Understandably, many people have a get-rich-quick attitude when entering the field of trading. When watching financial media, reading the press, listening to gurus and hearing about all those success stories in which people became multimillionairs over night, it is not surprising that the thought of some quick money lures tons of people into trading financial markets. Even if you are smart enough after your first losses, and you see that there is more to it than screaming at your screen, being hyped up all day and consuming CNBC 24/7, you still have to find a way, your way, to realize your initial goal/dream of becoming a trader, ideally an independent one who can live off what he makes in trading.
Don’t get me wrong, it’s not that you won’t find information out there, be it books or online, that advice you on how to survive, make a living, or even become rich in trading. The problem lies at the other end: there is merely too much information out there! This information is extremely easy to find, too! The online trading world, all the education websites, books, ebooks, coaches, mentors and seminars offered by everyone from your broker to seasoned traders, will give you a hard time taking steps in the right direction. And what I am talking about is the direction that is right for YOU. There are a million different ways to make money in the markets, but you first of all have to find your way among the many available.
Instead of coming into the markets like so many do, just following their intuition and feelings on when to buy or sell, how much to buy or sell or what to buy or sell, you can head down the right path from the start to not waste any time learning effectively. And at this point I am not talking about engaging in online forums, listening to the opinions of the so-called top analysts of the WSJ or elsewhere. I am also not talking about timing your schedule to catch the latest market report or sit in front of your screen when the FED announces this or that. I am talking about an approach that is simple-structured, easy to execute in daily life and still very profitable. Let’s not waste time a) listening to what other people think the market might do or what their indicators tell them what it could do, and b) being unfocused about where your strengths lie and how you could use them to your advantage in trading. It is very easy to get distracted with all that information out there, here we’ll focus on the aspects of trading that matter.
Instead of getting caught up in spreadsheets, quarterly statements and report xyz, you could focus on the technical side of markets. It seems to me it is the less time-consuming, less exhausting and “more reliable” way of dealing with markets. Surely enough there are profitable traders using fundamental analysis, viewing markets from the technical perspective is more straight-forward and flexibly applicable in my opinion. That’s why the technical side will be focused. A charting software is the basic tool necessary when dealing with the technical aspects of markets. In a charting software it is easily possible to zoom in on what the price is doing, put up some indicators or even an automated trading system. Because this is what you need to have, this is what a charting software is for. It is not there to draw dozens of objects and indicators into the chart, maybe even so many that you cannot see the actual price anymore. It is merely there for you to look at what I like to call the EKG of the market – the movement of price. All information available about a specific market can be found in the price, no need to get caught up in the next big news hitting the market. The price will take up the reaction of everyone active in that market and reflect their opinion/reaction/emotions right away in the manner of a price change.
It is your job to be able to follow the price changes in a profitable way by using a trading system, that has been backtested thoroughly over different markets and a longer period of time. The backtest will provide enough confidence in managing your capital in accordance to the rules of the trading system. The trading system does not need to be overly complex, expensive or difficult to execute. A simple methodology with limited entry, stop and exit signals can provide the clarity necessary to perfectly execute what the markets are telling you to trade. Over the long haul, the backtested strategy can lead to success in trading financial markets. Please understand that the trading system is NOT the main priority of a trader. It is certain that you need a clear plan for entry, stop and exit signals, but this plan will not make the difference in winning or losing.
Far more important are the aspects of Risk Management and Trader Psychology. While the latter is a purely individual issue to master, Risk Management factors can also be dealt with in a very simple manner in order to avoid unexpected outcomes. Ed Seykota wrote an interesting and extensive article on the subject. It is strongly adviced to make sure that the Risk Management of the trading capital is executed accordingly at all times to avoid being wiped out. Market crashes do happen, sudden desicions of Central Banks or dramatic natural or political events can have a strong impact on today’s global financial markets as well.
In our structured approach to trading we have now included the most important components: 1. Trader Psychology, 2. Risk Management, 3. Trading System. While any technical approach to trading makes use of these three components in different ways, Trendfollowing is one of the technical trading perspectives that you can take for an easy to understand, easy to execute, thorougly backtested performance and tons of free resources available approach to trading financial markets. Instead of recognizing chart patterns on a chart or following indicators to generate entry/exit signals, why not just focus directly on price itself, learn and understand the one trading system fitting to your style, and then focus on the process of execution and capital mangement?
The next blog post will bring you all the resources, mostly even for free!, necessary to follow through with a structured approach to trading, increasing your chances of actually becoming successful instead of endlessly meandering through the swamp of information online and in the hundreds of books, all claiming to have found the Holy Grail to trading.
The truth in trading is not that there is a secret out there, a person nobody knows who makes what the markets will do tomorrow – no magic ball needed, it’s a numbers game. Follow the system, manage your capital and know what to expect, then there is no way you won’t be successful.