Wednesday, February 20, 2008

The Holy Grail of Trading

Do you want to make money from the markets? Consistently? I'd suggest forgetting everything you know about the market. The more you know about the stock market the worse off you are. The majority of people when they first start out trading think it's necessary to know everything about it because the market seems so complex. The markets are complex only if you make them out to be. Trading is actually very simple but what makes it so hard is human nature, not the market.



Lack of confidence, second guessing, fear of losing money, being greedy and selling when you can, not when you're forced too all are human emotions and those qualities are the image reasons it's so hard to trade. It's not the market, it's you. The holy grail of trading is inside you, not in some technical indicator, a newsletter or some book. Understanding why people make the decisions they do under pressure and being able to read emotion from a chart, is one step closer to the only thing you really need to know. Emotion and perception about what people believe the prices should be are the driving forces of the market.



I'm telling you, technical indicators all pretty much same. It's the same regurgitated bull crap derived from volume and price. It only tells you where the price has been, none of them tell you where it will end up. If an indicator did tell you where the price is going to end up, exactly and all the time, that indicator won't work very long because everyone will jump on the bandwagon and destroy that particular indicator because everyone is expecting the same thing. At that point it'll be a great contrarian indicator.



Plus, the more technical garbage you have on your chart, the more likely paralysis by analysis will spring up while you're debating whetherimage to sell or buy. You have so much going on you start second guessing yourself because one indicator might be conflicting with another. Soon enough, you sit there doing nothing while the stock is declining. Having a game plan before entering a trade is so crucial because it prevents what I just mentioned. The game plan you create will include: when to get in, when to get out if it goes against you, when to get out if you goes in your favor. Knowing these before hand, I guarantee will take the fear and psychological load off you while in the middle of a trade.


Trading is about probabilities, the odds of something happening with the provided information. Creating a strategy you develop yourself or buying one if you have the discipline to follow it are ways to help push the odds in your favor. But, the hard part is following the strategy exactly. Following directions seems to be something people don't know how to do. Someone willimage buy a strategy, put on a few trades and they all end up being losers's so they completely scrap that strategy and find one that works. WRONG! You can't have 100% winners, it just doesn't work like that. You will have losers. Any strategy that doesn't produce losers, I'd be very afraid of. 


Another emotional barrier you need to get past is admitting your wrong while you're in the moment of a losing trade. This is something I have trouble with sometimes. Why? Because I think the stock will go back up. Horrible...the fact that the stock is declining is more than enough reason to sell it for the loss you have and move on. When you buy a stock, I'm sure you're expecting it to move in your favor. Why would you hold on to it if it's not doing what you intended it to do? Stocks will go against you, it's the nature of the beast. Again, why is this so hard to do? Emotion. We get so wrapped up in wanting to make money now that we won't sell it and hope it goes back up so we can say we "won".


Trading is something of an art. It's not something you can go to school for, learn and then start making money right after school. It takes time, a lot of patience, and passion to keep you driven to understand the language of the market. Which is why I think the market is similar to reading music.



To a musician, he/she can read the musical notes and tell if this is a master piece or work done by a 5th grader (not knocking any genius 5th graders or anything  but I'm sure you get my point). To the untrained and undisciplined person, that sheet of music looks like a bunch of mumbled up squiggly garbage. But anyone can learn to read music. Same idea apply's to trading. An uninformed person looking at a chart has no idea what's going on and wonders how anyone can consistently make money at this. But the to trader who understands emotion and can relate that idea with the chart of a particular stock, he can read whether he'll buy it or sell it or even walk away from the trade. He can read the probabilities and decide whether to pounce or not.


It's about only putting on trades where the probabilities are slanted in your favor. Trade these setups over and over, while cutting any losses that might result from a good trade turning into a loser, and taking profits that result from your trade, is the holy grail to trading. Keeping it simple is the best way to go.




Below are a few books that I've read and highly recommend everyone to read to help them on their journey. Go to amazon and read the reviews.

Non Trading Books

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