Trading in the financial markets is surrounded by a certain amount of mystique because there is no single formula for trading successfully. There is an old saying in business: "Fail to plan and you plan to fail." It may sound bull, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone.
Just ask any trader who makes money on a consistent basis and they will tell you, "Have a plan, or fail."
Approach
Before you start to trade, recognize the value of proper preparation. The first step is to align your personal goals and temperament with the instruments and markets that you can comfortably relate to. For example, if you know something about retailing, then look to trade retail stocks rather than oil futures, about which you may know nothing.
Market (Instrument)
You will find that certain instruments trade much more orderly than others. Erratic trading instruments make it difficult to produce a winning system. Therefore, it is necessary to test your system on multiple instruments to determine that your system's "personality" matches with the instrument being traded.
For example, if you were trading the USD/JPY currency pair in the forex market, you may find that Fibonacci support and resistance levels are more reliable in this instrument than in some others. You should also test multiple time frames to find those that match your trading system best.
Time Frame
The time frame indicates the type of trading that is appropriate for your temperament. Trading off of a five-minute chart suggests that you are more comfortable being in a position without the exposure to overnight risk. On the other hand, choosing weekly charts or a daily chart indicates a comfort with overnight risk and a willingness to see some days go contrary to your position. It is important to understand the difference and to know your Risk.
In addition, decide if you have the willingness and time to sit in front of a screen all day or if you would prefer to do your research quietly over the weekend and then make a trading decision for the coming week based on your analysis. Remember that the opportunity to make substantial money in the markets requires time. Short-term scalping, by definition, means small profits or losses. In this case you will have to trade more frequently.
Methodology
Once you choose a time frame, find a consistent methodology. For example, some traders like to buy support and sell resistance. Others prefer buying or selling breakouts.
I will talk more about the trading breakout technology in detail in my later post.
Set goals
Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? Many traders use will not take a trade unless the potential profit is at least three times greater than the risk.
For example, if your stop loss is a 1% loss per lot, your goal should be a 3% profit. Set weekly, monthly and annual profit goals in dollars or as a percentage of your portfolio, and re-assess them regularly.
Risk Control
In the end, successful trading is all about risk control. Take losses quickly and often if necessary. Try to get your trade in the correct direction right out of the gate. If it backs off, cut out and try again. Often it is on the second or third attempt that your trade will move immediately in the right direction. This practice requires patience and discipline but when you get the direction right you can trail your stops and almost always be profitable at best, or break even at worst.
Start Over
Starting over after losing a couple of trading would affect one's confidence. My suggestion , Get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong. Don't take it personally. Professional traders lose more trades than they win, but by managing money and limiting losses, they still end up making profits.
Keeping a trade LOG
After each trading day, adding up the profit or loss is secondary to knowing the why and how. Write down your conclusions in your trading journal so that you can reference them again later.
Monday, January 4, 2010
Tuesday, December 29, 2009
Common Mistakes That Cause Traders To Fail
A common problem that many newbie traders run into is that they start trading, make some decent profits, then all of the sudden they encounter what seems to be an endless stream of losses.
Eventually they end up losing their profits and eating away at their trading capital as they struggle to try and figure out what they are doing wrong. To be successful at trading futures, you must know what the common pitfalls are and what you can do to profit in the different futures markets. Here are the most common mistakes of futures traders and what you need to do to be a good trader.
1. Not Sticking With Your System
Just when a trading strategy is starting to show promise, many traders will deviate or abandon the system that they are using. This change means that you will not be able to unemotionally evaluate the market, leading to incorrect analyses and ultimately, losses. Instead, when you start to see signs of a change in trend taking place, you should be prepared to adapt your strategy to the changing conditions. This gives you the flexibility to make consistent profits in any type of market.
2. Not Protecting Yourself
Trading involves taking a certain degree of risk, so it is important to protect yourself. There are a few ways to do this, such as using a sell or buy stops to limit your losses to a comfortable level, or by using heading strategies like buying puts. This will keep your losses to a minimum while maximizing your profits.
