THE REALITY OF USING CHANNELS AND BANDS

Channels and bands both have the same objective—to put a framework around price movement. They tell us when prices are unusually high or low. We can turn that into trading by buying at the low end of the channel, or when prices penetrate the bottom band, and selling at the high end. It works most of the time. It is best when prices aren’t moving too fast.
By expanding the channel or band width and slowing down the trendline used to form the bands, we can identify more extreme price moves and be more selective about our buy and sell signals. This helps eliminate some bad situations, but it reduces the number of trades and increases the time you are in a trade. We know by now that the longer you hold a trade, the larger the price swing you will endure.
There is no perfect channel or band. They all have the same basic problem. When price begin moving quickly higher, selling is a mistake; when prices drop sharply, buying is a mistake. All trading methods will have situations in which they lose.

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Active as Opposed to Passive Management of Assets

The Wall Street establishment generally espouses the cause of passive investment management. Buy your favorite stocks or mutual funds or bonds, hold on through thick and thin, and hope that the stock and bonds markets are on upswings when you need the money. Not necessarily the worst of strategies—unless, of course, you happened to need to draw on your capital in mid-2002, at a time when stocks were more than 50%, on average, below their all-time peaks.
By the time you finish this book, you can be a successful active manager of your own investments and by so doing add to the returns available from the usual sources to passive investors. As an active manager, you will be able to do the following:

• Actively monitor the investment universe and select investment areas—and individual investments within those areas— likely to outperform the average investment of similar risk. In other words, you will have some idea as to when to emphasize bonds, stocks, gold, real estate, and international positions and when to opt for money market and other safe havens.
• You will have the ability to enter, and will enter, into investments relatively early in their rise and exit relatively close to their peak, either prior to or relatively soon after the final top is made. This does not mean that you have to be the first one in and the first one out. It does mean that you will be able to catch the major portion of up moves, while avoiding at least significant portions of the downswings that plague every investment at some time or other.
• And finally, you will be alert to special opportunities that develop from time to time in almost all investment areas and be able, ready, and willing to take advantage of such opportunities.
  

The benefits of active and successful management are self-evident.

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HOW TO PLACE AN ORDER

You need to be very careful and very precise when placing an order. This is true especially if you place the order by telephone. In the heat of trading, even experienced traders can make the mistake of buying when they wanted to sell. With electronic order entry you should not press the send button before you’ve checked and rechecked that you’ve entered everything correctly.
Terminology
You’ll need to get familiar with using the right words to enter an order. Long descriptions don’t work. The order clerk doesn’t care why you’re making this trade. Learn the following terms:
1. When you have no position and you buy, you are initiating (entering) a long position.
2. When you are holding a long position and you sell, you are liquidating (exiting) a long position.
3. When you have no position and you sell, you are initiating (entering) a short position.
4. When you are selling short, you are initiating (entering) a short position.
5. When you are holding a short position and you buy, you are liquidating (exiting) the short position.
In futures:
• If you are long 1 contract and you sell 2 contracts, you have closed out your long and you are now short 1 contract.
• If you are short 1 contract and you buy 2 contracts, you have covered your short and are long 1 contract.
• When you go from long to short, or short to long, you can say that you’ve reversed your position.

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THE IMPORTANCE OF A SIDEWAYS BREAKOUT

A sideways trading range occurs when there is no compelling news in the market. The range between the support and resistance lines actually shows the underlying market noise (volatility) caused by normal trading in and out of that stock or futures contract.
When prices move out of a sideways range, there must be news, or anticipation of news, to cause enough buying or selling to drive prices to a new level. This might be expectations of higher earnings, a possible acquisition, lower interest rates, or pending bad weather for crops.
A breakout of horizontal support or resistance will work successfully using daily closing prices (a conservative choice), daily highs and lows (an active choice), or even intraday prices (an aggressive choice). The risk of the trade is always measured by the distance between the support and resistance lines. This varies with the volatility of prices. Breakout systems are extremely popular because they:
• Are highly reliable even though they have high risk.
• Do not have a lag because signals come at the moment of breakout.
• Allow prices to move freely within the support-resistance band, imposing few restrictions.
Which Is Better, Using the Trendline or Breakout?
The breakout is more dependable because it recognizes an obvious change in the market at the time it occurs. The trendline shows the direction of prices based on their rate of increase or decrease. The breakout usually corresponds to a special event.
The breakout is reliable, partly because it has more risk. Remember that price moves are fickle. Prices may move up, but they do it in a very erratic way. It’s best to give prices room to flop around. Prices may break out of the trading range, make a new high, and then fall back into the sideways pattern for a while. The only thing we really know is that if we bought on a new high and prices then make a new low, something is wrong. Prices shouldn’t make a new low after making a new high. There is good, simple logic in a breakout system.

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