Greetings and salutations my fellow Market Sorcerers.
In light of the recent uptick in market volatility, we thought it would be a great time to spell out some of the core tenets of Market Sorcery which we employ here at The Society.
I will explain the most essential principles below and use some recent charts to make the points even more clear. Enjoy!
- Cornerstone of Market Sorcery: Pattern Recognition
The very first step to successful Market Sorcery is to realize that one must gain the insight into the potentially predictable price patterns that can be seen in the charts of price action in a company’s stock on the market.
Remember that price action is merely represented on charts and software programs etc. We look for these potential patters and attempt to get in front of future price movements. These patterns are not real things that you can simply assume will be correct or 100% solid references, rather they are representations of potential patterns existing only in traders and investors minds and drawn on charts with imaginary lines, until they either confirm or fail in real price action.
Finding a stock to trade is the very first step in Market Sorcery, and pattern recognition is the tool we use in selecting a stock.
We will go over a few charts below depicting price patters that either confirmed or failed our pattern prediction attempts.
- First up: AKCA
Just yesterday we correctly predicted a “Bull Flag” or “Bull Pennant” in recent IPO AKCA, which confirmed later the same day breaking out to new all time highs.
Notice how price makes an initial steep move higher, then consolidates and makes smaller and smaller moves up or down. This is an example of a “continuation pattern”. By this we mean a continuation of the previous move or trend up. These patterns work best in more solidified uptrends. They can also work well with new IPOs without much or any price action above the flag or pennant.
- Next up: AXON
This is an example of a stock that did not confirm but rather failed lower and forced us to stop out for a loss. Yes, even a Sorcerer makes mistakes, no one is perfect 😉
In this example we charted the stock as a potential “Ascending Triangle” which would suggest a potential move higher on a break above the recent highs.
We took partial positions attempting to get a good average size position by buying into the stock in increments as it moved below 22, which was our targeted entry price.
The stock did move up initially but failed lower and forced us out. We tried increasing to an oversize position as the stock came into our stop level one time (we will cover risk management topics later), but had no success in finding the correct reversal point and thus we had to exit the stock.
Coincidentally, AXON is still on watch to see if it reverses today, or continues to bleed out.
- Last but not least: CCIH
The Society has been keeping a close eye on Chinese small cap companies as they tend to significantly outperform the market at select times throughout the trading year. We noticed CCIH forming a “Falling Wedge“, seen in today’s chart below.
After reviewing short term charts we noticed the stock was consolidating at the open near recent highs and had the potential to break those highs and move up significantly.
Realizing we had missed to initial move off the lows, we went in with a partial position so as to allow us to “average in” at lower prices. This concept will be covered in a later section of this write up.
As you can see we got the short term move higher we were looking for and decided to exit the position with a tidy gain of over 11% in just minutes.
Now that you are excited by the potential, lets discuss the other two most important principles of Market Sorcery
- Two Pillars of Market Sorcery: Risk Management, Position Sizing
The absolute most important thing in trading or investing is: Do not lose money.
However as anyone involved in trading or investing can tell you, you will have losses. How you manage those losses is what is most important. Each individual has a different risk tolerance profile and must consider their own personality traits when getting involved with the Market.
- First Pillar: Risk Management
We have a few things for you to consider on the topic of risk management, but these are just ideas, like everything you read on this website. You absolutely must consider all the risks involved and talk to a certified financial planner before you invest in any financial instruments. Ye Be Warned
Never risk more than a few percent of your account on a single trade, unless you are investing the money in a well thought out, well researched investment that has passed your most uncompromising analysis. Additionally, you MUST always have a plan as to what price you will add to the position, book gains, stop out, etc.
- Second Pillar: Position Sizing
There is a reason these two pillars are listed together: One cannot exist without the other.
When trading a stock there will be times when you may need to plan on “averaging in” when attempting to locate a reversal in price from down to back up again. Many times there will be a whole area of price which may soon begin acting as support of a move back up, but one is not sure precisely where this will occur.
In order to get involved and have a position an advanced Sorcerer may attempt to buy a partial position, with the plan to add to the position lower should the chance present itself. This way if price never goes any lower, there are gains to be had. If price continues to a lower area of the potential support, a purchase of an additional piece of the position can be achieved.
This is a tricky strategy that should not be attempted by those who have not been trading for many years and proven themselves to be successful at the technique.
The add to the position lower will decrease your cost average, but also increase your risk. This is why it is very important to position size correctly as you attempt this strategy.
There is much more to say on this topic and we will be glad to elaborate at a later date.
Thank you very much for reading and please feel free to send an email with any questions, or join The Society today and take full advantage of the opportunities presented in the Market everyday!