When a beginner trader enters a highly competitive market environment, he should know, what will withstand the brightest and most polished minds of this business. The economic survival of these people depends on their best decisions.
Considering this, the question arises: is there anything, what a beginner trader can do, to take "your place in the sun"?
The answer is obvious: perceive trade, as a daily business process: plan deals, carry out relevant technical and basic research, make detailed preparations before opening the market, use the most optimal trading strategy, clearly linked to risk and money management. Get it right education and do not neglect your health, including psychological aspects.
Trade as a business
Those of us, who have some experience in business, willingly agree, that it is unthinkable to start any business, without a plan, not only for starting a business, but also for its maintenance for a certain time after, how the business began to develop. In spite of this, most new businesses fail within the first two years.
In the absence of a trading plan, every decision is made haphazardly, and many novice traders leave the trading business within a few months. Quite natural, that a person can only be considered a trader after trading at least three years on the market. AND, even in this case, his well-being depends on the degree of adaptation and applicability of the learning curve to the three essential dimensions: psychology, risk and capital management, and carefully selected trading strategies.
A novice trader should follow the example of any successful businessman in another field.: first, study your chosen business, so that you know, what is vital, and what not, to stay in this business. For example, you will learn, that capital preservation is the single most important component of business success. Regardless of, what are you doing, you should always remember this!
Forget looking for the best deals of your life. Primarily, take care of preserving capital, and everything else will come later!
When an aspiring businessman opens a business, he should be ready, at least, operate on it immediately, even if it will be done somewhat spontaneously. This is called the "learning in the workplace" method.. If the business is simple enough, then this type of learning might work. But, if the business is more complex and you face the best and brightest minds in it (how in trade), then this option will not work!
Lots of deals
Aspect of trade as a business, which illustrates, how bad "learning in the workplace" works, when do you start trading for lodging – most people don't know, that there are three types of deals, not two: long, short and out of market!
Beginner trader, who is studying for the first time, how to execute orders and only then how to trade, might think, that upward movement is enough, to open a buy position. Why not?, because novice traders are sure, that they can always come out, if the market goes against them!
But, they do not take into account the influence of human psychology – in the end, many newbies often translate their intraday trades into positional. With this approach and using this rhythm, all trading capital of a trader can be destroyed in the blink of an eye.
Trade is business, not very different from any other type of business. Its only product is money. – money is used, to make money. That's why, we can say, that trade is the only business, where losing money is the norm for a businessman!
All of this leads to an understanding of the critical aspect of trading success. – the difference between losing a "small portion" on average and much less consistent wins (as in the example below Dax, where eight losses versus just two wins). Once you know, how to lose these "small parts", then and only then, you will really start making money!
Amazing, but most novice traders think, what you need to have more 51% winning trades, to ultimately make a profit. In reality, most consistently profitable traders have less than 50%.
The calculation is quite simple. If you constantly use the stop order value in 200 euros (8 points on DAX) and have a losing streak in 8 transactions from 10, the total loss is 1.600 (8*200). That being said, it's worth mentioning, what a losing streak in 8 trades look unlikely for a well-trained trader.
so, we have left 2 winning trades. Let's see, will there be enough profit for them, to compensate for the total losses. If we take a look at the sentry schedule Dax за 27 February 2009 of the year, we'll see, that the price dynamics during the day was as follows: morning wobble up by 30 points, then wobble down on 142 item, wobble at noon in 122 point and evening wobble down into 60 points.
Now, let's calculate the hypothetical profit of two trades of this day, suppose on the minimum fluctuations in 60 And 30 points. If we calculate the total profit in 90 pips for both trades, then we get 2.250 (90*25). In this way, the difference between the gained profit and losses will be 650, meaning, that after such an incredible losing streak, we will still make a profit.
Besides, if we go further, and suppose, that the trader was included in these 2 transactions only after, as the third of the first hesitation has already taken place (28.8% movements), we'll see, that there is no loss, no win. Losing a losing streak is equal to winning two winning trades.
Now, when it became clear, what, in fact, we only need 2 transactions from 10, to be profitable, let's go ahead and try to understand, how can this be done day after day.
Finding a mentor
In my opinion, the path to profitable trading goes through the study, and the shortest and most efficient route – with the help of a qualified mentor.
To be successful in trading, you need to do one of two things:
Study on your own
But, this option will take a lot of time and money. Besides, you, probably, you will not be able to sufficiently cover the principles of money management and the psychological aspects of trading on your own, to be able to correctly and systematically apply them in your trading. These two things work together for most of the trading process..
Besides, even if you can grasp these concepts yourself, it will take you several years, to see measurable results – if during this time you do not leave the market or lose all your trading capital!
