As traders, we try to do constructive things that build faith in ourselves, and confidence in our trading systems. We want to stay on the right path and not wander into the wilderness of destruction. Here are the seven things that we must be cautious of for the sake of profitability.
- Blaming outside forces for poor trading results is an incredibly destructive behavior. High frequency traders, market makers, and irrational markets, give an undisciplined trader license to make reckless trades. The less responsibility taken for results, the more destructive they can be with an account.
- Trading with no plan and making decisions based on feelings, is a really bad idea. Letting opinions and predictions be a guide to entries, and emotions be a guide to exits, guarantees maximum destruction of trading capital.
- Trade first and learn how to trade later. Traders who don’t spend time educating themselves before trading will learn the hard way, and give their trading capital to other traders as tuition.
- Focusing on ego and the desire to be right, instead of profitability and big losses, will quickly destroy a trader’s account.
- Traders that fight the trend and disagree with the actual price action will give their trading capital to those that follow the trend.
- Trade without discipline and risk management and a trader will be destroyed regardless of their trading system or method.
- If a trader doesn’t diversify their life with strong relationships, fun, peace, and health, their trading results become too entangled with their self worth. This can lead to mental and emotional ruin.
The path to profitability leads away from these seven habits. In the end, traders are consistently rewarded for their good habits, and punished financially for their destructive habits. This is our stop list.
Chart courtesy of stockcharts.com
- The 50 day sma was broken and closed above which is a buy signal.
- The 200 day was broken and closed above today which is a buy signal.
- The MACD is bullish
- $IWM has been trading above the 10 day sma for 8 trading days.
- The momentum has been incredibly powerful with the price range expanding upwards today.
- Six of the past seven trading days $IWM has finished higher than it started.
- The ‘V’ bottom has held since the bounce.
- Today was a huge break out of a trading range.
- The 62.90 RSi gives $IWM more room to run up.
- This chart is nothing but bullish signals. It will be a blind sided whip saw if this move up fails to continue.
“A triathlon is a multiple-stage competition involving the completion of three, continuous, and sequential endurance disciplines. While many variations of the sport exist, triathlon, in its most popular form, involves swimming, cycling, and running in immediate succession over various distances.” - Wikipedia
Trading is a three-dimensional competition that requires the management of three continuous, simultaneous, endurance disciplines. While a variety of trading methodologies and systems exist, profitable trading involves management of the trader’s psychology, attention to risk control, and dedication to trading a robust system over an extended time period.
Many traders make the mistake of thinking that simply knowing the right methodology will guarantee their success. In actuality, it is a three event marathon consisting of more than just entries; psychology and risk management have much more influence over longterm success. Entries have no meaning without the right exits, and no system is a winning system without the discipline to follow it.
Here are the three events in the trading race:
A trader’s psychology has to be one of confidence in order to trade it with discipline. Confidence comes from doing homework, back testing, chart studies, and experience. A trader has to trade position sizes that turn down the volume on their emotions. They must have the mental discipline to follow the plan that they carefully crafted when the market was closed, when the market is open. When a trader drifts into greed, fear, and ego, they will likely wreck on the rocks of reality. A successful trader needs the psychology of an entrepreneur, cultivating the fortitude to get through the small losses so they can make it to the big wins.
A trader’s risk management will determine their short term and long term success. Trade too big and the trader will give back all past profits with just a few losing trades. Trading huge position sizes insures that a trader will eventually give their whole trading account away to disciplined risk managers. If risk is not managed, no trading method will lead to profitability because some string of losses will eventually be too much to bear.
A trader’s methodology should be robust enough to have an edge over the markets and other traders. High probability entries and set ups based on historical price action is a good place to start. Planned exits to lock in profitable trades when right, and knowing where to get out if proven wrong, is critical to success. A good trading methodology is trading with a plan that defines entries, exits, and position sizing. Implementing a strong methodology increases the likelihood that a trader’s overall wins will exceed their overall losses within the timeframe for expected profitability.
If you want to win the trading race, you must train for all three events.
Charts courtesy of stockcharts.com
- Last week suddenly the fear was turned off and the greed was turned on. The Ebola bottom held with an inter-day loss of the 30 RSI and the close back near that level by end of day. Bearish signals continue to be bullish in this relentless bull market.
- $SPY & $QQQ had almost a move back up last week that mirrored the down move erasing the sell off the 50 day as if it never happened.
- Both indexes rallied back above the 200 day keeping the long term up trend in place.
- Both indexes rallied back above the 50 day triggered a break out of to a short term up trend again.
- The market not selling off on the growing Ebola scare, $NFLX & $IBM post earnings sell offs, QE ending, and the Euro bank stress tests then what exactly will it take? This rally against all the fear mongering and bad news is bullish.
- While the volatility itself to the down side was bearish once again the upside move has once again crushed the $VXX being bullish.
- MACD bullish crossovers were all triggered last week. These bullish signals have worked well in past years.
- Bullish all time highs last week in: $AAPL $PG $GILD $UNP $ABBV $MMM $UNH $CELG $LOW $MCK $GD and oddly enough –> $XLU
- The RSI being in the 50s here gives this market room to move up more before being oversold.
- There is a high probability we consolidate price next week around the 50 days and give the 10 day sma a chance to catch back up with the extended price level off the bottom.