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Looking at the Big Picture

No one knows with any certainty the long-term direction or duration of the market. The longer the time frame, the less certain we can be. Even on a day-to-day basis, there is no certainty. We often look to certain patterns to reproduce themselves, but news events, earnings, company announcements, upgrades, and downgrades always make anticipating market moves a risky business.

So why do we study the pattern? What can be gained if all the study in the world still falls short of any kind of certainty? There are several reasons to keep an eye on the market direction, to use it as a guide in stock trading.

First of all, while the short term, three to five day outlook cannot be predicted, certain patterns do give us the low risk entries to some strategies we use. Take for example a market that has been in an uptrend (we can always look backwards by looking at charts) and pulls back for a few days, to an area of support. Then on that day it gets the strength to close over its open price. Whether you play the market or a particular stock that shows the same pattern (and many will), this often draws a line in the sand where we can play strategies, knowing that the current day's low is the support upon which we are relying. That will be the stop for the play. Patterns often do repeat.

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Second, it can be of great importance to know exactly what stage the market is in. You'll find that different strategies have varying degrees of success depending upon where the market is in a bigger time frame. For example in a strong uptrending market, you will find that basing patterns are frequently broken to the upside forming a "stair-step" pattern. This is a strong pattern in a strong market. However the same trader who continues to use this pattern without recognizing that the market has now lost momentum and is in a basing phase will not have the same success. Traders will find that breakouts do not carry as far and that many breakouts start to fail and become losses.

How can a trader avoid this? First, understand your strategy and know when it is best suited for the current market. Second, keep an eye on the major trends in the market and use a change in trend to reevaluate your strategies that you are currently using. Also, if you continue to track your results and strategies, you'll notice the change in success of the different strategies you used as the market changes. I don't mean to just determine whether you will go long or short. I mean determine which particular strategy you should use when you are long, and how aggressive you should be with the targets. Is it appropriate to go for new hires or 40 percent retracement? Is it best to not trade at all based on the strategies in your trading plan?

So how does a new trader begin to understand the basics of the current market trend? First, try with these few basic guidelines that hold true at any experience level. Moving averages are always a good guide to use to help you establish the current trend. Are the 20 and 40 rising or falling? Are we above or below the 200? Is the 20 above the 40? Is the 40 above the 200? Are we in a pattern of higher highs and higher lows or are they starting to even off showing the potential for a base to form?

Many traders like to be market "gurus" and nail every twist and turn in the market. But a wiser choice is to follow a plan, play proven strategies, and always keep a close eye on what the market has done to help you determine your best course of action in the future.

Stages of a stock cycle
Support and Resistance
S & R in a Flat Base
S & R in a Downtrend
S & R in an Uptrend
Drawing Trendlines
Laws of Technical Trading
Seven Mistakes
Exchange-Traded Funds
Taking Profits Education
Trading with the Trend
Trading with the Trend, #2
Importance of Volume
Volume in trends
Volume in consolidations
Volume in breakouts
Volume in breakouts, #2
Gaps Trading Education
Gaps Types and Characteristics
Trading Gaps Education, #2
Trading Gaps Education, #3
Trading Gaps Education, #4
Elliott Wave Trading Theory
Elliott Wave Trading Analysis
Elliott Wave - Fractals
Trading Signals Education
Trading Triggers
Trading Triggers, #2
When Disaster Strikes
Swing Trading Stock Picks
Slams Trading Strategies
Slams Trading Strategies, #2
PVTM Trading Strategies
Daily Stock Picks
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