Getting started in technical analysis by Jack D Schwager

82 trading rules and market observation

Entering trades

  1. Differentiate between major position trades and short-term trades
  2. If you believe a major trading opportunity exists, don’t be greedy in trying to get a slightly better entry price
  3. Entry into any major position should be planned and carefully thought through, never on intraday impulse
  4. Find chart that says timing is right now, don’t initiate a trade without confirming patterns
  5. Place orders determined by daily analysis. If market is not close to desired entry level, record the trade idea and review it each day
  6. When looking for a major reversal in trend, it’s wiser to wait for some pattern that suggests that the timing is right rather than fading the trend at projected objectives and support/resistance points
  7. If you have an immediate instinctive impression when looking at a chart, go with that feeling
  8. Don’t let the fact that you missed the first major portion of a new trend keep you from trading with that trend
  9. Don’t fade recent price failure patterns when implementing trades, even if there are many other reasons for the trade
  10. Never fade the first gap of a price move. For example, if you are waiting to enter a trade on a correction, and the correction is then formed on a price gap, don’t enter the trade
  11. In most cases, use market orders rather than limit orders
  12. Never double up near the original trade entry point after having been ahead. Often the fact that the market has completely retracted is a negative sign for the trade

Exiting trades and risk control (money management)

  1. Decide on a specific protective stop point at the time of trade entry
  2. Exit any trades if newly developing patterns or market actions are contrary to trade, even if stop point have not been met
  3. Always get out immediately once the original premise for a trade is violated
  4. If you are dramatically wrong the first day a trade is on, abandon the trade immediately especially if the market gaps against you
  5. In the event of major breakout, liquidate immediately or put a close stop
  6. If suddenly trades are volatile in the opposite direction, liquidate
  7. If selling into resistance or buying into support and the market consolidates instead of reversing, get out
  8. If the gut feeling that your recent recommendation is wrong, reverse your opinion
  9. If you are unable to watch the market, either liquidate all or have stop orders on all
  10. Do not get complacent about an open position. Always know when you are getting out
  11. Fight the desire to immediately get back into the market after a stopped out trade

Other risk control (money management) rules

  1. When trade goes bad, reduce position size, use tight stop losses, or be slow in taking up new trades
  2. When trading is going badly, reduce risk exposure by liquidating losing trades, not winning ones.
  3. Be careful not to change trading patterns after making a profit
  4. Treat small positions with the same common sense as large positions
  5. Avoid holding very large positions during news releases and major reports
  6. Futures trades; apply the same money management principles to spreads as to outright positions
  7. Don’t buy options without planning at what outright price the trade is to be liquidated

Holding and exiting winning trades

  1. Do not take small, quick profits in major position trades, In particular, if you are dramatically right on a trade, never never take profits on the first day
  2. Don’t be too hasty to get out of a trade with a gap in your direction. Use the gap as initial stop, then bring in stop in trailing fashion
  3. Try to use trailing stops, supplemented by developing market actions, instead of objectives as a means of getting out of profitable trades
  4. If large portion of objective is achieved quickly, take partial profits
  5. If objective is reached and you still like the trade, stay with it with a trailing stop
  6. If everything is going right, scale up and use close trailing stops
  7. If long term trade, have a game plan for reentering positions. Inability to enter at a worse price can often lead to missing major portions of a large trends
  8. When trading larger positions, avoid the emotional trap to be 100% right. Take partial profits

Miscellaneous principles and rules

  1. Always pay more attention to market action and evolving patterns than to objectives and support/resistance areas
  2. When you feel action should e taken either entering or exiting a position, act, don’t procrastinate
  3. Never go counter to your own opinion of the long-term trend of the market. In other words, don’t try to dance between the raindrops
  4. Winning trades tend to be ahead right from the start
  5. Correct timing of entry and exit can often keep a loss small even if the trade is dead wrong
  6. Intraday decisions are almost always losers. Keep screen off intraday
  7. Be sure to check markets before the close on Friday
  8. Act on market dreams
  9. You are never immune to bad trading habits. The best you can do is to keep them latent. As soon as you get lazy or sloppy, they will return

