Saturday, July 29, 2006


Markets can confound traders. They often run in two directions at once—
up on the weekly charts and down on the dailies. A market can reverse
without sending you an e-mail about its change of plans. A sleepy stock
can get so hot that it burns through stops, while a formerly hot stock
becomes so cold it freezes your capital along with your fingers.
Trading is a complex, nontrivial game. Markets consist of huge crowds
of people, and technical analysis is applied social psychology. We must
select several tools to identify different aspects of market behavior. Before
using any indicator, we must understand how it is constructed and what it
measures. We must test it on historical data and learn how it performs
under different conditions. Once you start testing an indicator, expect to
adjust its settings, turning it into a personal trading tool as reliable and
familiar as an old wrench.


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