“There seems to be some perverse human characteristic that likes to make easy things difficult.” ~Warren Buffett
“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.” -Warren Buffett
The biggest thing that trips up many new traders and even more experienced and sophisticated investors and traders is the need to make trading far more complicated than it needs to be. In studying many of the greatest traders over the past century what really strikes me is the simplicity of many of their approaches and on the other hand the complexity of many new traders in setting up multiple monitors, using endless technical indicators, and over thinking, over complicating, a very simple process. My personal trading success a decade of annual double digit returns has come from trading price action and trends. I have used price support levels, break outs to new highs, and moving averages as my primary indicators. I have had no more than 5 stocks on my daily watch list and no more than 60 to examine weekly. We are not trying to build a rocket to land on the moon, at its core trading is simply buying using a robust trading method, selling when your exit is triggered, managing risk in every trade, and staying disciplined in your trades, everything else is only in service to that.
What was one of the main indicators for a top millionaire trader who routinely returned 20% a month in his trading? The answer below may surprise you:
I came across this quote from Market Wizard Marty Schwartz from his book: Pit Bull.
“The 10 day exponential moving average (EMA) is my favorite indicator to determine the major trend. I call this “red light, green light” because it is imperative in trading to remain on the correct side of a moving average to give yourself the best probability of success. When you are trading above the 10 day, you have the green light, the market is in positive mode and you should be thinking buy. Conversely, trading below the average is a red light. The market is in a negative mode and you should be thinking sell.” – Marty Schwartz
I agree completely with his observation and I have found the same thing in my chart studies. Also in sharply up trending stocks the 5 day EMA is respected and acts as support. The key is to find an up trending stock that respects the 5 day or 10 day ema and then the moving average itself can be used for entry and exit signals for short term trend identification.
This is a simple system that can get new traders trading on the right side of the market with advice from the pen of a real millionaire market wizard.
Here are some great examples that I have recently traded using the 5 day ema as my guide for entries, holding the position, and exits.