3. Not Staying disciplined
In order to trade successfully, your undivided attention is required to be able to read and evaluate the markets effectively , trading requires alot of time , effort and discipline. Sometimes distractions are unavoidable, but you always want to have as few distractions as possible when you are trading. This will help you to focus properly, thus increasing your odds of more profitable trades.
4. Inflexible to changes
The markets are always changing. No matter how great you think you are as a trader, there's always a new idea that can help you improve your trading results. Too often, traders get caught up in thinking that they already know enough and they aren't willing to learn anything new. As the market conditions change, this type of trader is left behind with nothing to show but losses. However, if you remain open to new ideas, you will be able to change with the markets - and profit consistently, no matter what they do.
Eventually they end up losing their profits and eating away at their trading capital as they struggle to try and figure out what they are doing wrong. To be successful at trading futures, you must know what the common pitfalls are and what you can do to profit in the different futures markets. Here are the most common mistakes of futures traders and what you need to do to be a good trader.
1. Not Sticking With Your System
Just when a trading strategy is starting to show promise, many traders will deviate or abandon the system that they are using. This change means that you will not be able to unemotionally evaluate the market, leading to incorrect analyses and ultimately, losses. Instead, when you start to see signs of a change in trend taking place, you should be prepared to adapt your strategy to the changing conditions. This gives you the flexibility to make consistent profits in any type of market.
2. Not Protecting Yourself
Trading involves taking a certain degree of risk, so it is important to protect yourself. There are a few ways to do this, such as using a sell or buy stops to limit your losses to a comfortable level, or by using heading strategies like buying puts. This will keep your losses to a minimum while maximizing your profits.
3. Not Staying disciplined
In order to trade successfully, your undivided attention is required to be able to read and evaluate the markets effectively , trading requires alot of time , effort and discipline. Sometimes distractions are unavoidable, but you always want to have as few distractions as possible when you are trading. This will help you to focus properly, thus increasing your odds of more profitable trades.
4. Inflexible to changes
The markets are always changing. No matter how great you think you are as a trader, there's always a new idea that can help you improve your trading results. Too often, traders get caught up in thinking that they already know enough and they aren't willing to learn anything new. As the market conditions change, this type of trader is left behind with nothing to show but losses. However, if you remain open to new ideas, you will be able to change with the markets - and profit consistently, no matter what they do.
Introduction to trading breakouts
Breakout trading is used by active investors to take a position in a trend's early stages. Generally speaking, this strategy can be the starting point for major price moves, expansions in volatility and, when managed properly, can offer limited downside risk. Throughout this blog, i'll try to walk you through the anatomy of this trade from start to finish and offer a few ideas to better manage this trading style.
One of the most interesting topics in trading, and really throughout many areas of life, is what could be called market randomness or the Random walk where sometimes markets don't follow a standard set of rules and when this happens there would be volatility increases and large price swings.
Every trader worth his or her salt knows that trading against the trend is not a good idea. So it seems logical that the best trading systems would be those that follow the trend: when the trend is going up, take long trades only, and when it's going down, it's time to go short. That being said, you'd think that trend-following systems would have the best win/loss ratios, right?
But no one tells you when to enter and how to enter and where to set the stops to limit your downside risk, the breakout trading is a great strategy which can be used.
So what is a breakout?
A breakout is essentially a price that moves outside a predetermined support or resistance level with increased volume. A breakout trader enters a long position after the instrument's price breaks above resistance or enters a short position after the stock breaks below support.
Once the instrument trades beyond the price barrier, volatility tends to increase and prices usually trend in the breakout's direction. The reason breakouts are such an important trading strategy is because these setups are the starting point for future volatility increases and large price swings. In many circumstances, breakouts are the starting point for major price trends.
The markets are extremely dynamic and in constant flux. This brings in an element of randomness that can create profits for unskilled traders and losses for skilled traders, and it happens all the time.
