Hello DreamTai users,
In the last session, I had introduced you to Master Wong and Bob.
They are visiting my house today to talk about trading patterns. I have half an hour left. Let me clean up the room before Master Wong comments on it.
[[Ding Dong! The door bell rings]]
Sanjoy: Good afternoon Master Wong! Hello Bob!
Bob: Hello Sanjoy. I just made over $5,000 this week. Master Wong was watching over my trades today.
Master Wong: Shall we get started?
Sanjoy and Bob: Sure! Master Wong.
Master Wong: First of all, I will tell you the story of the Happy Monkey. Have you heard that story?
Bob: No.
Once upon a time, in the jungle, there was a money named "Happy Monkey". Since he did not have a job, he was free whole day.
Eveyday, he used to climb the trees, swing among the branches and have a great time.
Bob: What has this to do with trading? Also, what did the monkey eat?
Master Wong: Just listen, you will get the idea soon. The trees in that forest were really tall with many branches at different heights.
The monkey used to jump to a branch of the tree and search for fruits there. He used to eat the fruit on that branch.
If the fruit was good, the monkey would feel strong and then would jump to the next higher branch. Again the monkey would eat the fruit there. If the fruit was good, the monkey would gain strength and still climb higher.
Bob: What would happen if there was a bad fruit?
Master Wong: If there was a bad fruit, the monkey will feel sick and weakened and would fall down from that branch. He would try to grasp the lower branch while falling down.
After the monkey falls to the lower branch, he again eats the fruits on that branch. If the fruit gives him strength, he can recover, regain his strength and then jump higher.
If this fruit is also rotten, the monkey will fall down further to the next lower branch.
Bob: How does this relate to stocks?
Master Wong: Study the path followed by the Happy Monkey. If the fruits are good, the monkey can keep jumping higher. If the fruits at any branch are bad, the monkey can only fall down.
Now, study the following chart of stock. Draw a line at the peaks and the valleys.
See how similar it is to the path of the happy monkey. Whenever, there is good fruit, the stock goes up. Whenever, there is bad fruit, the stock goes down.
You will notice that usually, once there is bad fruit, there are series of bad fruits. And once there are good fruits, there are series of good fruit.
A stock goes up in series of higher highs and higher lows, till there is a lower low. As soon as you get a lower low, you should suspect that the trend has changed.
If the trend has changed to a downtrend, then you will see a series of lower highs and lower lows.
Bob: Oh I see..I think I got it..An uptrend is defined by a series of higher peaks and higher valleys and a downtrend is defined by a series of lower lows and lower peaks.
Master Wong: You are absolutely correct.
Bob: What happens if a trend changes from uptrend to down trend..that is have a lower high after series of higher high..and then instead of going into a downtrend, just moves in a flat range which is neither highre high nor lower low..that it it just bounces around here and there,?
Master Wong: For that, I use various patterns that I will teach you in the coming sessions.
For now, just do the following. Go home and take printout of a few charts. Draw the Happy Monkey path for each of the stock and try to predict whether the stock is in an uptrend or downtrend.
Bob: I have many questions. What if the chart does not follow the Happy Monkey pattern exactly?
Master Wong: I know, you have questions. For now..just follow the simple higher high higher low or lower high lower low pattern I had shown you. If a chart does not fit that pattern, just ignore it and look at some other charts which follow this rule.
I will leave now. Why don't you and Sanjoy come to my house next week. Also, lunch will be served there. Just phone my chef what food you desire to eat at lunchtime and he will prepare it when you arrive there next week. Bye.
Sanjoy: Bye! Master Wong. This session has been really an introduction to pattern recognition. It has been really helpful.
