There are many different styles of trading that can make a successful trader.
I have tried several and, for me, by far the most profitable is longer term technical trend trading. It is a method of trading that suits many personalities and lifestyles but by no means encompasses the whole trading community.
Not many people begin their trading career using mainly price action. They may incorporate either some common or even complex technical indicators to select their exact entry or exit points and the overall long or short decision might be based on fundamental analysis.
One of the most popular sources of fundamental trading is the news. This can take numerous forms, from product announcements and company earnings to economic data and market cycles. Many of these announcements are scheduled and have anticipated results, while others come as a shock and can rock the markets (even if just temporarily).
Getting into bad habits
As human beings we seem to have a thirst for knowledge which isn’t always in our best interest. Too much information, especially if it is conflicting, can paralyse us from making decisions.
We all know someone who cannot make the big decisions because they are too caught up with the little ones. Or a person who won’t make a commitment until they feel they have all the relevant information. This is not a good way to make a success of trading.
We also place too much emphasis on what we know (or think we know) without considering what we don’t know. A little learning can be a dangerous thing.
At school we were encouraged to ‘read around’ a subject to get a better understanding and be able to put things into context. As with most people reading this article, I love to learn new things, learn more about things of which I already have a basic grasp, and to expand my expertise in areas in which I already excel.
Studying a subject in depth can be a wonderfully satisfying experience but when trading we have to rule out the noise. In technical trading this means ignoring all but the most important fundamental tools.
Getting into good habits
Some retail traders begin their trading career learning some fundamentals and it can be difficult to tell yourself this information is no longer relevant if at a later stage switching to technical analysis.
You may have put many hours into studying company accounts, learning how gold is mined and marketed, the science behind the finite oil reserves, or how each and every macroeconomic announcement impacts microeconomic outcomes.
I personally find these items of interest – as I’m sure most people do. But as a technical trader they must not influence my trades.
My trading checklists have morphed over the years as I have honed my skills and benefited from experience. But, after I had decided to focus on being a technical trader, they have never included more than one of two noteworthy news announcements. These are NFP (non farm payroll) and earnings announcements.
I’m not saying, if you are also a technical trader, that these should be the only news items you concern yourself with. I do not trade T-bills or bonds – if I did I would have to find out if there was a particular news items that affected short term pricing for them.
This brings me on to the point that the only fundamental announcements a technical trader may want to be concerned with are those which can cause extreme intra-day noise on the market you trade.
TDT Tip: There are two reasons I concern myself with news items that affect intra-day prices. The first is to make sure I don’t set up or enter a new trade a few days before I am expecting the scheduled announcement, as the extreme volatility may spike me in and out of a trade without giving it time to develop. The second is to make sure I enter my trade with enough time prior to the announcement so it has time to be profitable (or, at the least, risk free) before the news is released.
There are an infinite number of reasons a news item may have little or no effect on current price action. Another announcement may be made to counter the original items before an effect has time to play out. Or, more likely is that the insiders already knew about it and so it has already been factored into price. Next time a stock tanks compare price action to the timing of the news announcements – there was probably a steady decline in price several days or weeks before Joe Public heard about it through the media.
Let your charts do the talking
How many times have you ignored sound advice? Price likes to do this too – it can dismiss even the most profound data. However much you think it must react in a certain way you are likely to be wrong more often than you are right.
If you have chosen to to be a technical trader then do not allow your wider knowledge to influence your decision. Trade what you see on the chart, not what you may think might happen.
Would you ignore a particular market if you were ignorant of it? I’ve never been to Japan and, to my shame, know little of it’s customs and economy – but I have had many successful Yen trades. I have experience in several industries but I do not limit myself to trading stocks in just those I believe I understand.
When I discuss trading plans, or checklists, with new traders they never include what my mother thinks, what the biased TV presenter thinks, or even what the extremely well-informed analyst thinks. Stick with the technical analysis.
I have known many inexperienced technical traders to hang on to positions because they heard on the news that their stock/base currency was due to rally. Or because “it’s obvious” that demand will eventually rise on a scarce commodity. This may well happen – but when?
If you’ve chosen technical trading then stick to it with the absolute minimum of exceptions. It avoids any confusion as to what your next move should be. I have no doubt that the most successful fundamental traders limit themselves to the absolute minimum of technical indicators, for the same reason.
If you’ve chosen to be a technical trader make sure your decisions are made based on technical foundations.
Only concern yourself with the few fundamental news items that may spike you in and out of a trade due to abnormal intra-day price fluctuations. Protect your capital by doing your best to be risk-free well before the scheduled announcement is due, or by waiting just a fews days (to allow the news item to pass) before entering new positions.
Don’t ignore your technical indicators and trading plan because you think you know what the market is eventually going to do – you may be right but you’re likely to experience a margin call before you can say “I told you so”.
If you want to be a technical trader then be one. Wishy-washy “maybe’s” need not apply!
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Good trend trading…