A trader must also determine when a certain string of losses or profits can be attributed their skill, and when it is random. The only way to do this while you are learning is to approach the markets with a trading plan and risk a small percentage of capital on each trade. In this way the trader can see how a method performs over the long run where randomness becomes less of a factor.
It is also important to remember that even the best traders and trading methods experience strings of losses. Learn how to apply the trading breakout methodology to increase your chance of making a winning trade.
One of the most interesting topics in trading, and really throughout many areas of life, is what could be called market randomness or the Random walk where sometimes markets don't follow a standard set of rules and when this happens there would be volatility increases and large price swings.
Every trader worth his or her salt knows that trading against the trend is not a good idea. So it seems logical that the best trading systems would be those that follow the trend: when the trend is going up, take long trades only, and when it's going down, it's time to go short. That being said, you'd think that trend-following systems would have the best win/loss ratios, right?
But no one tells you when to enter and how to enter and where to set the stops to limit your downside risk, the breakout trading is a great strategy which can be used.
So what is a breakout?
A breakout is essentially a price that moves outside a predetermined support or resistance level with increased volume. A breakout trader enters a long position after the instrument's price breaks above resistance or enters a short position after the stock breaks below support.
Once the instrument trades beyond the price barrier, volatility tends to increase and prices usually trend in the breakout's direction. The reason breakouts are such an important trading strategy is because these setups are the starting point for future volatility increases and large price swings. In many circumstances, breakouts are the starting point for major price trends.
The markets are extremely dynamic and in constant flux. This brings in an element of randomness that can create profits for unskilled traders and losses for skilled traders, and it happens all the time.
A trader must also determine when a certain string of losses or profits can be attributed their skill, and when it is random. The only way to do this while you are learning is to approach the markets with a trading plan and risk a small percentage of capital on each trade. In this way the trader can see how a method performs over the long run where randomness becomes less of a factor.
It is also important to remember that even the best traders and trading methods experience strings of losses. Learn how to apply the trading breakout methodology to increase your chance of making a winning trade.
Prelude to the setup of this blog
The recent increase in speculative trading activity in the financial markets, partly due to the development of online retail trading solutions offered on the internet, has created a new population of traders in the market.
Most of these traders are non-professionals that are attracted by the potential to generate income quickly. Many novice traders are lead believe that it is relatively easy to make money, especially when they are using a free practice account.
Unfortunately, when these inexperienced "traders" decide to start trading live accounts and risking real money on the market, they take the leap from the their virtual trading accounts to trading with real money, they are entering into the most difficult step of their initiation to trading: the correct trading psychology.
Especially when real money comes into play the influence of fear and greed would affect these "newbie traders" which often leads to misjudgment and losses.
In order to take a less painful first baby step , it would be easier if there is a trading plan.There is an old saying : "Fail to plan and you plan to fail." It may sound glib, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone.
Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either methodically follow a written plan, or fail."While it is still no absolute guarantee of success but you have taken the first step. If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to chart and modify your course. We are all here to learn , always adjust yourself and be flexible.
Most of these traders are non-professionals that are attracted by the potential to generate income quickly. Many novice traders are lead believe that it is relatively easy to make money, especially when they are using a free practice account.
Unfortunately, when these inexperienced "traders" decide to start trading live accounts and risking real money on the market, they take the leap from the their virtual trading accounts to trading with real money, they are entering into the most difficult step of their initiation to trading: the correct trading psychology.
Especially when real money comes into play the influence of fear and greed would affect these "newbie traders" which often leads to misjudgment and losses.
In order to take a less painful first baby step , it would be easier if there is a trading plan.There is an old saying : "Fail to plan and you plan to fail." It may sound glib, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone.
Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either methodically follow a written plan, or fail."While it is still no absolute guarantee of success but you have taken the first step. If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to chart and modify your course. We are all here to learn , always adjust yourself and be flexible.
Subscribe to:
Posts (Atom)