More about flags and prognosis for 2008

Hi everyone. First, thank you for your emails with your success stories! I love hearing about your great trades and overwhelmingly this has been the case. Of course with trading there are also challenges too, and I want to respond to an email I’ve just received, highlighting a challenge or two.

Since mid January it’s fair to say that the markets have been verychoppy, volatile and therefore the charts have looked a bit messy.  Youknow how I feel about that – I don’t like messy charts.  When I tradeflags, I like to trade neat looking patterns where I can easilyidentify my entry and exit points. 

The fact is that there are still great opportunities out there, butyou do have to be very selective.  Part of trading is knowing when topull the trigger and when not to pull the trigger. 

There are two pointers I’m going to suggest. 

  • First, stick to charts that are reasonably neat and tidy.  If you feel the chart is a big mess, then move to the next stock. 
  • Second, wherever possible, trade in the direction of the main trend. 
    If the market is trending downwards, then trade the BEAR FLAGs and ifthe market is going up then concentrate on BULL FLAGs. 
    Trading flags is always best when you’re trading in the direction of the trend.  I trade against the trend only whenI’m completely sure of a change in direction, otherwise I always tradewith the main trend.  In terms of timescale, for me the main directionwill typically be the last two months or so (around 40 bars on a dailychart). 

 
Here’s my prognosis for the rest of this year:

I think this year will be a bumpy ride.  Both the charts and my contacts on Wall Street are extremely bearish … in particular watch out for late summer / early autumn (you heard it here first!).All traders are going to have to be very prudent with the selection oftrades, and that means you’re going to have to be patient, andvigilent.  Vigilent means you’re going to have to supervise your tradesregularly, at least once a day when you’re in the trade. 

With regard to straddles, we’re in a quiet phase right now with thenext earnings season about 7 weeks away.  So the emphasis right now istrading the flag patterns as and when they appear. 

You may have noticed that we have a new area on the site called”TradeFinder Flags”.  Here you’ll be able to simply see a list ofstocks which are consolidating.  Again, you’re going to have to useyour discretion and only trade the neatest patterns and in thedirection of the main trend. 

 

A Pretty Chart

Here’s a perfect bear flag that appeared on TradeFinder just a few daysago – the stock ticker is IRIS.   See how clear it is.  See how it hasa nice flag pole, followed by a consolidating chart pattern and volumeshrinking during the consolidation pattern. 

bearflag perfect1b.png

 

Now look what happened next:

bearflag perfect2b.png

 

 Now let’s look at an ugly chart:

An ugly chart

ugly chart.png

 

See how there’s no real discernable pattern here.  This chart isbasically untradeable.  There’s no real trend, the bars are long, messyand have very inconsistent tail-lengths.  There’s no easy point atwhich to enter the trade … hopefully you can see this easily. 

Right now, more trades than normal are being stopped out,particularly if you’re trading bull flags within a bear trend … butmore than that, many bull flags simply aren’t being triggered, in otherwords, there lots of rounded tops.  This is fine because we wouldn’t bein the trade until the top of the bull flag has been exceeded,therefore with rounded tops we don’t make anything, but we don’t loseanything either. 

I’ll cover this thoroughly in the webinars to follow very soon. I’ll also cover how to manage the flag trade by using targets andtrendlines.  I’m completing the research and training for conductingregular webinars, so expect to hear more about this very soon. 

All the best

 

Guy

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