To Trade Successfully

Any successful trading must take into account three important factors: price forecasting, timing and money management.

  • Price forecasting indicates which way a market is expected to trend whether the trader is bullish or bearish. It provides the answer to the basic question of whether to enter the market from the long or short side.
  • Timing, determines specific entry and exit points. Timing is especially crucial when low margin requirements are low and the results in high leverage. It’s quiet possible to be correct on the direction of the market, but still lose money on a trade if the timing is off. Timing is almost entirely technical in nature. Therefore, even if the trader is fundamentally oriented, technical tools must be employed at this point to determine specific entry and exit points.
  • Money management covers the allocation of funds. It includes such areas as portfolio makeup, diversification, how much money to invest or risk in any one market, the use of stops, reward –to-risk ratios, what to do after periods of success or adversity, and whether to trade conservatively or aggressively.

The simplest way to summarize the three different elements is that price tells the trader what to do (buy or sell), timing helps decide when to do it, and money management determines how much to commit to the trade.

Money Management

The following are some general guidelines that can be helpful in allocating funds and determining the size of one’s trading commitments.

  1. Total invested funds should be limited to 50% of total capital. This means that at any one time, no more than half of the trader’s capital should be committed to the markets. The other half acts as reserve during periods of adversity and drawdown. If, for example, size of account is $ 100,000, only $ 50,000 would be available for trading purposes.
  1. Total commitment in any market should be limited to 10-15% of equity. Therefore, in a $ 100,000 account, only $ 10,000 to $ 15,000 would be available for margin deposit in any one market.
  1. The total amount risked in any one market should be limited to 5% of total equity. This 5% refers to how much the trades are willing to lose if the trade doesn’t work. A $ 100,000 account, therefore, should not risk more than $ 5,000 on a single trade.

Trading Tactics

Upon completion of the market analysis, the trader should know whether he or she wants to buy or sell in the market. This can be the most difficult part of the process. The final decision as to how and where to enter the market is based on a combination of technical factors, money management parameters, and the type of trading order to employ.

Using Technical Analysis in the Timing

  1. Tactics on breakouts
  2. The breaking of trend lines
  3. The use of support and resistance
  4. The use of percentage retracements
  5. The use of gaps

Tactics on Breakout: Anticipation or Reaction?

Trading multiple positions simplifies the dilemma. The trader could take a small position in anticipation of the breakout, buy some more on the breakout, and add a little more on the corrective dip following the breakout.

The breaking of Trend lines

Trend lines can also be used for entry points when they act as support or resistance. Buying against a major up trend line or selling against a down trend line can be effective timing strategy.

Using Support and Resistance

Rallies to resistance in major downtrends or declines to support in major up trends can be used to initiate new positions or add to old profitable ones. For placing protective stops, support and resistance levels are valuable.

TYPES OF TRADING ORDERS

Choose the right type of trading order as a necessity.

SUMMARY OF MONEY MANAGEMENT AND TRADING GUIDELINES

  1. Trade in the direction of the intermediate trend.
  2. In uptrend , buy the dips, in downtrends, sell bounces
  3. Let profits run, cut losses short
  4. Use protective stops to limit losses.
  5. Don’t` trade impulsively; have a plan
  6. Plan your work and work your plan
  7. Use money management principles.
  8. Diversify, but don’t overdo it.
  9. Employ at least a 3 to 1 reward-to-risk ratio.
  10. When pyramiding (adding positions), follow these guidelines
    1. Each successive layer should be smaller than before.
    2. Add only to winning positions
    3. Never add to a losing position
    4. Adjust protective stops to the breakeven point.
  1. Never meet a margin call; don’t throw good money after bad.
  2. Close out losing positions before the winning ones.
  3. Except for very short term, trading, make decisions away.
  4. Work from the long term to the short term.
  5. Use intraday charts to fine-tune entry and exit.
  6. Master intraday trading before trying intraday trading.
  7. Try to ignore conventional wisdom; don’t take anything said in the financial media too seriously.
  8. Learn to be comfortable being in the minority, if you’re right on the market, most people will disagree with you.
  9. Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.
  10. Keep it simple; more complicated isn’t always better.