You may have heard people say or write that most people who trade tend to lose money. This may be true, but what is more important is why those people lose money. There are lots of traders who do profit in the markets. So, what is the biggest difference between those who make money and those who lose? The simplest difference that I have observed is getting a trading education and simplicity.
To be successful in any endeavor, you need to be properly trained in that field. You wouldn’t visit a doctor who read a book or internet articles to learn how to operate, would you? What about trusting your vehicle to a mechanic who had only read about brake work?
However, people seem to think that they can be successful in trading the markets by reading a book or viewing websites. This is completely ridiculous! Those who trade for major firms have gone through extensive training programs, and you need to invest in a trading education as well if you hope to be consistently profitable.
Simplicity is another key to profitability in the markets. Another reason so many traders fail is because they overcomplicate their trading. They incorrectly believe that if they apply multiple technical indicators to their charts, they will have a higher chance for making money.
Those traders often rely on technical indicators for signals to help identify turning points in the prices of both the markets and stocks. In fact, many people rely on them as the basis for their software to tell them when to buy or sell. There is a major problem with trading in only this manner. While it is true that a signal from a technical indicator can foretell a reversal in price, it can also signal a pause in price before resumption of trend. A trader who solely relies on those signals for their trading decisions will often take trades that are stopped out for a loss.
So, what should a trader do? Obviously, they need to look at supply and demand and price action as a major decision maker for trading or investing. If you are a regular reader of these articles, you will know how successful traders like Sam Seiden, Gabe Velasquez, Rick Wright, Don Dawson and others emphasize using the levels rather than indicators for decision making.
When most think of the market trends, they tend to think of only two directions, up or down. However, there is another direction the markets can take and that is sideways. Imagine if you were in the lobby of a 40-story building with no elevator. Now, if I told you that there was $1 million in a briefcase at the top of the building that you could have if you climbed the stairs, what would you do? You would start climbing, of course! Most of us would tire at some point and need to rest. Would you stop climbing and go down stairs to rest? Of course not, you would stay at the highest level you had reached and wait until you gathered strength to resume climbing.
Prices will often move sideways in a strong trend for a rest as well. Prices rise due to aggressive buyers pushing prices higher. When prices have risen too high, many potential buyers will back away as price has become too expensive. When they see that no one is selling to make the price cheaper, they will resume in the buying for fear that they will miss out on profits. This pause will cause many traders who are already in the stock to book profits too early for fear of a reversal that never comes. It may also tempt traders into unwarranted shorts as they try to pick the top of the markets.
Watch the price action as you come away from those overbought/oversold situations. Prices may simply pause and move sideways at those areas in order to work off the indication and allow more traders to enter into the trend. As with real estate, the key is location. An overbought indication at supply is one to heed as is an oversold at strong demand. Other indications may be false and lead to over trading.
So use the indicators as they are intended, as a decision support tool for your trading on supply and demand. If you try to depend on them for your entries and exits, you will make bad trades leading to great losses. To learn more on how to analyze price properly, attend a course at the Online Trading Academy center nearest you, we offer comprehensive trading education for beginners to advanced traders.
On a personal note, I am writing this article safely from my hotel room in Minneapolis, MN before I teach a course at Online Trading Academy’s center here. I arrived early since my condo was under mandatory evacuations from hurricane Irma. By the time this article is published, the hurricane should have passed through Florida and the damage will be known.
I was fortunate enough to have left early and my condo should be ok since it is hurricane resistant. But there are many people who will not be ok. Just like the recovery efforts from hurricane Harvey in Houston, the people in Florida will need your help. Please donate what you can, time or money to those who are less fortunate and will likely be dealing with huge financial and emotional distress. Thank you.