How to Trade for Income and Growth
08/19/2011 3:30 pm EST
Most trading strategies are designed to achieve either income or wealth accumulation, but Oliver Velez explains how traders can become multi-dimensional and get both.
Every trader has a different approach to the markets, and they vary as much as trading itself. Our guest today is Oliver Velez; he’s going to talk about his overall approach and philosophy in the markets.
So, Oliver, do you have an overall approach or philosophy about the markets, and about making money as a short-term trader?
Well, I actually do. I think that most individuals feel that they have to choose to be a one specific type of market player, and I believe that we’re in an era where the market participant today can no longer afford to be one-dimensional in their approach.
There has to be a mixture of approaches, simply because we have such volatile markets, and things change much more rapidly today than they did in the past.
So, in general, we break our trading down into two broad categories: The income approach to the markets, which are short-term-oriented strategies and tactics; and then we have a wealth-generating approach to the markets, and we blend these two styles of market play.
There are times when the market is not in a wealth-generating mode. It’s stagnant, it’s uncertain, and it’s acting as if it doesn’t want to follow through in one direction or another. These are some of the most treacherous markets for the wealth accumulator because wealth opportunities are just dormant, and traders tend to get chipped away.
The income strategies that are designed for a market that is really not doing very much are the strategies that are appropriate in that market.
Then there are your trending, wealth-generating markets. These markets are the markets where your short-term-oriented traders are going to an ocean with a thimble when, in fact, they should actually be deploying slightly longer-term approaches to the market in those environments.
I think it’s important for your sophisticated market participants to understand when the market’s in a wealth mode versus when it’s in an income mode. I also believe that the technical approach—using charting tactics and techniques—is the best way for your average individual to play the markets.
See related: Chart Patterns Every Trader Should Know
It’s through various charting patterns the individual can spot and detect when institutions are actually more prone to be buying, and when they’re actually pulling out of various positions.
NEXT: How to Spot Institutional Buying on the Charts|pagebreak|
Can you give us an example of what that would look like on a chart—seeing that institutional buying and selling?
Absolutely. We teach individuals that the market is made up of only 13 individual charting bars. The market speaks a language. That language has 13 letters. These 13 letters are actually individual bars. Now, of those 13 bars, we teach our traders to only care about three.
The three bars—we call them “elephant bars” and various “tail bars”—there’s actually two categories. The elephant bars are very, very simple to spot in any stock or any market. They simply are elongated bars, longer than most of the bars to the left of it, and they’re very solid in color.
So a bull elephant bar would be a very long, tall, fat, thick, green bar that almost stands tall above most of the bars to the left of it. It’s greener than most of the bars to the left of it. It’s bigger, it’s fatter, and it’s girthier. These bars are key buy signals for us if they occur at or below a 20-period moving average on the individual item.
So what we’ll have our traders do is watch a stock with a 20-period moving average, and let’s pick a daily time frame. If one of these fat, sizeable green bars occurs at or near the 20, or below the 20, it’s a key signal that institutional buyers have just jumped into the stock.
These bars cannot be formed unless there’s institutional agreement and unless there’s a lot of it. So we teach our traders to spot these bars when they occur and to actually buy into the bars with protective stops just underneath those bars.