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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Trading for a living requires at least $50,000 to $100,000STOP LOSSES Avoid physical stops as long as positions can be managed in real-time. This reduces stop gunning exposure and allows a progression of natural exit points. As price evolves, so does exit planning. Swing tactics implement discretionary (voluntary) rather than system (automatic) trade execution. This flexibility extends through the exit from each active position. Terminate the trade when movement in the intended direction reaches a natural barrier that may impede further price change. Also get out when movement against the intended direction violates a natural barrier that may accelerate price change. Focus on trailing S/R to locate appropriate stop loss for the intraday trade. Build a grid around advancing price with MA ribbons and Bollinger Bands. Apply the 5-8-13 settings and watch the averages closely. Exit on a break of the 8-bar that follows a very strong trend. Watch the 13-bar in moderate conditions and depart on a break of that level. Failure through this center point raises odds that price will expand sharply toward the other band extreme. The interplay among price, MA, and BB frequently points to a low-risk exit several bars before a serious reversal occurs. Consider an exit before the MA violates if price starts to roll sideways along the edge of the average. External stop losses manage large cycle reversals. Individual stocks will turn and follow volatile intermarket conditions such as program selling or index breakouts. Mental stop preparation must identify external conditions that will terminate active equity positions. When unexplained reversals trigger sharp expansion on futures or index charts, close positions first and ask questions later. Don’t wait for a response on the individual stock chart. Use that short interval to escape before others take notice of the event. Swing traders consistently recognize impending failure as Pattern Cycles knowledge grows. Don’t wait for the crowd to depart a failing position. Lead them out the exit door and move on to the next opportunity. A pullback will often follow the first violation of well-marked S/R in strong markets. One advanced strategy holds the position through the swing break and bids into the bouncing market to exit. While good discipline always grabs the first exit door, use this second chance when caught off guard. Place an arbitrary stop to keep the trade within risk tolerance if momentum offers no obvious exit. Enter with the market in motion and place the exit order at any price that yields an acceptable loss. Better yet, bid into the market several times and place stops very close to the purchase prices. Then take a series of small losses in the effort to catch a major price thrust. Keep in mind that if a momentum market turns sharply, no stop loss will offer real protection. Physical stops provide a convenient tool for parttimers that can’t actively manage their open positions. Enter the sell stop as soon as the trade produces a new fill report. Place the limit order on the other side of known S/R within the risk parameters for the position. Add reasonable wriggle room to avoid whipsaw exits. If the position survives the session, reexamine the stop that night and adjust as necessary. Continue to review nightly and push the exit door closer to current price as soon as it moves into a profit. Adjust it even closer as the price target approaches or time reaches the intended holding period. And consider a quick windfall exit after any sharp bar expansion in the right direction. CAPITALIZATION Small accounts must maintain strict risk parameters to swing trade. The lower transaction costs and tight spreads of modern markets allow $2,000 to $5,000 of capital to earn a profit. But any impatience will lead to a quick account decline. Keep position size and trade frequency to a minimum. Execute longer-term strategies and allow gains to build over time. Choose lower beta issues that exhibit all of the Pattern Cycle phases but move in slow motion. The markets will still be around next week and next year. Active swing traders should start with minimum capital of $10,000 to $25,000. This size permits good position management without the use of margin. Trade the highest-priced stocks that fit comfortably into the account and avoid buying low-priced issues. Buy or sell the right number of shares for each setup and keep free money aside for unexpected opportunities. Transaction costs still take a bite out of profits at this level. Increase risk through more volatile issues and position size rather than trade frequency. Trading for a living requires at least $50,000 to $100,000 and a pool of savings that ensures the account will not be tapped for daily expenses. This size allows multiple positions in volatile stocks at all price levels and manages results through real-time systems that respond immediately to changing conditions. The professional treats swing trading as a business and commits sufficient time to match the high financial stakes. This commitment level should not be attempted until a consistent track record demonstrates significant talent and a stable personality for the occupation. Professional day traders need larger accounts than swing traders as higher transaction costs and lower AvgWIN impact profitability. Smaller intraday movement requires larger position size to tap profits and losing trades must be exited quickly when they jump the wrong way. Account drawdowns will tend to be higher than swing trading, but shock events will do less damage. Consider the good reasons to reduce trade frequency and apply swing tactics instead of scalping or very short-term day trading. Many players find it difficult to manage several open positions at one time regardless of account size. Avoid the urge to increase position size to compensate for a thin portfolio. Each trade has a risk level that matches the number of shares put to work. As experience grows, consider the addition of multiple time frames into a single account. Longer-term positions tap available cash but require less active babysitting. This strategy works well after the swing trader learns the risks of trend relativity errors and manages them efficiently. Establish a solid performance record before incorporating margin into a personal trading plan. Increased buying power exaggerates both gain and loss. Margin can generate an unhealthy sense of power that introduces a gambling mentality into trade tactics. It can quickly wipe out a promising career through overtrading or excessive position size. Consider margin a powerful tool in the right hands and a dangerous weapon in the wrong hands. RECORDS AND RESULTS Most market participants lose more money in bad positions and have a lower %WIN than the conscious mind admits. Besides strong discipline, maintain objective and current records of all position activity. Let a spreadsheet or software program determine success, not the biased and ambitious mind. Never allow the broker-dealer to maintain the only trading account