The science of technical analysis vs. the art of trading | Brian Shannon, Alpha Trends

Introduction

In this section, Karen Fifield introduces the podcast and its guest, Brian Shannon.

Introducing Brian Shannon

• Brian Shannon is a professional trader with over 20 years of experience in the market.

• He is the author of "Technical Analysis Using Multiple Timeframes" and founder of Alpha Trends, an educational company focused on teaching traders how to navigate the market successfully.

Discussion of Trading Approaches

In this section, Karen Fifield discusses with Brian Shannon his trading approaches and strategies.

Swing Trading vs Day Trading

• Brian Shannon is primarily a swing trader but occasionally does day trades.

• He believes that swing trading allows for more flexibility and less stress than day trading.

Discovering Your Own Trading Timeframe

• It's important to find your own trading timeframe that works best for you.

• Experiment with different timeframes until you find one that suits your personality and lifestyle.

Brian's Journey into Trading

In this section, Aaron Falk field asks Brian about his first interaction with the markets and how he got started in trading.

First Equities Trade

• Brian's first equities trade was with LoJack, a company that tracks stolen vehicles.

• His father encouraged him to invest $500 in LoJack when it was $4 per share.

• The stock went up to $10 per share six months later, earning him a profit of $6,000.

Understanding Market Psychology

In this section, Karen Fifield talks to Brian about understanding market psychology and indicators he uses most often.

Volume Weighted Average Price (VWAP)

• VWAP is an indicator that shows the average price at which a stock has traded throughout the day, weighted by volume.

• It's a useful tool for identifying support and resistance levels.

Psychology of Market Participants

• Understanding the psychology of market participants is crucial to successful trading.

• Brian looks at how people are reacting to news and price movements in order to make informed trades.

Brian's Trading Philosophy

In this section, Aaron Falk field asks Brian about his trading philosophy and approach to the market.

Four Stages of a Market Cycle

• The four stages of a market cycle are accumulation, markup, distribution, and decline.

• Understanding which stage the market is in can help traders make better decisions.

Importance of Risk Management

• Risk management is crucial to successful trading.

• Traders should always have a plan for managing risk before entering a trade.

Becoming a Stockbroker

In this section, the speaker talks about how he became a stockbroker and his early experiences in the industry.

Starting Out as a Stockbroker

• The speaker landed a job as a stockbroker after college.

• He didn't know what a stockbroker did but found a brokerage firm that sponsored him for the Series seven license.

• After passing his license, he started making calls to find potential clients.

Transitioning to Trading

• The speaker realized that being a stockbroker was more like telemarketing than trading.

• He moved to Lehman Brothers and learned how to sell before transitioning to trading.

• While working at different brokerage firms, he learned about technical analysis and became interested in it.

Trading with Other People's Money

• The speaker answered an advertisement for remote traders who could trade with leverage.

• He borrowed money for an initial deposit and was risk-averse, which helped him learn how stocks traded without losing too much money.

• He learned that you have to hate losing in the market and be willing to get out of trades quickly.

Overall, the speaker shares his journey from being a naive college graduate who didn't know what a stockbroker did to becoming an experienced trader who used technical analysis.

Trading with Third Leverage

In this section, the speaker talks about how he got into trading and the business model of his first firm.

Getting Started in Trading

• The speaker got into trading through a firm that sponsored people to trade with third leverage.

• The firm did not have any local offices, but they marked up commissions and got a piece of it.

• The speaker admits that he took a huge risk by getting involved in this type of trading.

Challenges Faced in Trading

• The speaker did not have a backup plan if his trading venture failed.

• According to the speaker, traders are their own worst enemies because they get emotionally involved and make poor decisions.

• One lesson the speaker learned was not to have too many concentrated positions, especially in little story stocks.

Lessons Learned from Early Trading Experience

• The speaker learned an important lesson when he lost money on Chantal Pharmaceuticals stock due to lack of diversification.

• This experience almost eliminated him from ever getting involved with a proper form.

Overcoming Challenges in Trading

In this section, the speaker talks about how he overcame challenges faced during his early years as a trader.

Learning Discipline in Trading

• Traders need discipline to cut losses quickly and hold winners for longer periods.

• The speaker admits that he started trading too big and too concentrated in certain positions.

• The speaker learned the importance of diversification after losing money on Chantal Pharmaceuticals stock.

Overcoming Emotional Involvement

• Traders get emotionally involved even though they try not to.

• The speaker recognizes when he is making poor decisions and liquidates his position.

• The speaker overcame challenges by recognizing his weaknesses and learning from his mistakes.

Conclusion

In this section, the speaker concludes by emphasizing the importance of discipline, risk management, and learning from mistakes in trading.

Key Takeaways

• Traders need discipline to cut losses quickly and hold winners for longer periods.

• Diversification is important to avoid concentrated positions in little story stocks.

