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 A member of the Market Technicians Association, the Chartered Financial Analyst Institute, and now holding the Chartered Market Technician Designation, Brandon has appeared as a guest on CNBC Asia's Cash Flow and conducted special seminars for CNBC staff on technical analysis. He has published articles in The Trader's Journal Magazine and was interviewed in Share Investor Magazine. Brandon was also an industry expert speaker at the Asia Traders and Investors Conference 2008. As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his trading classes and lectures. A wealth of knowledge, he has held NASD securities series 7 and 63 licenses. An Online Trading Academy graduate himself in 1998, Brandon has been trading equities, options, forex, and futures in his own account since.
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The Good, the Bad and the Ugly!
What a week we are having in the markets! I am teaching at Online Trading Academy's brand new New York City office and couldn't have been here at a better time. The streets are full of news vans as every major media outlet in the world descends on Wall Street to decipher what the outcome of our financial future will be. Obviously for the educated trader, there are opportunities in this market. However, with the wild swings and major volatility being seen, we need to focus on risk management more now than ever. Sure, it's great to be on the right side of a 400+ point Dow swing, but what if you are on the wrong side of a 777 point decline?
When we are trading, we need to divide ourselves mentally into two departments. The first is the trading department. That department focuses on identifying trading opportunities in the markets. They locate the entries, targets, and set the stops. The trading department creates the plan for the trade.
Once the plan is ready, the trader must then take it to the risk management department for approval. This is the most important department and the most overlooked. The risk manager needs to objectively evaluate the plan and decide how the trader can proceed with the plan and with how large of a position. I mentally rank trades from one to five. A trade of five has a great risk/reward ratio, strong correlation with the broad market, and multiple indicators (including price and volume) giving the green light. The risk manager usually rubber stamps those.
As I drop down the scale, my confidence in the trade declines as well. A four has some confirmation but not a "sure thing". I may take these trades but with smaller share size or tighter stops. A three is more or less a gut feeling with some confirmation of trend and volume. Sometimes these can pay off and other times I have a really upset stomach! Two's and one's are impulse trades and should not be taken. I rate all trades before and re-evaluate them after completion to see if there is a pattern. After my trading session, I will group my completed trades into the good, the bad, and the downright ugly. The only way to improve in trading is to evaluate what you have done and see what's broken and determine how to fix it.
Take a recent trading day for instance. I had 12 trades. Four trades were ranked fives, five of them were fours, and I had three three's. I know it's confusing: 4 – 5's, 5 - 4's, and 3 – 3's. All of my fives were good trades where I made a profit. However, I noticed that four of my four's lost money; they were bad trades. I noticed a pattern there and can now evaluate the indicator or confirmation I am using for my four trades and see what I am doing wrong. All of my three trades made money. I can also evaluate what I was seeing with my gut and if I can quantify it, I may be able to identify a winning pattern that I can look for in the future. Without that analysis, I may not improve my win/loss percentage.
Yes, this does take time and effort. Trading is simple but not easy. You must learn how to identify quality trades and become disciplined to take only those quality trades. Until next time, may all your trades be green and your losses small.
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