Strategy
February 11th, 2009
Trading will be the ultimate financial, emotional, and intellectual challenge you will ever encounter. Fear, doubt, complacency, greed, anxiety, excitement and false pride all can interfere with rational and intellectual thoughts. But, conquer those feelings and you will find the holy grail of trading – Financial Freedom.
What Is Technical Analysis?
Technical analysis is the study of a market’s price data, which is created by the emotions of its participants. Price reflects the current or anticipated value of a security from a supply and demand perspective. Therefore, price is the true and absolute reflection of value, as perceived by all the various market participants. A majority if the time, traders use candlestick charts (below) to help explain the market’s movement and sentiment.
Using charts to analyze markets and price movement is certainly not an exact science to say the least. Rather, it’s a working art that sometimes depends more on what the eye sees than any conclusive data point. And the more times you can successfully identify the characteristics of a pattern or trading set-up, the more likely you will be able to notice the set-up in the future and profitably make a trade.
Rule #1: Never Move Your Stops
This is the most important rule for professional traders hands down. Without a stop in place when the trade begins to go bad, you have a choice to make: sell or not sell. That’s when the fear of taking a loss appears. The pain of loss is two and a half times as strong as the joy of making a profit. That means traders will take even greater risks to avoid losing money. This is when losses start to pile up.
If you feel the desire to lower a stop, sell out of the position immediately. Fall in love, just never with a trade. It’s always better to cut your losses short as soon as the trade goes against you. You place stops because they protect and mange your risk. When you move these stops, you are now letting your emotions manage your risk. Decide what’s more important, being right or making money? Think of all those traders who hold a position just to be right. Don’t be afraid to take a loss. Losses are the cost of doing business.
A winning trade usually performs well right from the start. Bad ones go south quickly. Once you start second guessing and removing or lowering a stop, that’s when your losses become uncontrollable. You’ll find that the size of your wins diminish because your so paranoid about taking a loss that you’ll close out of a trade as soon as it shows a profit. Also, don’t become obsessive with checking your trades every minute. Place your stops and let the trade work it’s magic.
Follow A Successful Trading System
Formulating a trading plan should include the initial entry position, the risk management or loss objective and a target profit – in other words, everything you would need from start to finish. Successful trading takes hard work and discipline. You have to believe in the system you trade or you’ll ignore the signals you are getting. More importantly, not following a proven and reliable trading system is like driving a car blindfolded.
Without a successful trading system you will tend to over-trade. This is the number one reason why beginning traders fail. They over-trade because they want to be called a “day trader” instead of a “professional trader.” In turn, they rack up commissions and their portfolio crumbles as they fight back against the market. With experience however, the more you trade, the more money you will make.
Stop Reading The Headlines, Start Reading The Charts
I never get my trading ideas from the media or news. Today more than ever, the media is in the business of creating hype and buzz. They get paid for viewer ratings which are derived mainly from focusing on and exaggerating the real truth. When you hear news on a particular stock suggesting to buy or sell the stock, by the time it gets to the media, the major move is almost certainly over.
Plan Your Trade And Trade Your Plan
Even before you make a trade you should have already determined your profit and loss targets. Not having a profit or loss target is a trading barrier to success. How will you know when to get out of a bad trade? If you don’t set a profit target, raise your stop until price takes you out when the trend changes.
In the investment world, most people cut their profits short and let their losses run – the exact opposite of what they should really be doing. Sitting on a position, cutting out of a trade early, or not taking action on a well thought out trading plan all lead to emotional paralysis. On the other hand, understanding the potential opportunities and then having the confidence to act on a belief in them will absolutely result in successful trading.
Learn To Develop A Trader’s Mindset
Make sure you are trading because you want to trade and make money. If you get stopped out of several trades in a row, walk away from the markets for a few days. Asses the issues that are causing you to have unprofitable trades, make the necessary changes and get back into the game. Below are some common misconceptions about trading psychology:
1. I can trade without my emotions.
2. I know what I am feeling each time I make a trade.
3. My subconscious beliefs really don’t effect my trading.
Trading is 90% emotional and 10% mechanical. Understanding and learning to trade with – not control – your emotions will help you make, and more importantly keep, more profits. That’s why it’s important to keep a running log of how you feel when you trade. Were you confident or greedy when you lost money? Additionally, it’s important to reinforce positive ideas and thoughts into your subconscious mind. Once you understand how you act when your emotions are one particular way or the other, you will be able to adapt and navigate the markets with more consistency while increasing your returns at the same time.