• Learning from mistakes is crucial to becoming a successful trader.

Final Thoughts

• According to the speaker, anyone can make it as a trader if they have discipline, risk management skills, and learn from their mistakes.

Taking a Break and Reflecting

In this section, the speaker talks about taking a break from trading and reflecting on his approach. He also discusses how having a backup business helped him during this time.

Taking a Break

• The speaker took a couple of weeks to reflect on his approach to trading.

• He slowed things down and started trading at his normal size.

• The speaker reflects that if he did not have a backup plan, he would have been out of business.

Reevaluating Approach

• The speaker reevaluated his approach to trading.

• He was profitable every month for the first six or seven months by being disciplined and cutting losses.

• The speaker learned that basic principles such as "only price pays" and "follow the trend" are key to making good money in the market.

Trading Methodology

In this section, the speaker describes their methodology for approaching the markets.

Trend Trading

• The speaker is primarily a trend trader who looks for stocks in an uptrend using multiple time frames.

• They prefer swing trade setups that last for a few days in terms of trends.

Identifying Trade Candidates

-The direction of the 50-day moving average is used to identify possible trade candidates

-The speaker looks for stocks that have had a period of volatility contraction and have pulled back to a prior level of resistance that looks like it might be support or a key moving average or a retracement level.

Analyzing Timeframes

• The speaker goes down to a 30-minute chart to analyze the stock's movement over the last 20-40 days.

• They look at where the stock has come from on this timeframe, such as if it has risen by 10% in the last three days.

Trading Strategies

In this section, the speaker discusses his trading strategies and how he uses moving averages to identify trends.

Using Moving Averages for Trading

• The speaker generally buys a stock when it makes a higher high above a flat to rising five-day moving average.

• This indicates that the intermediate-term trend is turning back up.

• He sets his stop underneath the most recent and relevant higher low.

• The thirty-minute timeframe is used to come up with the risk-reward and plan the trade.

Anticipating Trades on Shorter Timeframes

• After identifying a potential trade, the speaker sets an alert at a specific price point.

• When the alert triggers, he looks at the stock more carefully and considers what's happening in the overall market.

• He watches it on a shorter-term timeframe and makes decisions based on price only.

Fundamentals vs. Price Action

In this section, the speaker discusses how he trades fundamentals versus price action.

Impact of Fundamentals and News on Decisions

• The speaker tries not to let fundamentals or news impact his decisions too much.

• He is aware of potential catalysts for a stock but avoids gambling on earnings reports.

• He believes that only price action pays, so he focuses on that instead of opinions about news or value.

Recognizing Technical Patterns

In this section, the speaker talks about recognizing technical patterns and how they can be useful in trading. He explains that there is an art to technical analysis and that it's important to understand what's happening underneath the market.

Cup and Handle Pattern

• The cup and handle pattern is a classic technical pattern that can be recognized easily.

• However, many of these patterns fail, so it's important to understand what's behind them.

• Higher lows being established tell us that buyers are gaining control price-wise.

• Buyers are getting more aggressive not only price-wise but also time-wise.

Moving Averages

• Moving averages are a mathematical trendline used to compare prices over a certain period of time.

• Many people misunderstand or misuse moving averages, but they can be effective if used correctly.

Understanding the 50 Day Moving Average

In this section, the speaker explains the psychology behind the 50 day moving average and how it can be used to identify potential buying opportunities.

The Psychology Behind the 50 Day Moving Average

• When a stock pulls back to the 50 day moving average, it may keep dropping or start to show signs of support.

• Long holders may sell some shares when a stock is above its 50 day moving average and buy more when it drops down to that level.

• Short sellers may put supply on a stock to bring it down to the 50 day moving average and then start adding demand by putting in bids.

• As supply decreases and demand increases, we see a gradual shift in market sentiment towards that stock.

Using Technical Indicators for Buying Opportunities

• It's important to look underneath the surface of a stock's price action and analyze technical indicators like moving averages on shorter timeframes (e.g. 30 minute timeframe).

• If there is evidence that a stock is starting to turn sideways after a pullback, it could be an indication of less supply and more demand.

• Traders who use Fibonacci retracements may also look for buying opportunities when a stock pulls back to certain levels.

• The volume weighted average price takes into account both price and volume traded for a given period of time, making it a useful indicator for identifying potential buying opportunities.

Understanding Volume Weighted Average Price

In this section, the speaker talks about the importance of volume weighted average price (VWAP) and how it is used by traders to determine support and resistance levels. He also explains how institutions use VWAP to measure the performance of their brokers.

Importance of VWAP

• VWAP is a key indicator for traders to determine support and resistance levels.

• The psychology behind VWAP is that if the average price is above this level, then the average participant is making money; below which, they are losing money.

• Buyers and sellers have a lot at stake at these inflection points.

• Retail traders may be underutilizing VWAP compared to institutional traders.

