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Here are some thoughts that may prove useful to those
early in their trading careers. There are numerous good books available to provide more
thorough content on trading style and tactics, and we strongly suggest a visit to your
local library. As time permits, we will try to list some of the books we have found
beneficial to us personally. In the meantime....
- Understand your personal trading psychology. Are
you easily bothered by a loss? Try to change this. If you trade regularly, then accept that
trading is like a business and losses are part of doing business. Don't let a loss
discourage you...be prepared to admit when you're wrong, close a bad position and move on.
Do you hang onto a suspect trade waiting to recover commissions or breakeven? Avoid
staying in a suspect trade...when it doesn't feel right, be decisive, close the trade quickly even if
at a small loss. Are you too quick to take your profits but not so quick to stop out with
a loss? This is likely the cause for most trading failures. You can make money in trading
if you are profitable only half the time but allow your winners to make you more than your
losing trades. This requires allowing some profitable trades to return you big profits,
even if only occasionally, while ensuring ALL losses are stopped early. This is about
"Money Management", an absolute key to successful trading, but following this
dictum is a matter of personal psychology.
- Always, always trade with a stop loss, especially
if trading futures. While some may be successful without discrete stops, this can be
dangerous unless you're watching the market constantly and disciplined enough to act when
required. Frankly, we don't think it's worth the risk. There are times when electronic
trading systems go down...without pre-placed stops, you carry enormous risk of being
locked out of the market during extremely adverse movements. It may be rare, but believe
us, it happens, and you don't want to be on the wrong side of the move when it does. There
are also times when we enter stops only to see the market take out our stops exactly to
the tick and then reverse to our originally anticipated direction. At times like these, we
wonder who is able to see our stops in the order book and were we played out. We don't
know the answer, but we know that not using stops will spoil the fun, likely sooner than
later. Having said all that, Robert prechter has a different approach to using stops, and we have to admit there are many times we agree with this informed comment. We've taken the liberty of reproducing his comments for your benefit here.
- Decide before you place the trade what your
objective is. Is it a scalp trade or a swing trade? If it's a short term scalp, decide
your profit objective accordingly, and once reached, either take it immediately, or if
you're going to hold out to see if it runs once it's reached, immediately place a stop
just below. Don't let emotions of hope or greed let you turn a scalp profit into a swing
loss. Keep a trading journal that outlines the environment surrounding each trade...what
was happening, why you went in, what your objective was, and outcome. This may sound
tedious, but the effort is invaluable in the early days and years of trading.
- As a follow-on to #3, accept that markets tend to
trend, and as far as humanly possible, trade in the direction of the trend. Counter-trend
trades can be profitable too, as long as they're recognized as such and traded
accordingly. See #3 and #5. When trading a trend, learn to place stops that will keep you
in the trade as long as the trend continues. Don't feel that a certain dollar profit is
"enough". Ride the trend for all it's worth, moving your stop down to protect
profits as you go. Once you get on the right side of a trend and see the profits add-up
you'll see the merit in the approach. However, also recognize that in most markets, there
are only 1 or 2 large trending moves in a year. Therefore, don't expect every move to be a
large trending move. Recognize what type of market you're in...is it range-trading,
consolidation, or a trend, and trade accordingly.
- As a follow-on to #4, while it's good to be a
trend-follower, we are generally conservative in that we don't jump on breakouts or
breakdowns. These can be hugely profitable, especially in the futures markets. However,
they can be emotionally painful as well if one gets in on the tail end of a false
breakout. If a breakout appears to be valid, we prefer to seek an opportunity to enter the
market on a retracement or successful test of the breakout level. This allows us to keep
our stops fairly close and our risk to a reasonable level if proven wrong. Momentum
trading is a valid strategy, but carries high risk for traders still learning the ropes.
- Be clear on the reason you're entering the trade.
If it's trend line resistance or support, or behavior of certain indicators, that's
fine...just know what your reason is. Concurrently, be brave enough to act on a negation
of the reason. If price violates the trend line against your expectations, close the
position. It may be a false break as happens frequently, but if your mental stop level is
wide enough to allow for such a possibility, don't let hope allow you to stay too long in
the position once the market proves you wrong.
- Don't try to catch the extreme tops or bottoms of
moves. While you may succeed some times, chances are you'll be premature on a trending
move and carry undue risk as the position moves against you, stops you out (or causes you
great emotional distress) and then reverses in what would have been your favor. Rarely do
markets make spike highs and then reverse so suddenly that one can't catch the reversal.
More often than not, a topping or bottoming market will probe the extreme again, giving
you a chance to get into the trade with a low-risk stop just beyond the previous extreme.
- Don't try to trade too many markets too quickly.
Each market is a persona in itself. If you watch it regularly, you will discover this
persona and be able to trade it to your benefit. You will recognize the tendency to run
stops, to reverse abruptly, to over- and under-throw supposed support and resistance
levels, to trade cyclically or in high-probability patterns during certain times of the
day. You will recognize which markets move to your expectation and whether in the expected
time frame. Those that do bear out your directional views but take longer to do so may be
better traded with options than futures. During the early stages of trading, try to
concentrate on a small number of markets and learn their behaviors. Many active traders
will watch each tick of a market, every day, for years in order to better understand the
market 'personality'. This may be more useful for the short term trader and is not a
necessity to be a successful swing or trend trader. In fact, it can be detrimental to the
medium or long term trader as watching ticks can mask the big picture and cause one to
miss out on big moves.
- Trading is tough business. It's hard for most
people to make money consistently, and even to keep what they've made. If you're new to
trading, especially to futures and options, make sure you trade only with risk
capital...money you can afford to lose and not compromise your everyday life - not money
meant for essentials like buying or furnishing a home, for education, or to pay your rent.
Try not to be swayed by get-rich-quick promises offered by the multitude of
options-trading seminars. It's never as easy as they make it sound. Start small and be
prepared to invest a lot of time and emotion into learning about trading successfully.
Start trading on paper before you trade with real money. Even if you're successful
paper-trading and are ready to risk real capital, remind yourself...start small. The
market will always be there and there's plenty of time to increase your stakes as you
become successful.
If you feel you don't have the time or frame of mind to study the markets or technical
analysis, consider using an advisory service that provides clear signals for entry, stop
loss and profit levels. Stick to those advisories and newsletters that have been around
for some years, that avoid hyping the current hot topic to gain your attention and don't
be afraid to try out those that offer free trials. No one has a perfect record, but if you
identify the few that are intellectually sound over various cycles and market
environments, narrow down & find a couple that suit your style and use them as trading
mentors.
While this site isn't meant to offer specific investment advice, we're happy to correspond
with experienced as well as aspiring traders to share experiences and to collectively
enhance our trading skills. Please feel free to contact us...if there is sufficient
interest in establishing an ongoing exchange of ideas and questions, we'll be happy to
start a forum page where traders can share views and have questions answered on a variety
of topics.
Oh, and one more thing. When you become a successful, consistently profitable trader, consider sharing some of your good fortune with your favourite charity. It'll keep you humble and we guarantee you'll feel better for it.
Happy trading to all.
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