Definitions of Upward and Downward Trend From Dow Theory

Upward Trend — An upward trend is a series of successive rallies that penetrate previous high points, interrupted by sell-offs or declines which terminate above the low points of the preceding sell-off. In other words, an uptrend is a price movement consisting of a series of higher highs and higher lows.

Downward Trend — A downward trend is a series of successive declines which penetrate previous low points, interrupted by rallies or increases which terminate below the high points of the preceding rally. In other words, a downtrend is a price movement consisting of a series of lower lows and lower highs.

Investment Philosophy

1. Don’t speculate unless you can make it a full-time job. 
2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of “inside” information or “tips.” 
3. Before you buy a security, find out everything you can about the company, its management and competitors, Its earnings and possibilities for growth. 
4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars. 
5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible. 
6. Don’t buy too many different securities. Better have only a few investments which can be watched. 
7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects. 
8. Study your tax position to know when you can sell to greatest advantage. 
9. Always keep a good part of your capital in a cash reserve. Never invest all your funds. 
10. Don’t try to be a jack of all investments. Stick to the field you know best. 

Capitulation on the Downside

Capitulation on the downside is a capitulation of the longs who bought stock, only to find that instead of going up, the stock is going down. They buy more as the price drops with the intention of averaging down, but this action only digs them deeper into the hole.

As the stock starts to bottom, the capitulation occurs and traders who are long panic and sell. They feel it is the end of the world and that the stock is going to zero. They want out at any cost. They can’t tolerate the discomfort and race to get out of losing positions. This massive sell-off kills the price of the stock, but at this point the traders no longer care about the price. At the low, a big buyer usually appears and takes out all these panicky sellers of stock. Which pushes the stock price up again. At the bottom, as sellers get out of their positions and eventually disappear, the selling dissipates, and the stock has nowhere to go but up.

Learn How To Execute a Trading System Flawlessly

The proper execution of your trades is one of the most fundamental components of becoming a successful trader and probably the most difficult to learn. It is certainly much easier to identify something in the market that represents an opportunity than it is to act upon it. However, there are some good reasons why it is so difficult to act on a trading signal other than what has already been identified as mental obstacles. To understand these reasons, you need to understand the nature of trading systems (defined as any methodology that consistently identifies an opportunity to buy or sell with a potential profit in some future moment), and how they interact with the markets and ourselves.

Most good trading systems, technical or otherwise, will take consistent money out of the markets over the long run. Many of these good systems have been available to the public for years. And yet, there is still a huge gap between what is possible and what almost everyone ends up with. The problem with trading systems is they define market behavior in limited ways when the market can behave in an infinite combination of ways. Systems mathematically or mechanically reduce relationships in human behavior characteristics to percentage odds of what could happen next. They can only capture a very limited number of these behavior characteristics compared to the billions that are possible. Any identified pattern may or may not be repeating itself with respect to the way the pattern or relationship progressed when it was observed in the past. Therefore, we never really know if it is valid or not until it has actually completed itself. The big psychological problem here is that people have difficulty acting on opportunities with probable outcomes.

Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt. The momentary suspense adds the thrill factor necessary to keep our lives from getting too boring. When it comes right down to it, no one trades to lose, no one puts on a trade believing it is going to be a loser, and all systems will definitely have some percentage of losing trades. So it’s difficult not to be tempted into trying to guess which ones are going to be the losers and not participate.

As most of you already know, trying to outguess your trading system is an exercise in extreme frustration. Sometimes the system will give you signals to trade in ways that are completely contrary to your logic and reasoning. Sometimes the system will defy your reasoning and be right, and sometimes you will agree with the system and it will be wrong. You need to understand that technical trading systems are not designed to be outguessed. What I mean is, they aren’t designed to give you isolated signals of an opportunity to be taken when it seems right. What they do is mathematically define, quantify, and categorize past relationships in collective human behavior to give you a statistically probable outcome of the future.