Market Patterns

  1. If the market sets new historical highs and holds, the odds strongly favor a move very far beyond the old highs. Selling a market at new record highs is probably one of the amateur trader’s worse mistakes
  2. Narrow market consolidations near the upper end of broader trading ranges are bullish patterns. Reverse bearish.
  3. Play the breakout from an extended narrow range with a stop against the other side of the range
  4. Breakouts from trading ranges that hold for one to two weeks or longer are among the most reliable technical indicators of impending trends
  5. Flags or pennants forming right above or below prior extended and broad trading ranges tend to be fairly reliable continuation patterns
  6. Trade in the direction of wide gaps
  7. Gaps out of congestion patterns, particularly 1-2 months trading ranges, are often excellent signals. (works especially well in bear market)
  8. If a breakaway gap is not filled during the first week, it should be viewed as a particularly reliable signal
  9. A breakout to new highs or lows followed within the next week or two by a gap (particularly a wide gap) back into the range is a particularly reliable form of a bull/bear trap
  10. If the market breaks out to a new high or low and then pulls back to form a flag or pennant in the pre-breakout trading range, assume that a top or bottom is in place. A position can be taken using a protective stop beyond the flag or pennant consolidation
  11. A breakout from a trading range followed by a pullback deep into the range (eg ¾ or more) is yet another significant bull or bear trap formation
  12. If an apparent V bottom is followed by a nearby congestion pattern, it may represent a bottom pattern. Might be going for lower lows if consolidation is broken, set protective stops near top of consolidation
  13. V tops/bottoms followed by multi-month consolidation that form in close proximity to the reversal point tend to be major top or bottom formations
  14. Tight flag and pennant consolidation tend to be reliable continuation patterns and allow entry into existing trends with a reasonably close, yet meaningful, stop point
  15. If a tight flag/pennant consolidation leads to a breakout in the wrong direction, expect the move to continue in the direction of the breakout
  16. Curved consolidations tend to suggest an accelerated move in the direction of the curve
  17. The breaking of a short term curved consolidation in the direction opposite of the curve pathway tends to be a good trend reversal signal
  18. Wide ranging days with a close counter to the main trend usually tend to provide a reliable early signal of a trend change, particularly if they also trigger a reversal signal
  19. Near-vertical, large price moves over a period of two to four days (coming of a relative high or low) tend to be extended in the following weeks
  20. Spikes are good short term reversal signals. The extremes of the spike can e used as the stop point.
  21. In spike situations, look a chart both ways, with or without charts. Eg, if the spike is removed and a flag is evident, a penetration of that flag is a meaningful signal
  22. The filing in of a runaway gap can be viewed as possible evidence of a possible trend reversal
  23. An island reversal followed shortly thereafter with a pullback into the most recent trading ranges or consolidation patterns represents a possible major top or bottom signal
  24. The ability of a stock or future to hold relatively firm when other related markets are under significant pressure can be viewed as sign of intrinsic strength
  25. If a market trades consistently higher for most of the daily trading session, anticipate a close in the same direction
  26. Two successive flags with little separation can be viewed as a probable continuation pattern
  27. View a cured bottom, followed by a shallower, same direction curved consolidation near the top of this pattern, as a bullish formation (cup and handle)
  28. Extreme sentiment readings can often occur in the absence of major tops and bottoms, but major tops and bottoms rarely occur in the absence of extreme sentiment readings
  29. A failed signal is more reliable than the original one. Go the other way, using the high/low before the failed signal as a stop
  30. The failure of a market to follow through on significant bullish or bearish news is often a harbinger of an imminent trend reversal

Analysis and review

  1. Review charts every day, especially if you are too busy
  2. Periodically review long term charts
  3. Religiously maintain trader’s diary, including a chart for each trade and noting intending stop and objective, follow up as to how the trade turned out; observations and lessons, net profit or loss
  4. Maintain a patterns chart book
  5. Review and update trading rules, trader’s diary and pattern chart book on a regular basis



42 observations regarding success in trading

  1. First things first, why is it that you really want to trade
  2. Examine your motives
  3. Match the trading method to your personality
  4. It is absolutely necessary to have an edge
  5. Derive a method
  6. Developing a method is hard work
  7. Skill VS hard work
  8. Good trading should be effortless
  9. Money management and risk control
  10. The trading plan
  11. Discipline
  12. Understanding that you are responsible
  13. The need for independence
  14. Confidence
  15. Losing is part of the game
  16. Lack of confidence and time outs
  17. The urge to seek advice
  18. The virtue of patience
  19. The importance of sitting
  20. Developing a low-risk idea
  21. The importance of varying bet size
  22. Scaling in and out of trades
  23. Being right is more important than being a genius
  24. Don’t worry about looking stupid
  25. Sometimes action is more important than prudence
  26. Catching part of the move is just fine
  27. Maximize gains, not the number of wins
  28. Learn to be disloyal
  29. Pull out partial profits
  30. Hope is a 4 letter word
  31. Don’t do the comfortable thing, do what is right
  32. You can’t win if you have to win
  33. Think twice when the market lets you off the hook easily
  34. A mind is a terrible thing to close
  35. The markets are an exciting place to look for excitement
  36. The calm state of a trader
  37. Identify and eliminate stress
  38. Pay attention to intuition
  39. Life’s mission and love of the endeavor
  40. The elements of achievement
  41. Prices are non random = the market can be beat
  42. Keep trading in perspective

Planned trading approach

  1. Define a trading philosophy
  2. Choose the markets to be traded
  3. Risk control plan includes
    1. Maximum risk per trade
    2. Stop los strategy
    3. Diversification
    4. Reduced leverage for co-related markets
    5. Market volatility adjustments
    6. Adjusting leverage to equity changes
    7. Losing period adjustments
  4. Establishing a planning time routine
    1. Update trading system and charts
    2. Plan new trades
    3. Update exit points for exiting positions
  5. Maintain a trader’s diary
    1. Reason for trade
    2. How the trade turned out
    3. Lessons

~ by antinomian on July 23, 2007.

2 Responses to “Getting started in technical analysis by Jack D Schwager”

  1. Excellent list! I need to save this to review every few months. Many thanks!

  2. Great post. It is clear You have a great deal of unused capacity, which you have not turned to your advantage.

    The way you write shows you have a need for other people to like and admire you, and yet you tend to be critical of yourself.

    It seems to me that while While you have some personal weaknesses you are generally able to compensate for them.

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