What I have also noticed is that it is not that easy to correct your mistakes even if you know that you are making one. Cutting your losses sounds so easy but when an actual trade is going against you, it seems like the toughest decision to sell and take that small loss. I have probably made that error about 10 times now in this short period in which I have been trading. Realizing that you are making an error is one thing, however, having the discipline and mind set to actually correct it is another.
Taking into mind these things, I have tried to develop my own trading edge based on probabilities that if followed over a long period of time will work for me. There will be losses in the way, however losses can always be cut short and winners can be allowed to run.
- Risk/Reward strategy– Before entering into any trade, you should be able to define your entry point on that trade, the exit point if the trade doesn’t go your way and the point at which you will take your profits when its going your way. For example, if the stock is currently trading at $115 and it falls down to its support line at $100 then your best entry would be to buy the stock at around $100-$102 area and put the stop loss as around $99. If the stock moves in your direction than keep raising your mental stops and book the profits. Also make sure that there is not much overhead resistance which will stop the move for the stock. Put your money in A+ setups only. One good stock run can make your week or month. Let your profits run when you have found a winner.
- Do your homework– 1-2 hours homework everyday working on the charts. Find support and resistance areas. Look at RS, trendlines, make notes on the entry and exit points. Look at the weekly and daily chart. Over the weekend, find atleast 15 good setups on long and short side to play for the next week.
- Follow the trend (Market Indicators and Direction)– As easy as it sounds, this is one of the most profitable strategy that can be employed. Always follow the market. If the market is going up, you buy and if its going down, you sell. When you are fighting your inner instinct and hoping that the stock goes up or down when the trade is going against you, close the stock and cut your losses short.
- Chart reading– Chart reading is one of the essential part of trading. You should be able to point out the support areas, resistance areas, draw the trendlines, look at the RS line. Look at the 30 week MA and also which stage the stock is in along with the whole group.As can be noted based on history, that patterns repeat themselves over and over.
- Price and Volume– Price and volume are important in defining the move of the stock in a particular direction. Volume should rise when stock moves higher.
- Psychological factors– Do not judge the market by the last trade you made. Each trade is independent of the last one. Each trade has its own probabilities that are well defined. Market is there to give you money when you start moving with it rather than resisting it. Whenever you take a trade, remember that market is full of uncertainties and its better not to have any opinions about it. If you have your risk/reward strategy in place, then you wouldnt be scared of trades and exit when the trade is not working for you.