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All Safety in the Market students should be familiar with the expression “Get to know your stock or commodity like a cow knows her calf”. In fact, it is highlighted in bold on Page 12 of your Smarter Starter Pack.
Obviously you won’t be able to truly know all 200 stocks in the ASX200, so the question becomes “which markets should I choose?”
Those who have worked through David Bowden’s Final Six Day Incubator Course will know that he did the bulk of his analysis on the SPI, the Swiss Franc, and Soybeans – a stock index, a currency and a commodity.
The important thing is to make sure you choose markets that behave independently of one another, so that you have something to trade all year round. For example, Chart 1 shows a line chart of the Euro overlaid with a Swiss Franc chart.
Chart 1
click chart to enlarge
You can see from the chart that the Euro and the Swiss Franc have an extremely similar pattern. It would not make a lot of sense to specialise in these two markets alone. You would find both currencies trending strongly or going sideways at around the same time.
A better pair to analyse would be the Euro and the Japanese Yen, shown in Chart 2 below.
Chart 2
click chart to enlarge
Chart 2 clearly shows the divergence between these two stocks. It also shows that even though one of these currencies may be going sideways occasionally, it is very unlikely that both currencies will be range trading simultaneously. This gives us a good chance of having high-quality trades every month on at least one of the currencies.
To test if a market is something you would like to specialise in, open the price chart and go back over the past history day by day, applying your trading rules and trading plan. Those of you with ProfitSource can use the “Walk thru” mode to cover up the historical data, enabling you to make your decisions without seeing where the market has gone. Chart 3 shows the Walk thru mode in action.
Chart 3
click chart to enlarge
You can use the arrow keys to move forward one day or one week at a time. If you find that you can’t achieve your trading goals with the benefit of hindsight, you may need to look at adjusting your trading plan or choosing another market to analyse.
This work is time consuming, so don’t expect to know a market backwards in a day or even a week. You will need patience. But it is well worth the effort, and it will give you a lot of confidence going forward.
For those traders searching for a “trading buddy”, don’t forget to visit the new Forum on the Safety in the Market website. The “Local Trader Group” discussion board is a great place to meet traders who are looking at the same markets and using the same techniques as you.
Be Prepared!
Mathew Barnes
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