s the thing: Everyone is looking at that gap, everyone is assuming that the stock will go up, so everyone will buy and that will bid up the security. Double Bingo! The profit opportunity is gone. So maybe you’re better off going short? Or avoiding the situation entirely? Who knows! And that’s the problem. Looking for obvious patterns like gaps tells you a lot about what is happening in the market, but only your own judgment and experience can tell you what the next move should be.

Reverse-reverse psychology

Sitcoms always revert to tired formulas. The smart kid brags about how he or she will dominate a talent or quiz show and then panics on the big day. The two people who can’t stand each other will get a horrible sickness that requires them to be quarantined — in the same hospital ward. The teenage son can’t believe what fabulous soup his mother made, and it turns out she was brewing a homemade cleaning solution.

Or there’s this one: The kids want to do something that the parents don’t approve of. The parents try reverse psychology. “Go to the party, kids, have fun!” they say, thinking that the kids will not want to do anything that parents approve of. The kids, knowing that the parents are trying to pull the reverse psychology, decide to play along with reverse-reverse psychology. “Don’t worry, we’ll stay home!” they say — and then sneak out. Hilarity ensues.

Technical analysis is a useful way to gauge market psychology. But when trying to determine the mood of the market, it’s really easy to start overanalyzing and working yourself into a knot. Should you follow the trend or trade against it? But if everyone trades against it, would you be better off following it?

Instead of puzzling over what’s really going on, develop a system that you trust. Do that through backtesting, simulation, and performance analysis. The more confident you feel in how you should react given a market situation, the better your trading will be.

The random walk with an upward bias

Under the efficient markets theory, all information is already included in a security’s price. Until new information comes into the market, the prices move in a random pattern, so any security is as likely to do as well as any other. In some markets, like the stock market, this random path has an upward bias, meaning that as long as the economy is growing, companies should perform well, too; therefore, the movement is more likely to be upward than downward, but the magnitude of the movement is random.

If price movements are random, some people are going to win and some are going to lose, no matter what systems they use to pick securities. If price movements are random with an upward bias, then more people are going to win than lose, no matter what systems they use to pick securities. Some of those who win are going to tout their system, even though it was really random chance that led to their success.

Technical analysis is a useful way to measure the relative supply and demand in the market, and that in turn is a way to gauge the psychology of those who are trading. But it’s not perfect. Before you plunk down a lot of money to learn a complex trading system or to subscribe to a newsletter offering a can’t-miss method of trading, ask yourself if the person selling it is smart or just lucky. A good system gives you discipline and a way to think about the market relative to your trading style. A bad system costs a lot of money and may have worked for a brief moment in the past, with no relevance to current conditions.

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