Study with a mentor
This method takes much less time, and the financial result will be more tangible, because the money spent will more than pay off in the future.
I am convinced, that trading is a profession! It is impossible to do it improvised, what most novice traders think. If you act as your mentor, then you would have lost the money paid to him in the market, without recognizing, how to be consistent and, thus, profitable.
Besides, that a mentor should be a good teacher, he still needs to be a successful trader. He must be proficient in modern trading techniques, to maintain and improve your own trading consistency. Perfect, if the mentor will be a member of a professional organization (like the Association of Technical Market Analysts), which maintains high ethical standards for the science of technical analysis.
Psychological aspects
Regardless of, you decide to study on your own or with the help of a mentor, you must know, that trading is not only a multitude of tasks, but also a strong psychological challenge. In other words, knowing yourself will help you move up the path of study.
Primarily, you must have adequate trading capital, so that lack of it does not frustrate your work. The required initial capital depends on the selected market. For example, to trade index futures you need a minimum 25.000$, and in the E-Mini or forex market, you can start trading with 1.000$ or even a few hundred dollars and build up the account. but, it is better to start trading with full capitalization right away.
Wherein, it would be a huge mistake to use borrowed money! The use of borrowed money in trading will hinder the achievement of full psychological potential, because you will constantly experience the fear of losing money!
Then, there is a question of confidence. Nothing can be done without it! No trader will use a trading strategy, not having full confidence in its effectiveness. But, gaining confidence is a difficult process! It takes many months, even years, to get to know the optimal tools, which you have checked and rechecked, and which give the best trading results! Confidence is built on testing, routines and rituals. but, this – the only way to get the proper experience and move on to the next step in learning the trade craft.
Right attitude now remains as the most important component of performing the necessary tasks.. I highly recommend "persistence" as the most important of the relationship.. When you persisted in your study, and subsequently find, that have to make a difficult decision, you will be serene, because you know the odds in advance and because you have seen, how the same worked before.
AND, anyway, the loss was planned, and you can't lose anymore, than a "small particle". After a losing streak or, against, huge profits you must experience the same mood: serenity, no regrets and a willingness to start over and over again.
Your attitude is based on confidence, which you got from your experience. Keep in mind, that frustration and joy occur quite often in the trading process. But, under pressure, you should never change your attitude. There will always be a new day and there will be new deals, if you have saved your trading capital, following the rules for the loss of "small particles".
As you can see, the basis of learning and trading consists of three parameters: psychology, risk and money management, and the trading strategy is exactly in this sequence.
Trading plan
Even if you are lucky enough to find a consistent and profitable trading technique, there remains a problem with its adaptation and application!
In this case, the method of building blocks or modules of knowledge looks useful in terms of studying and trading, because they are individual and adaptable.
Modularity helps to retain and apply that, what was learned. Concepts should be simplified this way, so that the novice trader can quickly understand them without any or very little previous knowledge of technical analysis.
Trade management can be optimal, only if prepared in advance. This is done, using a trading plan, which should include procedures, which must be strictly followed at every step of the trade.
A trading plan almost forces the trader to obey a set of general rules, which he is guided by, to respond to market action with an organized, in a predetermined way, instead of, to react to them under the influence of emerging emotions. No trading plan, the trader will be forced to improvise, which does not provide the best solution in times of stress.
The execution of the trading plan is completed by entering the completed transactions into the trading journal., which serves, kind, ledger of "executed only" transactions. You must record all your actions to execute the trade..
By keeping a trade journal, you will have a better chance of remembering more than just, what have you done, but also why did you do it; not just steps, which you have taken in the current trade, but also how they relate to any general "lesson learned". Below is a list of some points., which need to be covered in your journal, which is far from exhaustive:
What is the main reason, on which you entered into a deal?
· The deal has evolved, as expected?
How would you rate the feasibility of the transaction?
What is the risk (conservative or aggressive) you took, and was this risk really the best option??
Were there any hidden aspects of this transaction?
what suggestions can you make, who would improve this deal, could you really take them?
Besides, the trader should try to get some statistics from his journal, which will definitely improve trading results.
Without a predetermined strategy, carried out with proper tactics, the probability of a trade will always be 50/50.
When, why and how
For better understanding, I will use simple "when" principles, Why and how, to explain the management of the deal.
The when principle – this initiator of the transaction. In other words, this – timing factor. These are not only pre-phase signals, but also trading stage signals.
