Thursday, May 9, 2013

The key to confidence

Many traders are unsure whether to buy or sell. Typically, this presents itself as the trader reversing their position with every loss. When they encounter a market such as the few bars on today's open, they may find themselves getting into may trades and getting chopped up.

Such traders have very little confidence in their ability to judge the overall direction of the market. The ability to recognize if the market is trending or simply in a chop is the basis of being profitable. The market provides different options based on whether its trending.

Therefore the first skill a trader needs to work on is the ability to read market direction. This also includes the ability to know if there is no real direction. The simplest way to get there is to always draw a trendline. When the price moves well beyond your trendline, you should assume the trend has ended but until then, trade only in the trend direction.

Over time, trading in only one direction improves sense of direction. You may then consider adding obvious reversals such as the three push move and obvious TCL OS at b26. When you have confidence in your direction, you will be able to re-enter in the same direction (#3) even when your original entry failed (#2)

Do not be overconfident on initial success. A sense of direction is primary but not a complete set of skills. Entering correctly, estimating stop size, and an ensemble of many other skills make a complete trader. Also be wary of very strong and very weak trends that will test your ability to trade profitably.

Wednesday, May 8, 2013

Location: Trading a trendline

The primary precondition to trade trendline is an established trend. Two higher highs followed by two higher lows is a bull trend. After the open, we had the first higher high at b6 and the second higher high at b10. b11 was the second higher low. There are some optimizations that try to detect the trend earlier, but 2 HH/HL is a definitive bull trend that anyone can recognize.

At this point, you can take a long trade and trade it until the trend breaks (by the strong move down from b14 to b21.)

If the trend break is caused by a reversal such as the three push W and TCL OS to b13, then you should consider taking trades in the new direction. If there was no clear reversal, the trend has simply terminated and you should not take any more trades until a breakout and new trend is established.

Once you see a reversal you can simply wait for a signal bar to form after poking the trendline. A conservative trader may choose to wait for two LL and two LH (b15,17,21,24) and then take every signal bar that pokes the trendline. Once the signal bar triggers, the trendline shifts a bit to give a shallower trendline.

If you do nothing else but trade the trendline with discipline, you should find a better than 50% success rate. Note that the steeper the trendline, the better your chances of success. If the trendline is too shallow, your chances of stop-out are high even though the market may ultimately go your way.

Thursday, May 2, 2013

Trendline Discipline

The single most requirement for successful trading is discipline: the ability to stick to your own rules. Most people are impulsive and are easily pushed emotionally one way or another. Take stock of your own history. Do you rush to the office kitchen when someone announces free cookies or buy things on impulse? Check out the hot girl while at work well knowing that its detrimental to your career? If so, you are likely to be a poor trader.

Good trading requires you to be convinced that your rules matter and following them has long term benefits far outweighing the short-term emotional pleasures of breaking them. Once you realize this, then it becomes a matter of training yourself to stick to your rules.

Consistent profit comes from consistent behavior.

Once your profitability is consistent, you can work on improving it. Even a consistent loss is better than whipsawing between profit and loss since an introspective trader can figure out what is making them lose and apply corrections.

One of the simplest rules of trading that you can practice discipline on is trendline discipline. The idea is that you always trade with support behind your trade and even when other supports such as the ema are far away, a trendline is usually easy to draw. The best trades will take off from trendlines  or will pullback to trendlines. The only exception to this rule is a W such as b16 opening wedge or b55 WP.

Even if you don't follow any other rule, trading only after a trendline is tested (preferably poked through, not just tagged) is likely to improve your results.