Thursday, May 10, 2007

Desire and Competitive Drive..Triangle Patterns

"I'm convinced, after my years of sports, that the only things separating the champions from the also-rans are desire and competitive drive."

Joe Montana
The Winning Spirit:16 Timeless Principles That Drive Performance Excellence

To achieve a goal in trading or investing, just like in sports, desire is a key ingredient to success. Desire is not the same as just wishing for something. Desire is a mental-state or energy that empowers us to keep going in good times and bad to achieve our goals. Often in trading the biggest battle one faces is from inside themselves. It is the battle of fear versus greed, over-confidence versus humility. New traders often experience the swing of emotions from the highs of easy success to the low feelings of what ever action they take will be wrong. Everyone goes through a stage when things are going so poorly that they feel like they would not even hit water when falling out of a boat. It is in times like these that desire and competitive drive to be the best help right the ship and steer a path to a better course.

One way to minimize the emotions in trading is to try to quantify basic beliefs or concepts that trades are based. These can range from simple ideas to intricate quantitative ideas that involving multiple markets. In either case it is helpful to have a list of basic beliefs that a trader is convinced of and is going to base his or her approach to the market on. These concepts can be technical indicators, fundamental analysis, or better yet a combination of both.

From personal experience, one concept that seems to hold true is the idea of triangle patterns. Basically these patterns are a series of higher-lows combined with a series of lower-highs. There are variations which can have higher-lows approaching a static resistance level(ascending triangle). The opposite is lower-highs approaching a static support level(descending triangle).

This is a monthly chart of Houston Exploration-THX. From 2001 until the end of 2003 Houston Exploration formed a long triangle pattern. This was a series of higher lows accompanied by series of lower highs. This continued until a point was reached when either the buyers were going to give up or overwhelm the sellers causing the stock to go higher. This started to happen at the end of 2003 and continued into the early part of 2004. A very nice run followed. This was pretty much the case for stocks related to the price of oil.

This is a chart of Cameron International (CAM). This formed the same pattern, but did not start its climb until later in 2004. Seeing these triangle patterns isn't always easy with the standard bar chart, but with a point-and-figure chart they tend to jump off the page at times. Below are both Houston Exploration (THX) and Cameron International (CAM) in point-and-figure charts.

The basics of point-and-figure charts are a topic for another time, but essentially they take into account only supply and demand for a given stock. There is no volume or date involved; just price. They tend to remove much of the noise and vibrations of choppy trading periods and clearly show support and resistance, and some clear chart patterns.

Triangle patterns can form in any time frame. This can be seen in the 60minute bar chart of the S&P 500 futures contract. A symmetrical triangle formed and a break out followed. This move was negated by the wild moves up and down that followed the FOMC announcement. This is just an example to show that this pattern can be found in any time frame and is a very profitable pattern to look for.

This chart of ATI shows the potential some of these patterns can hold. This stock broke out of this triangle and continued on a run to over $100.

The next article will deal with more details in dealing with triangles as well as some short-selling examples. There are a lot of aspects of trading with these patterns that can give the trader/investor a huge advantage.

It is important to have many tools to work with and triangle patterns are just one of the many. This may or may not be one that many people find so simple, but it is an example of having a core concept to base trading/investing. They are not the total package, but just one concept to incorporate other ideas into. Having a core belief or trading philosophy is very important, but it's even more important when the wind is in your face and things are not going well. It allows you to get back to basics and simplify things. Successful trading is not a race, it is an ongoing process and desire is an important key. Desire and Competitive drive are two key ingredients needed to perform mental and financial alchemy.

If interested in reading more on Point-and-Figure charting, Tom Dorsey is the expert.
His site can be linked to HERE.

His book on charting and Joe Montana's book on the winning spirit:


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