While trading, it is natural to come in to contact with different traders. Recently, I observed some comments floating around a chat forum which caused me to raise my eyebrows in concern. I am certainly not claiming to be an expert in these matters, but some interesting issues surfaced which I would like to share with you.
Trading Decisions for the Market You are Trading
As some of you may know, I trade ALSI futures. The traders in the chat room in question also trade these futures. What was so interesting to me, was that some of these traders kept calling tops and shorting the market while it was clearly rising, based on the fact that the FTSE was turning lower.
It is so important to trade the chart in front of you. Remember if you are trading the ALSI, then it makes sense to base your trading decisions on what is happening on the chart of the ALSI! This may seem obvious, but is not always practised.
Calling Tops and Bottoms May Be Fun...
But you are more likely to go bankrupt trying to do so. Sure, you may get it right every now and again, but it is a lot easier (and safer) to wait for confirmation before taking a position. Trading in the direction of the trend is the easiest way to profit in the market.
Smart traders have told me to forget the first 1/8 and the last 1/8 of any move and just enjoy the meat in the middle. It is a very costly experience to keep shorting a rising market and to keep buying a falling one. The simplest way to test this theory once the market is closed is to imagine doing the exact opposite thing at the same point and judge the profitability of taking the other position at that point in time.
This may seem counter-intuitive, but so often I find that doing the exact opposite thing at a particular point results in a far more profitable outcome. Maybe that's just me, but it does indicate just how often people are incorrect about their particular views.
Using Stop Losses
I was horrified to hear that some people trade without them! Some traders in this forum would take a particular view and if the market moved against them, they would keep adding to a losing position to average out the price.
It is great to be "correct" about your view on the market, but you will not feel so smart when you are bankrupt. In my books, it is ludicrous to trade without stop losses. Good traders will always know exactly how much they are willing to risk even before entering the trade and where they call it a day when the position moves against them.
I cannot stress the importance of understanding these core concepts, regardless of the time frame, the market or the size of the account that you are trading. So next time you enter a trade, keep these ideas in mind and hopefully it will improve your performance.
