Trading in the financial markets is always accompanied by a certain amount of mystery simply because there is no exact formula for success. Think of markets as a vast ocean, and think of traders as surfers. Surfing requires talent, balance, patience, appropriate equipment and the ability to be alert in the environment around you. Would you ride in water that hides a dangerous underwater current, or is teeming with sharks? Better not.
The attitude required when trading in the markets is no different than when surfing. When you mix good analysis and effective excitement, you will improve your success rate dramatically and like many other composite skills, good trading is achieved through a combination of talent and hard work, writes Investopedia.
We present you the four fulcrums of the structure, with which you can build a strategy that serves you well in all markets.
Before you start trading, get acquainted with the value of proper preparation. The first step is to combine your own goals and temperament with the instruments and markets with which and in which you feel confident.
For example, if you understand retail, then it is better to focus on trading in the shares of such traders than in oil futures, about which you know nothing. Start by evaluating the following three components:
It shows which type of trade is right for your temperament. If you feel more comfortable using five-minute charts, it means that you prefer not to take overnight risks. On the other hand, choosing weekly charts shows convenience to this type of risk, as well as a willingness to see how some days do not go as you expected.
Also, decide for yourself whether you have the time and desire to sit in front of the monitor all day, or you prefer to do your research quietly and calmly over the weekend and then decide on the upcoming week – based on your analysis.
But remember only one thing – the ability to accumulate significant amounts of money in the markets takes time. Short-term “scalping” by definition means low income and high costs. In this case, you will need to trade more often.
Once you have chosen a time frame, find the right methodology. For example, some traders like to buy at support levels and sell at resistance, while others prefer to trade at breakouts. Others want to trade using indicators such as MACD and trend reversal points.
The next step is to test whether the chosen methodology works sustainably and gives you the desired advantage. If your system is reliable more than 50% of the time, you will benefit from it, albeit small. However, test several strategies until you find one that provides consistent positive results. Then stick to it and try it with a variety of tools and different time frames.
Over time, you will find that some instruments are traded much more often than others. Low-liquidity tools make it very difficult to build a profitable system. Therefore, you need to test your system to determine if its “character” fits with different tools.
For example, if you trade the USD / JPY pair in the forex market, you may come across the fact that Fibonacci support and resistance levels are more reliable with this tool than with anyone else. Don’t forget to test a number of time frames to find the one that best suits your trading system.
The Broker and Trading Platform
Choosing a reputable broker is of paramount importance and spending time researching the differences between brokers will be very helpful.
Make sure your broker’s trading platform is suitable for the analysis you want to do. For example, if you like to trade off of Fibonacci numbers be sure the broker’s platform can draw Fibonacci lines. A good broker with a poor platform, or a good platform with a poor broker, can be a problem. Make sure you get the best of both.
A Consistent Methodology
Before you enter any market as a trader, you need to have some idea of how you will make decisions to execute your trades. You must know what information you will need to make the appropriate decision on entering or exiting a trade. Some people choose to look at the underlying fundamentals of the economy as well as a chart to determine the best time to execute the trade.
Whichever methodology you choose, be consistent and be sure your methodology is adaptive. Your system should keep up with the changing dynamics of a market.
Determine Entry and Exit Points
Many traders get confused by conflicting information that occurs when looking at charts in different timeframes. What shows up as a buying opportunity on a weekly chart could, in fact, show up as a sell signal in an intraday chart.
Therefore, if you are taking your basic trading direction from a weekly chart and using a daily chart time entry, be sure to synchronize the two. In other words, if the weekly chart is giving you a buy signal, wait until the daily chart also confirms a buy signal. Keep your timing in sync.
Calculate Your Expectancy
Expectancy is the formula you use to determine how reliable your system is. You should go back in time and measure all your trades that were winners versus losers, then determine how profitable your winning trades were versus how much your losing trades lost.
Take a look at your last 10 trades. If you haven’t made actual trades yet, go back on your chart to where your system would have indicated that you should enter and exit a trade. Determine if you would have made a profit or a loss. Write these results down. Total all your winning trades and divide the answer by the number of winning trades you made. Here is the formula:
If you made 10 trades, six of which were winning trades and four of which were losing trades, your percentage win ratio would be 6/10 or 60%. If your six trades made $2,400, then your average win would be $2,400/6 = $400.
If your losses were $1,200, then your average loss would be $1,200/4 = $300. Apply these results to the formula and you get E= [1+ (400/300)] x 0.6 – 1 = 0.40, or 40%. A positive 40% expectancy means your system will return you 40 cents per dollar over the long term, if you keep your risk equivalent to 1% of your account on every trade.
Focus and Small Losses
Once you have funded your account, the most important thing to remember is your money is at risk. Therefore, your money should not be needed for regular living expenses. Think of your trading money like vacation money. Once the vacation is over, your money is spent. Have the same attitude toward trading. This will psychologically prepare you to accept small losses, which is key to managing your risk. By focusing on your trades and accepting small losses rather than constantly counting your equity, you will be much more successful.
Positive Feedback Loops
A positive feedback loop is created as a result of a well-executed trade in accordance with your plan. When you plan a trade and execute it well, you form a positive feedback pattern. Success breeds success, which in turn breeds confidence, especially if the trade is profitable. Even if you take a small loss but do so in accordance with a planned trade, then you will be building a positive feedback loop.
The steps above will lead you to a structured approach to trading and should help you become a more refined trader. Trading is an art, and the only way to become increasingly proficient is through consistent and disciplined practice.