We often discuss here the importance of having and following through with a trading process, as managing the uncertainty and the risk inherent in the markets is a priority, for both capital and mental preservation.
At its core, successful trading is not about finding a system or a chart pattern that can predict the future, which is impossible to do, but about managing whatever happens in the future. In other words, successful trading is more about managing the mind, and the expectations swirling around in it, than it is about the charts. Accepting that the future can (and will) unfold in any of a number of ways is what allows the trader to manage winners and losers. So, in developing a technical trading process the trader must first and foremost develop the proper mindset that goes along with it.
Once the proper mindset is developed then an historically proven trading edge can guide the trader in his or her decision making process from preparation to entry to exit. For technical traders the trading edge should be based on a particular price pattern that is so clearly defined that it…
1. Allows the trader to develop a watchlist of stocks that meet specific “pre-trade” criteria. In other words, what price action is usually present BEFORE entry. As an example, if the trader’s edge is a trend breakout what price action is necessary before the breakout? Setting up a watchlist in preparation for entry helps keep the emotional element from interfering with the pre-defined process.
2. Allows the trader to adapt the trading edge to changing market conditions. One of the reasons so few traders succeed is because they try to fit a one size fits all trading system into varying market conditions. A trend trading system will have a low probability of success in a choppy, trendless market; therefore, the breakout trend trader would have to either step aside during a trendless market or adapt to market conditions by trading breakout failures.
3. Allows the trader to define a loser. The best technical trading edge is one that first defines its failure. What does the trade have to look like for it to be a failure? Pre-defining a failure is only possible with the proper mindset…the mindset that accepts uncertainty.
4. Allows the trader to define a winner. Defining a winner, just like defining a loser, is necessary for proper trade management. Once a trader accepts that she will have losers she must learn how to allow winners to run. I believe this is the most difficult part of the trading process as we are prone to cut winners short while letting losers run.
In the following webinar we discuss the above as we review past, current, and potential trade opportunities based on an historically proven trading edge adapted to meet any of a number of various market conditions.
Several of those discussed in the above, along with others that met our criteria for a trade, triggered the last few days. You can view our discussion below:
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