The Minefield Garden !!

The day someone decides they are going to pursue a trading career, they are typically making that decision because of the potential financial prize. In other words, they are making that decision because of the perceived benefit, not the risk and work it takes to achieve the benefit, and that all makes sense. After all, no one gets excited about risk and potential failure. What most people don’t understand, let alone consider is that they are about to step into a “minefield” of very sophisticated and strategic traps that have the potential to drain and destroy their bank account and self confidence all in one. When I look at the traders who do well and those who don’t, there is a clear observation. The traders who focus on the prize tend to lose money and never achieve their goal. The new traders who focus on the traps and risk tend to succeed and reach their goal. As always, it’s one group providing income for the other. That’s trading.

Discipline: This is a must. If you don’t have discipline in other parts of your life, don’t think you will magically have discipline when you start trading. In fact, trading will challenge your discipline more than you can imagine. From birth, we gravitate toward things that make us feel good and run from things that we are afraid of. In trading, you have to think the opposite if you want to succeed. What I mean is that we want to buy low and sell high. To buy low when prices are cheap and at a support (demand) level where they are likely to turn higher, you need to buy when everyone else has sold, after red candles, with down sloping indicators, accompanied by bad news, and so on. The act of buying low and selling high is NOT comfortable for the human mind. Therefore, you must have the discipline to follow simple rules.

Profits and Losses: People love profits and don’t like losses. This often leads to people taking profits quickly when they have them and refusing to take losses because they don’t want to lose. This action is VERY common and leads to a short trading career. Successful traders take losses quickly when their plan tells them to and they hold on to gains until they reach their target. In other words, they plan their trade and trade their plan. Think of Las Vegas. Have you ever realized how much money a casino losses in a day? The number is huge but they don’t care because they know they have a plan that ensures the gains are greater than the losses so the most important thing for them is to trade their successful plan that includes losses.

Determination/Longevity/Position Size : You have likely heard of the person who spent lots of time digging for gold. They dug a deep whole and found nothing. Dug deeper and found nothing. Dug a little deeper and found nothing and then gave up. What they didn’t realize is that they were only 5 more feet away from the gold. Someone else came in and only had to dig five feet and the gold was sitting right there. Trading is the same. You will be challenged. Trading is like a mirror. It reflects every emotional flaw you have and Murphy’s Law exposes all your flaws very quickly in trading. The journey to self empowerment with trading is a marathon, not a race so make sure you use small position while you are learning. Don’t take on risk until your demo trading proves that you have an edge that your competition doesn’t have. Then, begin your trading with as little position size as you can. Let your results dictate when you should increase that size. The problem you need to be aware of is typically, determination goes hand in hand with aggressive action. Don’t let the burning desire (determination) to reach the “prize” lead you to take on too much risk, too soon. Longevity is the key and properly handling risk with position sizing and small losses are the key to longevity. Instead, channel your strong determination into energy that allows you to follow your rules.

Some see trading as the safe beautiful garden with all its pretty flowers. Few astute market speculators realize that the pretty garden is really a mine field with deceptive traps designed to do one thing, drain your account. There are other traps in the mine field that separate the successful from the unsuccessful and I will cover those in time.
Until next time, Safe Trading !

- MASTERMIND

Find the Fool !

I have a friend, I’ll spare him the embarrassment of mentioning his name here, who always seems to buy and sell stocks at the wrong time. He watches a lot of TV  news channels and gets excited at the prospects of becoming rich quickly from any publicly traded company that happens to make the news. It struck me after having watched my friend lose plenty of money throughout the years, that there are many others who get involved in the markets the same way. They hear a hot tip, listen to a broker who pushes some brokerage inventory or watch the top performer lists on their computers.

As a trader, this is the type of person we would like to find. We want to find the consistently wrong investor/trader and take the opposite position. This will obviously lead to successful trades for us. Since I can’t share my friend’s contact information with all of you, I will have to share a way to find when the uneducated investors enter the market.

Most of you may have read trading books that state that increasing volume is good for the continuation of the trend. While this is true, there becomes a point of saturation where the markets cannot sustain the trend. Think of what makes prices rise. There has to be a buyer and a seller for every transaction. However, when there are many buyers chasing a limited amount of supply due to a limited number of sellers, prices will rise as the buyers outbid each other to claim the shares.

This will continue until most people who were interested in buying shares are already in or have stopped bidding as shares became too expensive. Now the market is saturated with too many worried holders of shares who will sell to realize profits. Unfortunately for them, at this time, there are few buyers for their shares and they become forced to sell at lower prices to attract buyers. Eventually, all of the supply will be dumped onto the market and prices will start to rise as buyers once again outnumber sellers. This is what happens behind the scenes in all markets and we see this action causing support and resistance levels.

The interesting thing about this price movement is that the amateurs typically enter into the trend AFTER it has already been moving. This seems counter intuitive as you wouldn’t walk into a car dealership and offer them higher than label price, or pay extra at the drive through just because you love the taste of a Zinger Burger (my colony friends know how delicious they are). However, when it comes to trading and investing, most amateurs look to buy after a large rise in price or sell after a large drop.

As a professional trader, I want to trade against these amateurs and in the same direction as the Institutions and Market Professionals. So the takeaway from this article is that when we trade, we must look for the highest probability entries at support and resistance. Often our trades will be confirmed immediately after we enter with large candles and professionals entering. We can help to time our exit at our target support or resistance when we see large candles signaling the amateurs’ entrance into the trend.

Trade with the professionals…find the fool and take the opposite position. As they say, "At the poker table, if you don’t know who the sucker is… it is you!" Learn the tactics that professionals use to trade and avoid common mistakes of the amateur.

Until next time, safe trading!

- MASTERMIND