Absolute Trading! Good Ol' Market Wisdom

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Beginning traders, for want of any better way to get started, usually start out as what we call "pattern" traders. That means they scan their charts each day for what we call "high probability set-ups" that reportedly put the odds in your favor by taking a trade only when those particular patterns appear on your screen. If that is where you have started let me advise you to focus on just one or two patterns for the time being. Regardless of all the nice little rectangles, triangles, pennants and wedges they love to refer to, once you take a look inside those cute little lines, you will spot mostly only two real price patterns, either M's or W's. The M's are supposed to indicate a topping out of the market and potential reversal whereas the W's are supposed to represent just the opposite (a bottoming and potential reversal.)

 

Now please recognize that some traders who have either failed at either recognizing or trading those patterns will warn you off patterns altogether and perhaps even say they are total poppycock and hazardous to your trading future. Please take that advice with a bit of caution. Remember, anything that tons of other traders follow almost religiously, including patterns, fibonacci support and resistance, floor pivots or whatever have you, has value as it leaves clues as to market direction and action. Just realize that the big traders often play those positions opposite to the way the small retail traders do. For instance, the big boys are busy accumulating contracts in many of the down moves while the retail traders are selling out to them cheaper and cheaper as the market moves down, then lo and behold they stop buying and the selling dries up. What happens then? Well the buying starts in the opposite direction and of course the big boys then sell and thus distribute the contracts they accumulated back into the market for some nice tidy profits as prices rise.

 

There are however at least another two sides to that equation (beyond patterns) and they are support and resistance (sometimes loosely associated with the term "value") and momentum/volume in the market that is either supporting or resisting the action at hand.

 

As Soultrader and others in this thread and elsewhere have intimated, you would be well advised to learn about price action. Unfortunately, telling that to a newbie is tantamount to telling them they would succeed in trading if only they would just learn how. What is price action after all and how the heck does one learn it and make use of it? Ahh... there's the rub.

 

There are perhaps untold ways of approaching the markets, but almost all of them boil down in the end (if you wish to be very successful at it) to learning about value, about extremes beyond value and also about support and resistance that you might encounter between the two. If no one has told you before today, the big institutions and professional big money players mold and move the markets, whereas the retail traders like you and I generally provide the money that goes to fill their bank accounts. That is why the smarter traders here will tell you first to learn how to stop losing money before you focus on making money.

 

All this is a long winded way to tell you that you must study and learn who moves the markets and how they do it. After much testing of magic indicators strategies and much frustration you are likely to eventually come to the same conclusion, either learn all you can about market value and support and resistance or get yourself out of the markets before your account is vaporized. You might do well to think of your trading screen (price chart) like a battlefield. There is a battle fought there every day between the bull army and the bear army. Your job is to learn about the artillery and troop concentrations (lines of either support or resistance) and make an assessment based upon what you see happening in front of you - the price action - in conjunction with those support and resistance lines and what is likely to happen as the battle between the bull army and bear army rages on closer and closer toward one of those points on your screen.

 

I first suggest you learn all you can about pivots and support and resistance, especially as it concerns what happens when the price action either bounces off of them or goes through them in either direction. Additionally, you need to always think about three things before each trade, once you understand the structure of the playing field: trend, timing and momentum or volume. Is there a trend or is the market chopping to and fro in a fairly tight range? Please understand that very few people successfully trade chop in a consistently profitable manner, very few. I must add however, that very few people who mostly only play "break-outs" (wherein they try to immediately pounce on the breakthrough of price through some formidable line of resistance or support) fare much better.

 

The smarter and more consistently profitable traders are often waiting for proven establishment of the next trending movement. Remember that although a market only trends about 15% to 20% of the time, once it begins it often goes on longer than most traders expect. Timing is your next consideration (and please remember you can eventually do all of these things in just a few seconds as your experience takes hold) and you will probably have to look to your assessment of whether the move is breaking out of known and accepted "value" to new heights or new lows and if so.. you assess your third issue which is momentum or volume. Has the action reached an area on the screen where the big players have been lying in wait to pounce? Is price breaking through the daily pivot in a new direction? Has it passed R1 and seems as though people are piling on in a race to the next line of resistance at R2? These are questions that can only be properly assessed once you both understand the structure of the markets as noted above and have spent ample screen time in observance of what normally happens at such junctures so that you have some feel for what happens more often than not in similar situations.

 

Trading is a profession, much like learning to become a surgeon or an airplane pilot. There is a lot at risk and you don't jump in and put money or lives on the line without knowing what you are doing and having an experienced understanding of how best to protect your patient, your crew or in this case, your capital, at all times.

 

After plenty of study and lots of screen time you are ready to begin thinking in terms of probabilities. Don't worry about being right more often than being wrong. Focus instead on controlling your losses. Just like in a battle, you only commit your troops when you truly believe that you have an advantage over the enemy. As soon as you notice you are wrong in your assessment, cut your losing positins without mercy. Do not make a habit of waiting for them to eat their way all the back to your stops.You don't need to be in the market all the time, but you must be in the market when your rules or signals/triggers tell you to be there otherwise, just keeping losses small won't be enough, as you won't be in the market when those big moves come along.

 

Anyway, I have gone on way too long here and I am all tuckered out, so I will wrap this up here and hope that there was at least a tiny morsel of something useful for you here in all this typing.

 

Happy Trading

 

This is an excerpt from the discussion located here.