Ignore the open, focus on the close

Plenty of novice traders understand that charts are important, but it can be confusing trying to figure out which signals are important and which signals are just noise.

All technical analysts agree one of the most important signals is the closing price. However, it’s not just the closing price that counts – it’s the closing price in relation to the day’s action that really counts.

The end of the day is when the professionals play

In general terms, most technical analysts view the closing price for daily sessions as holding more importance than closing prices for, say, five-minute periods.

This is because the end of the day is when key players have to fill orders, and they’ve often made judgments on whether to enter (or sell) according to the day’s action.

Other periods, like five minute or hourly charts, are arbitrarily chosen by you and don’t provide the same level of information.

However, all markets will have certain intra-day charts that are mostly used by professionals, and, in those charts, the closing price will give you important information.

What are you looking at?

There are two important pieces of information you can get from the closing price.

The first piece of information tells us which side was in control at the end of the session. We do this by looking at the close in relation to the range. At the top of the range, the buyers are in control. At the bottom, the sellers rule.

This is important because, as we’ve discussed, the key players are usually viewed as in control at the end of the day. Also, the close of the day should be most likely to signal what will happen tomorrow.

The second piece of information tells us how committed one party is. We do this by looking at where the closing price is in relation to the open. If is it is only marginally away from the open, then there is little commitment.

But if the closing price is significantly away from the open, then this piece of information gives you a good indication the day’s trend is likely to continue.

The first rules of Trading

Sometimes traders can get emotionally invested in a stock or a trading strategy and see their bank balance shrink to zip.

That’s because it’s easy to get excited about trading and forget the reason why you’re investing in the first place – to make money.

And in order to make money, you have to use your head and manage your money against risk.

Watch your bank balance!

You must remember that your number one goal in investing is to protect your trading capital.

Money management is what separates the successful traders from the ones who crawl home with their tails in between their legs (and their wallets empty).

The most sensible way to manage your money is through keeping your trades small (also known as the “basket approach”) and never average down (also known as increasing your holdings in falling stocks).

Profit versus loss

In managing the money set aside for investing, one must always remember to compare the potential size of a loss with the potential size of a profit.

Just because someone profits on trades most of the time doesn’t mean they’re ahead.

They may still have more profits than losses but lose out on the whole, because the magnitude of their few losses is severe.

On the other hand, those who only make a small proportion of profits relative to losses may do well because their losing trades aren’t significant.

Some intelligent grey heads have noted that it doesn’t even matter how many of your trades are profitable so long as you use intelligent money management principles.

Eye on the ball

It’s easy to get distracted by “trading noise” – the entry decision, the exit decision – the day-to-day or minute-to-minute movements of a stock.

However, your overall goal as a trader should be to preserve your capital.

In other words, take care of your money. This may sound like the kind of sensible advice your mother would tell you, and you might be dismissively thinking, “I know, I know!” But you’d be surprised at how important this message is – and how often people forget it!

In the end, what you’re doing is trading to survive – if you can survive, you can keep trading, after all.

And the longer you trade, the better your chance of trading success.

The six stockmarket viewpoints

Each of our individual personalities lead to various ways of viewing the world, so it should come as no surprise that different personalities will accompany different viewpoints of the market.

How do you view the market? Esteemed trading psychologist Brett Steenbarger theorized that there were six common ways in which stockmarket enthusiasts view the market, as a form of “cognitive lense”.

Steenbarger’s six market views are listed below. Ask yourself whether you identify with any of them – and whether you are familiar with the positive and negative aspects of each view, as well as the likely outcomes of each approach.

1. A trader views the market as an enemy to be conquered

This viewpoint seems to depict the market player as a conquering hero that feels that they have the power to overcome the market, if they so choose.

On the other hand, it can be interpreted as the type of trader or investor who feels that the market, as an enemy, is a threat – a threat that is too powerful to be conquered.

Though it is good to be confident, the former school of thought could lead a trader to overconfidence; the latter to underconfidence.

