Want to improve your trading profits, but not sure how?

Let’s step back a bit first before answering that question. Most new traders want to trade to get rich quickly, right? This is typical human speculative behavior. Social media hype can make trading look easy, but that gives very false impressions.

  • Trading can be very rewarding but like any profession, it’s very important to have a strong desire to learn rather than just dive in, or follow others blindly.
  • If you have already made losses, treat this as an important part of learning.
  • Unrealistic expectations of getting rich fast and not understanding what it takes to be successful often results in bad trading decisions, bad experiences and big losses.

It took me a while to learn to trade consistently well. I valued learning from professional traders. You can simplify your learning curve for trading by tapping into the experience of successful traders, but don’t just expect to mirror their methods, you need to find what works for you and make the methods your own.

Can you relate to these experiences?

  • Media hype helps attract people to markets. Here are some extracts: – “To the moon”, “buy, sell, hodl” and “Just made $2000 in the last 15 minutes – did you get some too” and “Our methods will make you rich – 90% of our trades are winners”.
  • Many amateur traders believe this and get sucked into this environment, because it looks easy and they don’t want to miss out (#FOMO). That’s not trading – its typical speculative herd behavior, or gambling – the house generally wins.
  • Some new traders have “beginners luck” and start to make some profit. This is not uncommon in strong trending markets driven by hype – ride the trend.
  • Those new traders then decide to take more risk for bigger profits and open larger positions (some use leverage) – this is the effect of greed. It can also be driven by the feeling of being “invincible” because of the “wins” that have been made to date.
  • The trend then completes, and they get caught on the wrong side of the market and start making losses. Confusion leads to disbelief, despair, panic and capitulation (often just as the trend changes).
  • They try to average the losses by adding new positions to the original position not realizing that the bigger trend has changed against them.
  • The losses can magnify to a point where they can become catastrophic, which leads to not just a large financial loss, but also significant emotional stress.

The emotional component related to trader psychology has the potential to be more damaging than a financial loss.

Welcome to trading 101. If you have already gone down this path, it will be potentially harder to learn to trade unless you accept what has happened, learn from it and put it behind you with determination to do things differently following a structured learning process.

Successful trading relies on 3 integrated skills – gives you a huge EDGE.

  • Long-term success is reliant on more than just technical analysis. It requires an integrated focus on three separate skill areas:

1) Proven trading Methods and Strategies (using Technical Analysis);

2) Effective Risk Management;

3) Discipline to manage yourself with the right “mindset”;

Dropping your guard on any one of the three will invariably result in a compromised trade. The integrated focus is your trading “edge” and this approach will put you at a huge advantage relative to other traders. While methods and strategies will vary from trader to trader, all the professional traders I know use this integrated approach.

Balanced integration of all three for successful Trading

What are proven trading methods and strategies?

  • Trading methods and strategies are determined by applying technical analysis to historical price charts and back testing their performance to help determine whether they have higher probability of being profitable over time.
  • The methods and strategies can then be applied in real time on real trades to further prove them. The key is to keep good records to help evaluate ongoing performance.
  • Professional traders develop sets of rules for trading each strategy. Typical examples might be rules applied to trading a classical chart pattern, or an Elliott wave count, or a to a guideline for using a Median Line.
  • The strategies should be referred to in each trade plan along with the relevant chart time frames.
  • As you get more confident with the proven methods, you will learn to make your own small refinements to further improve them (“personalization” of the base methods). Make them your own.
  • Not many traders use the same methods. Most will develop their own unique variation of a method. These are often subtle refinements. Do your methods give you a proven and profitable market edge?
  • I focus on swing and position trading on daily, 240 and 60-minute charts trading in the direction of the larger trend. This allows me to do more effective planning and focus on a small number of quality trades a month, even if you are busy with family or work. I would encourage new traders to do the same and avoid day trading.
  • My proven methods use Median Lines and have clear trading rules.

What is effective Risk Management?

  • Protecting capital is vitally important. If your trade capital is compromised and diminishes, your ability to trade successfully is severely compromised.
  • Trading capital should be separated from your other assets and investments and treated as though you can afford to lose it if something goes horribly wrong.
  • To manage risk, you must first evaluate it. I use Median Line Analytics to help identify trends using significant price pivots. The median line is defined trend, support, resistance, and changes in price behavior. They are excellent for evaluating risk.
  • I use Median Lines (Andrews Pitchforks) to evaluate risk. They are extremely effective defining trend, support, resistance and changes in price behavior. If you know these parameters, you can anticipate where the low risk entries are and wait for the market to come to you. Here’s an example.

Median Lines on $XVG for evaluating trade risk

What is good guidelines for Risk Management?

The  guidelines I use for Money (Risk) Management are outlined in:

“Come into my Trading Room” by Dr Alexander Elder.The exception is that I limit risk on any one trade to 1% rather than 2%.

Also, if you lose more than 6% of your trading equity in a month, then you should stop trading for a month and determine what you need to do differently to turn these losses around.

  • Position sizing should be determined after risk is evaluated.
  • A simple performance measure – track your equity curve and make sure that your equity curve is growing, and not declining.

Trading Psychology

Don’t underestimate the impact of emotions on your trading. These emotions will include fear and greed. They can impact on your ability to think rationally because real money is at stake. It’s normal human behavior to get upset if you lose money. Successful trading relies heavily on your discipline and ability to not let your emotions interfere with your trade plans.

There are some references about trading psychology in Dr Elder’s books. The references that I have used and recommend are those that have been prepared by Mark Douglas and these include:

“Trading in the Zone” and “The Disciplined Trader”

These books give a lot of insight about how to achieve a “Trader’s Mindset” for success.

  • It is important to plan trades, to be confident in the methods that you are using to evaluate trades, and to accept that your risk on open trades could be lost. Confidence in my own methods and ability to manage risk helped to strengthen my trader mindset. I also accept that losses are an inevitable result of trading. The key is to keep those losses small and asymmetric to the larger wins.
  • Try to let the market come to your setup rather than chase a market. If the setup is not triggered and price leaves the station without you, look for the next a low-risk set up, or another entity with a new emerging set up.
  • Avoid getting distracted by other traders, or social media. Learn to “live and die” on your own merits.

The Importance of Record Keeping

It’s very important to document all your trading plans and to review them when the trades are closed. This is a vital part of the continuous learning process and when you think about it, if you are putting $1000 of trading capital at risk, wouldn’t it make sense to spend 10 to 20 minutes planning on how best to do that first?

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