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Everyone trades a little differently. The trading method outlined
below is MY personal approach to trading. This method has worked for me
for the last 20 years, and has helped me to avoid big draw downs since
the mid 1980's. My trading strategy has helped me to make a good living
trading.
It takes some time to learn my method of trading because
it's based on tape reading and getting a "feel" for the market. This is
*not* about a fast,easy formula to "get rich quick" while you sweat out
every trade. Instead, this is about developing confidence and trading
consistently without fear and without big draw downs.
Here is my 10 Step Approach to Learning My Style of Trading:
1.
Practice exiting trades at break-even, using a one-tick target, a two
or three tick soft stop (mental stop) and a 1.5 point hard stop. Never
*allow* the market hit your hard stop. Exit by moving your target
toward your hard stop, not by moving your hard stop towards your
target. With time, all of this must become a reflex. You won't always
be able to keep your losses down to 2 ticks, but only on rare occasions
should you find yourself letting the market hit your hard stop.
("Rarely" means only about once every 50-100 trades after you get the
hang of it.)
Even though your entries won't be good enough in the
beginning to make a profit trading these tight soft stops, your entries
will gradually improve until you turn the corner and become profitable.
Learn exits and entries separately. Don't let the one influence the other.
Taking
losses this way takes dedication and discipline, so stick with it. It's
the key to confident trading. If you never take large losses (and
rarely medium size ones), the fear of loss pretty much goes away, and
your confidence grows. Especially after your entries improve enough to
support a "scalping" type exit strategy.
2. Every trade *in all
market conditions* begins as a scalp. Let me clarify this: if you're in
a choppy market and you're looking to get small gains, like a point or
so, manage your initial hard and soft stops *exactly* the same way you
would in a quick trend or any other type of market. That means keeping
losses as close to 2 ticks as possible, taking lots of break even
trades and exiting every time the market doesn't give you *instant
gratification* (within a minute or so).
No matter what the market
is doing, you must demand that it moves in your favor right after you
enter, otherwise you get out as close to break even as possible. This
means you'll be closing a lot of trades near break-even within the
first minute. This is the foundation of learning to trade for
consistent gains.
3. Don't worry about the commissions on
break-even trades. If you do, you'll hold on to losing positions,
begging them to turn around for you. This is called *hoping.* In this
business, this type of *hoping* is the kiss of death. Your money-making
trades must move your way in the first minute or less. When trades
don't act right in the first minute, most of them will hit your hard
stops.
So don't get hung up on the fact that your broker loves you. Who cares if he/she makes a living?
Your
concern is *limiting losses*. I care more about this than anything else
in trading. (Well-timed entries make my tight soft stops possible, so
they're almost as important as the exits.)
4. Practice your
entries until your timing is so good that you can *reasonably expect*
the market to go your way immediately, before it goes more than 2 ticks
against you. This is not easy at first, but if you stick with it,
you'll get it.
5. Practice fading the emotional extremes on your
entries. (Fading means entering in the opposite direction of the
market's last move.) When an extreme NYSE-Tick (often above 1000 or
below -1000) occurs at the same time the market accelerates into a
support or resistance area, look for a price stall or reversal and fade
the move. Fade the emotion.
6. Rarely, if ever, *chase* the market on your entries. Wait for a pullback to get onboard a trend.
I
favor shorts over longs... I can get out of a short position quicker
than I can get out of a long position. I don't know why. I like to say
that I "see gravity better than helium." In the rare strong-trending
markets where I may chase an entry, it's going to be a down trend, not
an uptrend. I don't trust up trends enough to chase them. Maybe it's
just a personal quirk and maybe not. I honestly don't know.
But
it's interesting to note that most (not all) professional traders I've
met are Bears and prefer short positions over longs. You should give it
some thought and find out which direction works better for you. Are
your losses bigger on shorts or longs? Specialize in one direction and
trade the other direction only when things are looking real good.
7.
Never let a gain turn into a loss. This will mean getting out of most
trades a little (or a lot) too soon. You just have to live with it.
Swing for home runs (greed) will ruin your trading. There is no
mechanical formula that I know of, (such as, "move your stop to break
even after you get 3 ticks gain") that will work. You have to develop a
feel for how the market is acting at the moment, and use your feel to
reduce your target or advance your hard stop. This comes with
experience.
8. Develop a feel for the big picture movements of
the market, not just the intraday action. Use the end-of-day market
internals to analyze the market's mood and develop a daily bias.
9.
Practice does *not* make perfect. Only *perfect practice* makes
perfect. I learned this in my younger years, pursuing a professional
baseball career. Perfect practice will keep your losses smaller than
your gains in the trading business.
There
are a lot of things involved in perfect practice. When you get tired,
or when the phone rings, or whatnot, *don't trade*. Always, *always*
exit trades exactly the way I've outlined above on every trade in every
market condition. Always *wait* for your pitch, the well-timed setup
for entering. Don't practice sloppy entries just because you're bored.
Only perfect practice will help you. Anything else just amounts to
practicing bad habits.
10. Get a mentor. I traded for 6 years
before I learned to keep my losses small. My trading turned around
immediately after I met my mentor and talked to him on the phone for
one week. Is there any serious profession that you can learn without a
mentor? Maybe there is, but I don't know of any. It's certainly not
trading.
Mike Reed is author of TradeStalker's RBI Trader's
Updates. He has been trading the Market for 23 years. His support and
resistance numbers have been published on the internet since 1996.
Mike's nightly support and resistance zones are specific and incredibly
accurate. He offers an unlimited free trial of his nightly TradeStalker
RBI Trader's Updates. He will be offering "live" training online as
well. http://www.TradeStalker.com
Copyright 2005 Mike Reed
Article Source: http://EzineArticles.com/
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