And while it is important to recognise at times that the market is something of a creature that is out of our control, it is also important to recognise that the market is never your enemy.

Those who blame the market for mistakes are likely to succumb to negative emotions, and overlook the fact that their own mistakes are driving a bad trade.

You cannot “conquer” the entire market, but you can conquer your own trading fears and set up efficient and successful trades through discipline, training, and using you desire to trade in a positive manner.

2. A trader approaches the market as a puzzle to be solved

We all feel at times that the market is a puzzle to be solved. This occurs when the market moves in ways we don’t expect it to move.

The recent bear market is a good example of this. Despite warning signs, no one really saw the global economic downturn coming – and it his us hard.

Though it is smart to acknowledge that the market in general can be puzzling at times, this “bigger picture” shouldn’t distract you from each of your smaller pictures – your individual trades.

Spending too much time analysing why the market is moving the way it is can lead to a kind of analysis paralysis – you fail to closely follow your trades whilst you puzzle over the overall picture.

On the other hand, it is a strength to engage in curiosity over the market, as this can lead to greater learning about the market. Just don’t run away with the idea.

3. A trader sees the market as a paradise of potential riches

What a starry-eyed viewpoint this one is! However, it would hard to find a trader who hasn’t felt this to some extent.

This sentiment is especially common amongst traders who are beginners. The lure of money, after all, is a big part of the reason why you get into the stock market to begin with.

Desire for money alone however does not a good trader make. Despite what many stock market films will tell you, greed isn’t good – greed can blind you, and ramp up your overconfidence.

It is important to view the market with a positive mind-set, but your focus should be on the strategy used to make money, not the ideal of money.

4. A trader regards the market as a mistress to be wooed

This view involves the mind-set where a market player may think, “Persistence alone will pay off in the end.”

In romantic comedies, our wannabe-Romeos will go to creative and outlandish ends to win their women. In real life, this sort of behaviour lands you in jail, or at least with a restraining order.

Okay, the market is a different field altogether – but restraint IS important. Constant persistence is not only draining, but it can give you tunnel-vision. Wooing is a costly action because it is time-consuming.

Because the concept of wooing is also interwoven with the idea that good luck will settle your end game, this can also be a dangerous mind-set to take on. The stock market is not the same as gambling, and you’re not relying solely on luck. You need to employ thinking and be prepared to learn a great deal if you want your trades to succeed.

5. A trader views the market as a dangerous minefield

This is smart thinking in a lot of ways, because this mind-set acknowledges that there will be mines ready to explode in the stockmarket. Trades don’t always fall our way, the market doesn’t always react as we expect, and there will be disappointments.

However, it doesn’t pay to be a pessimist, in the long-run. Fear of a trade exploding in your hands can lead to fear of executing trades.

Our trading psychology lessons have covered a lot of information already on fear, and how it can cripple your trading life.

While it is important to take a disciplined approach to the market, it’s also important to acknowledge that there will be positive trades that bring positive returns. After all, isn’t that why you’re in the market in the first place?

6. A trader looks at the market as a video game

This is a very interesting and current way of viewing the market. After all, fifty years ago there were no video games on which traders could base this mind-set. (Looking at the market as a New York Times crossword puzzle, anyone?).

Video games nowadays are extremely popular, and are increasingly becoming a large part of people’s pastimes. However, video games are pastimes in that they don’t have to be taken seriously.

The stock market engages your money, so it must be taken seriously. And while it’s fine to enjoy the process of trading (as we enjoy the process of playing video games), you have to remember that in real-life there are real results when it comes to the market. You can’t simply press the escape key and restart the trading game.

Of course, we’re not suggesting that the stock market become your sole life focus, but it is important to take it seriously.

Conclusion

Take a look at the above metaphors, and analyse whether you identify with any of them.

If you do, is this mind-set affecting your trading? Are you engaging any emotional responses to trading that trigger these mind-sets?

If you identify very closely with any of the above mind-sets, it could be time to change how you trade – and think.