More about flags and prognosis for 2008

Hi everyone

First, thank you for your emails with your success stories!  I love hearing about your great trades and overwhelmingly this has been the case.  Of course with trading there are also challenges too, and I want to respond to an email I've just received, highlighting a challenge or two. 

Since mid January it's fair to say that the markets have been very choppy, volatile and therefore the charts have looked a bit messy.  You know how I feel about that - I don't like messy charts.  When I trade flags, I like to trade neat looking patterns where I can easily identify my entry and exit points. 

The fact is that there are still great opportunities out there, but you do have to be very selective.  Part of trading is knowing when to pull the trigger and when not to pull the trigger. 

There are two pointers I'm going to suggest. 

• First, stick to charts that are reasonably neat and tidy.  If you feel the chart is a big mess, then move to the next stock. 
• Second, wherever possible, trade in the direction of the main trend. 
  If the market is trending downwards, then trade the BEAR FLAGs and if the market is going up then concentrate on BULL FLAGs. 
  Trading flags is always best when you're trading in the direction of the trend.  I trade against the trend only when I'm completely sure of a change in direction, otherwise I always trade with the main trend.  In terms of timescale, for me the main direction will typically be the last two months or so (around 40 bars on a daily chart). 

 
Here's my prognosis for the rest of this year:

I think this year will be a bumpy ride.  Both the charts and my contacts on Wall Street are extremely bearish … in particular watch out for late summer / early autumn (you heard it here first!). All traders are going to have to be very prudent with the selection of trades, and that means you're going to have to be patient, and vigilent.  Vigilent means you're going to have to supervise your trades regularly, at least once a day when you're in the trade. 

With regard to straddles, we're in a quiet phase right now with the next earnings season about 7 weeks away.  So the emphasis right now is trading the flag patterns as and when they appear. 

You may have noticed that we have a new area on the site called "TradeFinder Flags".  Here you'll be able to simply see a list of stocks which are consolidating.  Again, you're going to have to use your discretion and only trade the neatest patterns and in the direction of the main trend. 

A Pretty Chart

Here's a perfect bear flag that appeared on TradeFinder just a few days ago - the stock ticker is IRIS.   See how clear it is.  See how it has a nice flag pole, followed by a consolidating chart pattern and volume shrinking during the consolidation pattern. 

Now look what happened next:

 Now let's look at an ugly chart:

An ugly chart

See how there's no real discernable pattern here.  This chart is basically untradeable.  There's no real trend, the bars are long, messy and have very inconsistent tail-lengths.  There's no easy point at which to enter the trade … hopefully you can see this easily. 

Right now, more trades than normal are being stopped out, particularly if you're trading bull flags within a bear trend … but more than that, many bull flags simply aren't being triggered, in other words, there lots of rounded tops.  This is fine because we wouldn't be in the trade until the top of the bull flag has been exceeded, therefore with rounded tops we don't make anything, but we don't lose anything either. 

I'll cover this thoroughly in the webinars to follow very soon.  I'll also cover how to manage the flag trade by using targets and trendlines.  I'm completing the research and training for conducting regular webinars, so expect to hear more about this very soon. 

All the best

Guy