The Bear Growls for Thursday – The Sun also Rises
“How did you go Bankrupt?” asked Bill
“Two ways,” Mike said “Gradually then suddenly” – The Sun Also Rises, a novel by Ernest Hemingway
The above could easily be a conversation between any two traders or hedge fund managers, as that generally is the turn of events when things go south real bad. The financial bleed happens ever so slowly then wham it hits like a ton of bricks. Death by a thousand cuts and then the big gamble, that never seems to be a winner, ends with the blowup of the account/fund. This scenario can be avoided with common sense proper position sizing, trade management, and a system where profits are maximized and drawdowns limited. That is the ideal, but we all know that isn’t easy and doesn’t always work that way, does it? First things first, if one’s trading is consistently showing more losers than winners and the drawdowns are not improving, one should stop trading altogether and pull back from the market for self-analysis and to make a plan for a different approach. Our objective is to do more of what is working and less of what is not working.
For day traders new to the business, a basic technical analysis course with follow-on learning is essential. In the early 1980s when we were new to the business, we took Technical Analysis 101 at the New York Institute of Finance with one of the greats Ralph Acampora who was the Director of the Technical Analysis department at Kidder Peabody at the time. In our estimation, that basic education was key to our advancement in the business of trading and investing.
After becoming knowledgeable in the basics of the business, the student must then go out on their own. Initially, it can be a heart-rending journey of ups and downs but given time and experience, one should find their stride and make a career of it if they are disciplined and thorough.
Here are some basic tips;
1) Determine what kind of trader you want to be, a day trader, swing trader, or longer-term investor. Much of the knowledge applied in all three time periods is the same when it comes to technical analysis. Day traders tend to carry positions only for the day, sometimes overnight, and are much more transactional than swing traders. Swing traders tend to hold positions for a few days to a couple of weeks and are less active, and investors hold positions for much longer periods of time.
2) Define the setups that are best for your strategy. Is the strategy a trend following strategy? A breakout strategy? A volatility strategy? One has to define what setups work best for the strategy being applied. The setup is your reason for trading.
3) Once one has defined the setup, one needs to figure out when to enter the trade (this is part of risk management). What is the trigger that gets the trader into the trade?
4) After the trade is put on, the trader must define a stop loss level and price targets for the trade. Risk should never be more than the projected profit. A potential profit of 1.5 times the risk for some strategies is a good start given a 50% win/loss ratio. Remember to never let a good-sized profit become a loss by learning how to trail a stop order properly.
Good luck and stay safe.
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