Minggu, 25 Desember 2011

How to advance in stock market trading

I recently received an email from an individual who already gained extensive hands-on experience in trading, but seems unable to get ahead. Whenever a large gain was made, it is slowly drained away by little losses here and there. At the end of the day, he is muddling around break even:
After all this, I feel I should be further in the game. Instead of being a consistent breakeven trader, I want to be a consistent profit maker. Perhaps you can open my eyes to trading.

Upon analyzing his transactions, I believe to have figured out the root of his problem. The most striking misbehavior is that he scalps the market up and down and takes way too many opportunities. Taking that many opportunities will result in many errors because a trader is not proficient enough to maneuver every move. He took 13 trades on a single day, very typical for beginners.
Trading off the 2 minute chart as he does is a false belief of having control over the market. You do not get more details from shorter time frames, but more confusion.
To design and execute a winning system, you must design yourself to becoming a winner, too. It implies that you refrain from trading out of gut feel, but according to rules of your strategy. I believe it's a fallacy to assume that being break-even is a significant step toward consistent profitibality. You will think that one final touch to the strategy will make you profitable. Actually, it just proves that you cannot hold onto gains and will lose a lot of money very soon. A winner is someone who can hold onto gains and continue to build up the equity curve. So take less trades out of gut feel, and more based on objective observation of trends.
In case you do not have a firm trend following strategy yet, I advice you to take a step back and look at what is really happening in the market. Try to interpret the battle of bulls and bears behind. It's all common sense. Concentrate on pure price action, not on candlestick formations, head and shoulders, topping patterns, you name it. They are all a consequence of this dynamic battle anyway. Close the small time frames and look at nothing below the 1H chart.
I know that you are seeking an indicator that will give you the answer each time, but a reliable indicator or a combination thereof does not exist. Do not fall into this trap that so many traders before you have, and still do. The only indicator which I find helpful is the exponential moving average (EMA) for general orientation. But beyond that I use none, not even volume. Only price pays.
Trading is about using common sense and objective analysis. I can tell you that the successful trend trader always looks at the big picture, not the small one. And it is quite obvious why. His experience has taught him that being active is not beneficial.
It is infinitely easier to understand the underlying forces and flow with them instead of taking a beating up and down. What was the reason he took those 13 trades? Was the market changing direction that often? In fact, it was exploding higher and never changed direction on that particular day. It was not hard to figure out that buying and staying long was the only sensible thing to do.

author : Matthew H

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