As the first one can be, for example, candle "come" (uncertainty bar) or any reversal pattern. The second one “takes over” from the preliminary signal and transforms it into the final signal, expressed in a stronger and more visual way: bar opening above the previous high candles "Experience", indicator entry / exit into the overbought / oversold zone, strong rebound at the Fibonacci level, midline testing and so on.
The why principle – this the factor of confirmation of the impulse of a double time period and is mandatory for a profitable result. The most common example is the alignment of time periods. – upper with lower (trading) period.
We can do this either to confirm both price charts., or, to see, how the indicator develops on the same charts. We usually focus on the development of a trend on a larger time frame, expressed by its market price and / or indicator, which coincides in the direction with the price dynamics or lower indicator signal (trading) time period.
It is a very important trading tool., without which a trader should not make any transactions. It should be remembered that, that not every alignment of time periods will bring a beneficial result. As soon as the periods are aligned, this may be accompanied by other confirmation factors, like a breakout bar above / below the trend line, which can be the moving average, slope line or any orthodox or unorthodox trend lines or levels, denoting resistance and support.
The how principle is the operational factor of trading, mandatory for a profitable result. This final principle will come into effect, as soon as the pre-signal and signal phases have successfully occurred. This covers entering and exiting the market, related to risk management, as practiced by the Three Step Technique – the procedure for executing a deal with the preparation of three orders. It also represents a guarantee of consistent profits..
Three-step technique
This progressive technique has three steps:
Step 1: Find the best entry and place the first order.
Step 2: Find the best position for a stop order and then place it immediately after the entry order is executed.
Step 3: Find the most appropriate reward target and then calculate the optimal reward to risk ratio, which should not be less 2.5 (the ratio may be less, if the transaction is very likely). Don't forget, what is the main goal of a trader – capital preservation. There will always be another opportunity, but only if you still have trading capital. That's why, we are looking for trades with low risk and high probability.
Here – working example:
Entry stage – 1-3 tick above the doji high.
Stop order stage – 2-4 tick below the doji low.
Profit target stage – first target on the midline (ML) and the second target on the upper median line (U-MLH) Will Andrews.
As the price progresses, always consider the last swing with its high and low. Also remember about Fibonacci retracement levels of price and time, and not only the last corrective swing, but also the whole swing of the last trend.
Most of the time, these three consecutive steps are prepared in advance. – in the moment, when a trade decision is made. To preserve trading capital, it is very important to comply with the condition, to, as soon as the stop order and limit order have been set, they shouldn't change.
Due to the reliability and automatic nature of this technique, I called it the automatic way of trading. If only two orders are prepared in advance, then we are in semi-automatic mode.
Three-step technique (or it can also be called the "technique of three orders") should be done every day, with no exceptions. It takes discipline and patience.. The trader must reach a high level of routine, constantly checking and rechecking your well-balanced decisions and actions.
For those traders, who completely adapted this technique, it represents a guarantee of consistent profits.
I highly recommend, for all traders to go through the six steps of the trading plan: preliminary signal, main signal, the confirmation, entrance, setting stop orders and profit targets.
Trading Strategies
We have not yet considered trading strategies in this article., because, in my opinion, it is the least important factor in obtaining consistently profitable trading results.
Undoubtedly, there will be no trading without an accurate strategy, but I consider strategy to be the main part of trading, which comes after the other two parameters in order of importance (psychology and risk / money management)!
From the available trading arsenal of a professional trader, I will mention three principles of trading, which can be used for profitable trading: trendy, lateral movements, associated with resistance and support and volatility. The format of this article does not allow describing all of them., therefore, we will consider only some, which I consider to be the basis for low risk and high probability trades.
I created an Integrated Andrews Pitchfork Analysis to detect (in front of the market crowd) trend development. Using this tool will give the trader a professional edge. I will illustrate it in the following graphs:
As you can see, on the chart above, price movements are associated not only with resistance and support lines on the price chart, but also with trend lines on the indicator. Every hesitation, as it seems, closely tracked! The appearance of mirror bars is approximately at the level 1.000 denotes, that a strong upward bias has exhausted itself, reaching the inevitable reversal.
The above graph illustrates the use of Andrews' Integrated Pitchfork Analysis with Daril Guppy's GMMA tool. I have studied this combination for a while and have always been amazed at its brilliant results.!
Conclusion
I will repeat myself one more time, that some confusion, inherent in trade, does not deny its commonality with other types of business. This applies not only to the business plan, which becomes a trading plan for traders, but also by designing a learning curve, through a well-designed study plan, module-based.
The guiding principle of the trader as "the owner of his trading business" is, that without a predetermined trading plan, carried out with effective tactics, trading is no different from a random bet 50/50.
author: Mircea Dolog
Source Forex Magazine.
