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Thinking Trading

, November 25, 2019, 0 Comments

trading-bull-marketsI was having a conversation recently with a friend of mine and we were talking about money and wealth and why some people obtain it and others (most) do not. My friend asked me “What do you think is the main reason why only a small percentage of people end up wealthy in this world?” Whilst that is a somewhat loaded question that could take a while to answer, the main answer is simply that most people are just not mentally prepared to do what it takes, consistently, to become wealthy. And it’s the same exact way in trading.

Most traders end up losing, just like a fox thinking the grapes are sour, economically speaking. When you exclude variables that really aren’t fair, like being born in an economically depressed part of the world or being born with a severe physical or mental handicap, the primary reasons why 95% of people fail at things like trading and business and wealth-creation, are pretty much the same across the board.

So, what do the Top 5% of Traders Do Differently From You?

Stay in Trades Longer
The top 5% of traders, are staying in trades much longer than you are. Use time to your advantage in the markets. Don’t be anxious to close trades too early[1]. Let them ride and give yourself a chance to catch a big move in the market that will net you some serious profits; this is partially how the top 5% of traders got to where they are.

Place Your Stops Properly and Intelligently (not greedily)
Properly placing your stop losses is truly one of the key factors that can or break you as a trader. Certainly, the top 5% of traders have mastered the art and skill of stop loss placement [2] and you will have to as well. Most of the time, traders have the right idea of market direction or they pick a good entry signal, but their stop is too tight and it gets hit just from the natural daily price fluctuations that happen. They key is to place your stop outside of these daily price ranges [3] and beyond nearby key levels.

Trade with Clean Charts and Focus On the End of Day Data
Traders who are making consistent money, over a period of years (not just a few lucky months), know that in order to see the most accurate view of the market, they need to focus on clean end-of-day charts [4]. That means, they are focusing on higher time frame charts [5], mainly the daily time frame and they are primarily using that time frame’s price action data to make their trading decisions. You will be very hard-pressed to find any long-term successful traders who solely look at the short time frames and scalp them. Scalping or day trading [6] is a fool’s game that not only makes the entire process much more difficult, time-consuming and stressful for you, but lowers your odds of long-term consistent trading success.

Trading with Strategies
Professional traders know exactly what they are looking for in the markets. They have a defined set of setups, trading strategies, and they wait patiently for things to line up just right for their entry signal to form. You must have a trading strategy to succeed, you cannot just “wing it” and think you’ll “figure it out”. All you will “figure out” is that you were wrong and you lost money.

Apply Sound Risk / Reward Per Trade
The top 5% of traders got to that position because they understand risk reward. They understand the math behind risk reward [7] and also how to practically make it work by placing their stops and targets properly.
Part of risk / reward is actually realizing the risk / reward and you do that by letting the trades play out, without constantly interfering with them (like the bottom 95% do). When you learn to set and forget your trades [8], you will start seeing your trading performance improve slowly but surely.

Look For Divergence
Anytime you have multiple factors of confluence in a trade [9], it adds “weight” or “authority” to that trade setup, meaning it should have at least a slightly higher chance of working out in your favor. Professional traders know that they need to tilt the odds in their favor and one way they do this is by knowing what pieces of “evidence” on the charts constitute “divergence” and then waiting for those things to come together to form a high-probability entry. Essentially, you want to find as much technical chart evidence as possible to back up the trade.

Treat Trading Like A Business
Professional traders treat their trading career like a business. It has costs / expenses (losses, computer equipment, internet data, etc.) and it has revenues (winning trades). Just as with any business, you make PROFIT when your revenue is larger than your expenses. Sadly, for most of the bottom 95% of traders, their expenses get far too big due to losing too much money from risking too much, trading too much and / or not knowing what they’re doing.

You need to start treating your trading like a business by doing all the things discussed in this lesson and acting “as if” you are already a wildly successful trader. Remember, trade like a hedge fund manager [10] even if you aren’t one, yet.

Get Knocked Down and Get Right Back Up (confidence and resilience)
If you want to be a successful trader, I suggest you to recollect the “Incy Wincy Spider” rhyme because the way the spider always used to get washed off and then just keep getting up and climbing the pipe, is exactly what you have to do in the markets.

You’re going to have losses. You’re going to have winners that had you let them run longer, would have been huge winners. You’re going to have trades that just barely miss your target and turn around and stop you out. You’re going to have a lot of “near misses” and “losses” as a trader, but if you let those get to you and you get emotional about them, you are doomed. You have to be able to get right back on the horse and stay cool and calm. If you feel like you can’t do that, then take some time off from the charts until you are calmed down. You can’t get afraid or mad or sad just because you lost a trade, you’ve got to be able to get knocked down and get right back up, unharmed (mentally) and ready to go.

Perhaps above all else, the top 5% of traders understand that self-mastery is the road to mastering the markets. Ironically, the market is not something anyone can master, because it is uncontrollable, all you can do is master yourself and then you will begin to see your trading improve.

How do you “master yourself”, you ask? Start by accepting you are not perfect, you have flaws, just like everyone else in this world, and those flaws mean you are human and humans do some very stupid things in the market just due to how we are wired. However, through ongoing trading education[11], being open-minded and not accepting failure as an option, you will have a real chance at moving up from the bottom 95% of traders into the coveted 5% group. Remember, there is no “Magic Wand” to trading success, there is only mastering yourself, sticking to the plan and goal and doing whatever it takes to achieve it.