How Institutions Use VWAP

• Institutions use VWAP as a value comparison for brokers. If a broker can execute trades better than the VWAP during a set period, they get more business.

• Retail traders are starting to use VWAP more often but not overusing it.

Understanding Market Cycles

In this section, the speaker discusses market cycles and provides an overview of the four different phases of markets.

Four Phases of Markets

• There are four phases in market cycles: accumulation, markup, distribution, and markdown.

• The speaker offers an infographic that explains these phases in detail.

Understanding the Four Stages of Business Cycle

In this section, the speaker explains the four stages of business cycle and how it influences the market.

The Four Stages of Business Cycle

• Stage 1: Accumulation occurs after a decline, where stubborn holders hold onto their stocks despite a decline. During this stage, the stock becomes indecisive as supply and demand reach equilibrium.

• Stage 2: Participation occurs when buyers start to gain control as moving averages flatten out and begin to turn higher than usual. This is when you anticipate a breakout.

• Stage 3: Distribution happens when the stock is met with more supply and moving averages cross back and forth representing indecision. It's either digesting those gains through time before breaking out or if it breaks down then we look at it as a stage for decline that stock has no void if you're just a long trader or it's a short sale candidate.

• Stage 4: Decline is when moving averages are heading lower, indicating that there is no real trend revealing itself.

Time Frames

• Discovering your time frame is important because it determines your patience level. If you have the patience of someone like Warren Buffett, then you've got no business looking at an intraday chart for what happened for one day but if you are maybe a little bit more ATT (attention deficit trait), then shorter time frames may be better suited for you.

The speaker emphasizes that understanding your time frame is crucial in trading since it determines your patience level.

Starting Out with Trading

In this section, the speaker discusses how to start trading and why day trading is not appropriate for beginners.

Starting with a Longer-Term Horizon

• It's best to start with a longer-term horizon before moving on to day trading.

• Swing trading is an ideal time frame because it allows traders to get feedback on their trades within a couple of weeks.

• This approach gives traders the opportunity to learn and hone in on things better.

Why Day Trading is Not Appropriate for Beginners

• No one should start out with day trading as it requires experience and patience.

• The more often you're confronted with having to make a decision in the market, the more likely your emotions are going to creep into the decision-making process.

• Day trading is not appropriate all the time, especially when there's a choppy market environment.

The Skill of Day Trading

In this section, the speaker talks about day trading as a skill that can be developed over time.

Developing Day Trading Skills

• Day trading is a great skill to have but not appropriate for everyone.

• People who are new to trading are often attracted to day trading because they think taking more trades means making more money.

• Successful swing traders make more money than strictly day traders.

When Day Trading is Appropriate

• Day trading allows traders to put some money in their account without exposing themselves to overnight risk where we might have a market that's capping on frequent basis.

• Traders need capital and experience before starting day trading.

Why Do Traders Lose Money?

In this section, the speaker discusses why most traders lose money and never reach a high level of success.

Impatience and Ego

• People get impatient with the market and don't find out who they are and what their personality in their appropriate timeframe is in the market until after they've made too many big mistakes.

• The majority of traders lose money because they lack patience, understanding of themselves, and their appropriate timeframe in the market.

• When traders get into a trade that goes against them, they start pulling up news and looking for other opinions. This doesn't allow them to take that quick loser when they went in with a plan.

Difficulty of Trading

• Trading is an extremely difficult business that requires mastering oneself before mastering trading skills.

• There's no barrier to getting involved in trading, but it takes time, experience, and capital to succeed.

Importance of Diversification in Stock Trading

In this section, the speaker emphasizes the importance of diversifying one's stock portfolio and not just investing in a single company.

The Risks of Investing in a Single Company

• Investing in a single company can be risky as all stocks go through cyclical phases where they decline.

• It is important to avoid getting too involved with just one or two big share sizes based on personal preferences.

Resources for Learning More About Stock Trading

In this section, the speaker shares resources for learning more about stock trading and technical analysis.

Where to Find More Information

• To learn more about the speaker, visit trans.net and StockTwits.

• The speaker's book on technical analysis can be found on Amazon or technicalanalysisbook.com.

• The speaker recommends using multiple time frames when analyzing stocks. A link to his trade on Stockholm Ford/29 is provided.

Conclusion and Additional Resources

In this section, the host thanks the guest for sharing his insights and provides additional resources for listeners who want to learn more about stock trading.

Thanking the Guest and Additional Resources

• The host thanks the guest for sharing his knowledge with listeners.

• Links are provided to TrendsHelp.com, EarningsBeats.com, IBD Meetups, and RedCapTrading.com for those interested in learning more about stock trading.

Closing Remarks

In this section, the podcast comes to an end with closing remarks from the host.

Closing Remarks

• The host thanks the guest again and says goodbye.

• Listeners are encouraged to subscribe to the podcast on iTunes and leave a rating and review.