Trading, if approached incorrectly, can turn into a bad dream for many traders. The outcome for traders should be to get paid and make consistent money, but strangely many traders forget about this outcome and turn to trading for other reasons.
At times anyone can have a big winning trade or even a few, just as anyone can hit a golf ball straight 300 yards at the driving range on occasion.
The difference is consistency. Professional traders consistently turn a profit just as professional golfers consistently drive the ball exceedingly well. One of my passions is to help traders of all levels move him or herself to the outcome of consistent profits.
If you ever log onto the TSU Facebook Page or the TSU Membership Site, you will quickly see that most are searching for the holy grail or the pot of gold at the end of the elusive yellow brick road.
Students jump from strategy to strategy as quickly as Larry King does with wives. One month is the wide range bar strategy, the next is the jump to Bollinger Bands, then onto possibly credit spreads, then it is off to mastering Fibs or VWAP or fill in the blank.
If I can just learn more then I will become great is how the majority approach trading. The outcome of this blog is to present a formula, a winning formula that I hope will help students stay the course and stay focused on making consistent profits.
Analysis + Chart Location + Price Action + High Quality Pattern + Controlled Risk = Results
Let’s break each one down.
Analysis is the first part of the winning formula equation, but the least important in order to achieve the goal of consistent profits. Becoming a great analyst is fine but not completely necessary.
If you effectively become a master of the other 4 points of the equation and become a great analyst then even better but the reason I downplay the importance of analysis is that most traders, especially new ones or struggling traders, spend the majority of the time learning analysis at the expense of the others, and this can be colossal disaster.
The absolute truth is no one can beat the market, no matter how much one learns. Strong analysis entered at a poor chart location without a pattern and with poor risk management will lead to losses. So let’s move on to chart location.
Chart location is arguably the most important piece to the trading puzzle. Like in real estate you can analyze a piece of property and even rehab it to perfection, but if it is on the "wrong side of the tracks" it likely will not sell and if it finally does it will more than likely be for a loss and you will want to poke your eyes out for buying in the wrong location.
The same holds true for trading.
Have you ever bought or shorted a chart and then saw it almost immediately go in the wrong direction? I hear this often from students and my response is always the same. It is simply that you entered at the wrong location.
Now, this happens to all traders, and it used to happen to me often until I made it a law to not take trades at poor chart locations even if everything else is saying it is good to enter.
Now if you ever find yourself in a trade at a poor location, do not go into hope mode, rather act in your best interests and get out for a small loss. You can always enter again at a better location and have the capital to do so.
Price is the ONLY leading indicator in technical analysis. All other indicators are a derivative of the price but they are all lagging, so why not focus on the one that matters most, PRICE.
How can you intelligently use price to help you determine strong support and resistance areas?
Price allows you to look at an area on a chart objectively. The easiest way to accomplish this is to see how price reacted the last time it was at a particular support area. Did it move away quickly from that area or not?
If it moved quickly then we know at that support area there was demand. If it did not move away quickly then it demonstrates a lack of buying. By objectively looking at price rather than getting caught up in lagging indicators, it will help you avoid shorting into strong support or going long into strong resistance.
Becoming really good at recognizing winning patterns is paramount to becoming a consistently profitable trader. Trading patterns occur over and over, and even though they won’t always produce the same results, it does lend to the trading power of probability.
Utilizing high-quality patterns for trade entries will give your trades a better than average chance to immediately go in your intended direction.
Remember, you want your trade entries to look as similar as possible to stack the odds in your favor, because unless you believe you will be the first to beat the market, why not just trade like the professionals, with high-quality patterns.
Keeping your losses small is one of the easiest things traders can do to improve their results. Stops are your friends not your enemy, but even to this day, I see trades only highlighted with entry and target, without a mention of the stop or only a brief mention of it.
The trades that stop, people don’t mention and my question is, why not? I don’t like to stop on trades, but I always protect my best interests and always focus on keeping my losses even less than the original intended amount.
Losses are part of this game and if you don’t learn from losses than you are not progressing. One of the most valuable lessons is did you lose more or less or the exact amount you originally intended? If it was more, than why?
Did you hope it was going to come back? Did you not want to be wrong? Whatever the reason, get over it and make sure you first and foremost act in your best interests.
If you lost your intended amount then congratulate yourself and if you lose less than your intended amount then even better as you implemented a strategy to reduce full loss to less than full and over a series of trades that will do wonders to your trading results.
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