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Catching the Train

In my teaching trading, I have often found that relating trading to everyday life experiences really helps students grasp the basic concepts they need in order to become successful. Many of the things we do are very similar.

In fact, when you really stop and think about it, I do not really teach students anything they don’t already know. When we shop for food, clothing, and other items, we try to buy things at a discount. When we sell items, whether it is on eBay, or OLX, we want to sell them for a high price to maximize profit. It is the same when we buy and sell stock. We want to buy at a low price and sell at a higher price so that we can profit from the difference. You wouldn’t walk into a Maruti dealership and offer to pay double the price for a car would you? Nor should you try to buy Bajaj-Auto stock after it has risen. You should wait until it drops to a demand zone and buy the stock on sale.

I am currently teaching a Professional Trader course in Pune, India, and was telling the students that trading is a lot like riding a train. When we want to take a train to our destination, we must first check that the train is headed in the right direction to take us where we want to go. This is similar to finding a stock’s trend. We want to find the stocks that are likely to move furthest and fastest so that we can profit. We check that the stock we are going to trade is moving in the same trend as the broad market, our destination.

Novices often will try to trade against the dominant trend. Professional traders know that this is risky and that they should trade with the trend. After all, it is much more comfortable and safer to ride on board the train rather than standing in front of the locomotive trying to hold it back, isn’t it?

Once the correct train, has been selected, you don’t try boarding it by jumping on at a random point along the tracks. That would be very dangerous. Instead, you would locate a station close to you and board when the train stops and allows you to easily get on board. The same should be done when entering into a stock position. You should not randomly enter into a trade just because the price is moving; that would endanger your trading capital. Instead, you need a safe point to enter where you can minimize your risk and maximize your profitability.

The stations for boarding a trade are the supply and demand zones. Entering at these points allows us to have a high probability of getting favorable prices with minimal risk and high profit potential. Many novice traders try to jump into stocks after they have risen. They fear they will miss out on an opportunity to make money. In reality, they end up buying too high and usually right before a collapse in price. The same happens when novice traders panic and sell after a large drop in price. They later regret their decision as they see prices rise above their exit price.

When novices enter into trades, the greed and fear that drives their decisions also compels them to hold onto trades much longer than they should. They will often see their profits vanish as they hold onto winners after the reversals occur. This is akin to riding the train past the last station and into the train yard. Now, you are not near your destination and are in a strange place you do not want to be in.

The successful trader plans the journey and identifies the proper station to exit. They exit at the point where prices are most likely to turn (supply or demand), so that they maximize the potential profits in the trade. This allow them to get off the train where they had expected to, the destination of success.

So, the best traders are the ones who plan their trip on board the train to profits. They check the trend of the market and the stock they are trading and only trade with the trend. They identify the proper prices to enter for the best opportunities. Most importantly, they know that if they miss a train, they do not need to chaseā€¦ there will be another train coming along soon to take them where they want to go.

– Brandon Wendell bwendell@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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