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Ed. Note - These mailbag articles first appeared on StockCharts.com back in 2000. They are just as valuable now as they were then, so we've added them to our new Mailbag blog. Enjoy!
Q: The Price Labels that appear on your charts seem to be one day late for buying signals. Can you move them up one day please?
A: First off -- do NOT use Price Labels as trading signals. They are not intended for that purpose.
The Price Labels are based on a calculation that looks "ahead" in time. They are similar to the Zig Zag indicator in that regard. While it looks like they have given good signals in the past, that is because we "cheat" and look into the future when deciding where to draw them. These are qualities that rule price labels and the Zig Zag out for use in a buy/sell trading system. Price Labels are provided to give you the exact values at which major reversals occurred so you don't need to look those values up in a data table somewhere.
- Chip Anderson
Q: How should a novice like me mentally approach the business of trading?
A: I got to thinking about mental attitudes and trading when I was watching the recent marathon tennis match between Todd Martin and Andre Agassi. Both players showed great traits that many traders may look to add to their arsenal.
A Serious Business
They approach the game of tennis as a business, with solid preparation and a game plan. Some part-time traders approach trading as a hobby and don't put in the hard work required to succeed. I am not saying trading is only for full-time dedicated individuals. However, trading and analysis are ongoing exercises, not something you can leave for a few months and expect to come back to as good as when you left. The less you trade, the more rusty you will become, and the greater your chances of losing. This does not mean you have to trade all the time, but rather remain active and consistent with your analysis. Once you prepare and master the basics, you should have a game plan. Part of this plan involves scenario development to prepare for different situations.
Lack of Emotion
What continues to amaze me is the lack of emotion each player showed during the match. Agassi was down 5-2 in the fifth and held off two match points to win the final set 10-8. Adrenalin and emotions must have been running high as the match went back and forth, but you could never tell by looking at the players. You (or at least I) could not tell if either player had just hit the shot of his life or just got aced. Their expressions stayed the same after each point and they moved on to the next point. Once that point (trade) was over, there was no sense getting excited about it. The best they could do is to learn from the previous point (trade) and apply it to the next. Stay with the facts and don't let emotional decisions enter into your trading plan.
Dealing with Losses
Each player came into the tournament and match with realistic expectations. There are going to be ups (gains) and downs (losses) throughout the match (trading month) and neither player expected an easy ride. It is impossible to win every point, every game or even every set. You have to be prepared to deal with lost points, lost games and lost sets. What separates the great players (traders) from the no-so-great players (traders) is how they deal with losses and adversity. Agassi was down, and by most counts, out of the match. Sure, the possibility of losing went through his mind, but he instead focused on the next point (trade) and tried to build some momentum one point (trade) at time. A few winning points turned into a few winning games and pretty soon confidence was restored. The next thing you know the match is tied up and now Martin was the one feeling the pressure. Every trader has losses. The important thing is how traders deal with their losses.
- Arthur Hill
Q: The Chaikin Money Flow (CMF) for Protein Design Labs, Inc. (PDLI) in May 2000 stands tallest relative to March and July. Yet the price graph peaks in March and in July -- the price is higher than in May! Is this an instance of divergence between price and CMF? If so, what does it indicate?
A: CMF takes a single parameter, the period. By default, the period for the CMF is set to 20, which means that price and volume from only the previous 20 days are used to compute the index. The fact that CMF(20) peaked in May means that price and volume movements for the previous 20 days were very favorable. To make a valid comparison, you need to use a longer period that encompasses both dates. Check out the changes in the CMF on this chart as the period lengthens:
One other thing to notice: even on those longer duration charts, the CMF peaks well before prices do. That is an indication that the run-up at the start of the year was in trouble and hints at the big decline that occurred in March.
- Chip Anderson
