The reason most trade is to make profits. Rarely do we do so for the sport of it. There are some, however, that do treat their trading as if at the game tables of Las Vegas. Those that do, unfortunately, are soon sent packing to their day jobs so that they can return with another stake to try again. But if you are one of those who think trading should be taken more seriously, keep reading.
Trading is difficult, and then again, it is really simple. Perhaps it should be said that trading is simply a state of mind. What may appear daunting a task to some may yet seem as a catwalk to others. The glass is half full, the glass is half empty, that sort of thing.
How does trading appear to you? Are you overwhelmed with all the news? Or is it all the technical indicators being tossed into your trading programs making your eyes go cross? Perhaps it is all the different trading programs themselves that have you looking dumbfounded out your office window, staring into space and making strange sounds from between your drooping lips.
Well, maybe some choice words here might help clear up that situation for you. A little perspective can go a long way to getting you to see the market in a whole new light.
If the markets moved haphazardly with no rhyme or reason, I would suggest to you to run for the hills and do not look back. Fortunately, this is not the case. With all the conviction in the world, I know for a fact that the markets are governed by natural laws that make it predictable in various degrees. What degree they are predictable is more dependant on who is doing the predicting and how.
The mere fact that the markets have a tendency to trend says a lot about how much randomness it contains…very little. Rather than acting like a scratched record, it moves with such harmony that displays an obvious mathematical relationship between its tops and bottoms. One need only to spend hours upon hours studying these charts to eventually see this to be true.
But the point is that the markets have a tendency to trend. And because this is the case, it is to your advantage to concentrate your trades with that trend in mind. A market moving higher is more likely to continue doing so then to move lower. And a market trending down is likely to continue doing that over moving up. At some point in time the trend will eventually end. But if you just look at your charts you will see that it takes a long time for this to happen.
Knowing this alone you can put the odds in your favor. However, unless you have the cash to withstand the trend corrections (the moves opposite the trend that is usually temporary), you may not last after one or two of those corrections. The issue here is that of TIMING. In other words, if you are buying you want to do so as close to the trend bottom or correction bottom as possible. That way you will not have to withstand any major draw to your trading capital and will have ‘stay-ability’. Ah, the feelings of being able to stay in a big trend and watch your account swell up like a tick on your dog. The better you can time your trades the less cash you need. It is a given.
So you know that you want to trade with the trend. And you know that the better you can time the market the less you have to risk and the more you can gain (because you can hold on longer in the trade as it goes your way). So how do you go about seeing the market in a way that is less intimidating, without resorting to using rose colored glasses borrowed from your 3-year old?
One way is to start from the top and work your way down. At your disposal are charts of different time frames. There are yearly, monthly, weekly, daily and intraday charts that you can use to view your market from top to bottom (no pun intended). Start from a higher time frame than you will be trading from. If you are looking to day trade, look at the daily chart to get an idea of the predominant trend for your market. If you plan to be in a trade for more than a day (position trading), then make sure to look at the monthly and weekly chart before you make your trading plan off the daily chart.
When you look at a chart in a higher time frame, you get to see the big picture. Are prices moving lower overall on the monthly chart, forming lower monthly swing tops and bottoms? If so, then the major trend is down. And what should this suggest to you? That it is likely to continue down. Since you viewed this on a monthly chart, how do you think this will look on your weekly or daily chart? That downtrend on the major monthly chart will be a major, major down trend on your weekly chart. And on your daily chart it is going to be going down for a long, long time.
So if you happen to be planning your trades off a daily chart, you best be selling off each corrective swing top and get that idea of buying out of your head. If your trend is long-term up and your weekly is in its upward swing as well, then you better only think buying dips and nothing else on your daily chart.
By doing this, you will start to see the market in a much reasonable light. You will see the big picture and all the little noise will have less impact on your psyche. Once direction is known and it has been determined that you are going to focus strictly on buying or selling based on the trend, then you can look at ways of improving your timing further.
Rick J. Ratchford has been trading since 1989 and since 1996 is an Analyst for ProfitMax Trading Inc., a membership for traders specializing in the advance forecasting of market tops and bottoms.
http://www.profitmaxtrading.com
“Know Today the Market Turns of Tomorrow!”
