18 October, 2009

The Greatest trading lessons I have learned

by Michael Storm aka Robinhood

#1.) Price has MEMORY.

Where there is a pivot or a turning point on any given chart and then a subsequent rise or downdraft, it takes TIME to overcome or correct such a move. Candlesticks tend to stall or consolidate around such areas. This of course depends upon how recent the event was. The more recent the event, the more resistance to overcoming a prior high, or breaking through a prior low. The BREAKING of such areas is called the breakout or breakdown.

#2.) Fear is far greater than greed.... always analyze from the perspective of "what are other traders thinking/feeling" at these moments or what will they feel if price goes to X? With Forex, buying in one currency IS selling in another. Due to the nature of the massive margin, traders cannot hold for large moves against them. So, selling begets more selling as stops are being triggered. Buying begets more buying (because the other side of the currency is being sold and again stops being triggered cause price to continue in that direction).

#3.) Patience is a virtue. ALWAYS wait for each bar to complete. Waiting for a setup to complete is of the greatest importance because failed setups are more common than completed ones.

#4.) Disciplined stops are vital to survival. Always place a stop immediately after entering a trade. What if a tree drops on your cable lines or the computer crashes in the middle of a trade? (personally had this happen several times)

#5.) Reversals and breakouts have the most meat in them

#6.) Charts are the "footprints" of money. Our job is to be an expert tracker/hunter.

#7.) Trade what you SEE, not what you believe. How does one explain this to someone.... that is the question. Stop having a bias short or long, let the charts tell you. Is price rising? Then only place trades to the long side. Is price descending? C'mon. What is the trend? Your going to bet against the trend? Only a fool tries to catch a falling knife. Let the knife fall first. ONLY trade in the direction of the trend, for we know not how far down is down, or how low or how long the trend will last. It always goes further than you think.

#8.) News is (somewhat) irrelevant. If it is going to move, it will show up on the charts. The price action rules!

#9.) Its ok to lose. Lets try and keep it to no more than half of all trades. All losses must be small. Let the winners run. For you WILL go broke taking profits too soon and/or letting losers run. It is NOT my job as a manager of my family's money to allow a trade to go massively against me. I "hired" that trade to perform and it better darn well perform and right quickly or I am OUT. When in doubt get out. Can always re-enter later.

#10.) Everyone has an agenda. Believe nothing. Read between the lines. Many times contrarian thinking rules and trades go the way to HURT the most traders.

#11.) Education is cheap, its ignorance that is expensive! Your never too smart or know it all. Keep learning till you stop breathing.

#12.) Again... Patience pays. It is best to sit in cash and WAIT for a truly awesome trade opportunity. I do NOT get paid to trade. I get paid to WAIT. I get paid to POUNCE when the pouncing is right!

#13.) Examine all trades in the light of multiple time frames. I personally use a 1, 5, 15 minute and 1 hour chart. Always keeping my mind on each candle in each time frame. How far can that bar move? The ATR (average true range) can be visually seen and taken into account with the other time frames.

These are the biggies for me. As a professional scalper in stocks for 10 years, trading sometimes 100K shares a day, I really needed to be right. Here is a list of a few more. If you trade stocks as well, you may understand most of this: WHERE is the 800 pound gorilla trading (the market maker, the axe)? How many "bullets" does he have? What is his goal? Where are his danger levels (price levels that should not be broken, for the selling would trigger stop losses forcing him to take on more shares than he can, or wants too)? Where is the next level or pivot that price is heading to.? Where is the next resistance level where price will stall out? And for God's sake remember the power of the trend is almost unstoppable. Well that's it for now. Thanks for reading. This is one of the first articles I have ever written. Hope it will be a help to someone. If so perhaps I will write more. Follow the rules you establish for yourself, and good luck!

Sources: http://www.winnersedgetrading.com/trade-of-the-day/the-greatest-forex-trading-lessons-i-have-learned