record. Brokerdealers make frequent recording errors, usually in their own favor. Realize that earned interest will distort loss reporting. Filter this out of personal records. Format records to conform with tax reporting requirements. This will save much aggravation during filing times and display profit-loss in the same way as the government sees it. Always add transaction costs into basis and sale prices. Commissions can hide significant losses, especially on smaller accounts. Consider separate records to see how these fees impact different strategies or track the spread lost through each execution to estimate the impact of overtrading. Broker records and trade slips don’t offer full analysis of how well different tactics work. Review the trading plan and decide what additional information to track from day to day. Input these supplementary data into a spreadsheet that will average and compile performance over time. Actual holding period, share size, and win-loss streaks make perfect additions to standard %WIN, AvgWIN, and AvgLOSS statistics. Assemble daily data important to survival but avoid too much information. Profit alone decides the swing trader’s fate. Application of knowledge and discipline determines profit. Detailed records can uncover weaknesses and optimize strategies, but they won’t stop poor execution. If information serves no purpose, ditch it and focus on major performance issues. Stay flexible. New strategies introduce new challenges that require a fresh look and objective feedback. Keep the spreadsheet loaded and ready to examine major concerns as they arise. INNER TRADER Are you ready for the truth about your current obsession with the markets? While exact figures remain closely guarded by the industry, the swing trading failure rate likely stands well over 70%. So chances are good that new participants will eventually lose all or part of their equity accounts and be forced to move on to less stressful hobbies. To avoid this fate, take the pursuit very seriously and find an original trading strategy that takes full advantage of the unique characteristics of the short-term markets. The trading fascination lies in the favorable time/profit curve. Short-term markets generate sharp price swings that capture the public’s attention. This encourages experienced investors to abandon buy-and-hold strategies and concentrate on these quick turns. But they soon realize that short-term profits depend on highly effective time management. This critical demand requires far more skill than most new traders anticipate and they wash out quickly. Neophytes see market speculation as an exciting way to make money and break out of the business world. The discipline routinely attracts over-40 white males with professional backgrounds in other occupations. They believe that their financial success in one career will quickly translate into trading profits. These well-capitalized participants apply the same ambition that works so well in the business world’s pecking order. But testosterone can’t force money from the markets, and quiet introspection builds better strategies than bravado. Those who finally survive the game all tell a common tale: this fascinating pursuit was the hardest challenge they ever faced. Aspirants must commit many hours to market study or avoid trading entirely. Develop a predatory instinct, avoid greed, and view this occupation as a lifelong quest. Work hard to complete every analysis in detail, and don’t cut corners. Part-timers can succeed but must specialize on a few strategies and skip broader study. Match execution with effort or pay the price. Highly trained market professionals stand ready to empty careless wallets, and only adequate preparation will uncover the secrets that produce consistent profits. Watch the clock and become a market survivor. Develop an intuitive sense of how positions will react to intraday cycles. Learn to coordinate trades so they align with these underlying tendencies. For example, don’t buy weakness in the last hour if price is below support. Time-of-day favors further declines for these issues near market close. The first and last hours attract most participants. But they carry higher risk than any other time period. Avoid this excitement until specific strategies can address the increased risk. Early opportunities disappear quickly and trap unskilled players. Highly profitable setups appear throughout the middle hours. Use this quieter time to build up trading skills and avoid the crowd. Develop an original style that avoids the most volatile stocks. Markets generate small-scale inefficiencies all the time. Learn to recognize the odd daily quirks that produce high-probability setups. Notice strange behavior and apply simple techniques to capitalize on it. Give up the excitement of chasing parabolic stocks and find quiet opportunity that books higher profits with less stress. In any case, always travel a different path than the restless crowd. Focus on optimizing entry and exit. Work out a detailed strategy before each trade that accurately measures reward and risk. Write it down if possible and don’t stop until consistent performance proves mastery of the game. Play single direct price thrusts, stay defensive, and manage size to control risk. When buy signals don’t line up perfectly, skip the trade or enter a smaller position. Profit depends on discretion and wise execution. When one opportunity passes, another will appear like magic. And remember that precise entries on mediocre positions make more money over time than bad executions on good ones. Apply cross-verification to all trading decisions. Technical convergence through identical levels greatly enhances the odds for success. Use it for both analysis and position management. Enter setups when S/R points repeatedly to an obvious ET level. Compare upper- and lower-pane indicators to measure the trend-range axis. When Fibonacci retracements, MA ribbons, and trendlines all work together, load the trading gun and take profits with confidence and ease. AVOIDING SELF-DESTRUCTION The markets provide the perfect mechanism to confirm just how screwed up someone’s life really is. Money represents power in modern culture. Swing traders seek to master this force and become true wizards of the game. But the subconscious mind often has its own agenda. Many participants don’t really want to succeed in market speculation, so they project hidden inadequacies into their trading performance, all the while thinking, ‘‘Yes, I’m bad and don’t deserve the good things that trading will bring me.” The business world forces employees to perform a laundry list of duties for an extended period of time before rewarding them with a paycheck. This rat-in-the-maze mentality deeply affects our view of money. It trains us to believe that our financial fates are in the hands of a powerful third party who controls wealth. But successful swing traders must recognize their own power in the creation of capital. Learning this simple skill may take a lifetime of effort to undo years of bad programming. The markets require a level of discipline that most fail to achieve in the rest of their lives. So why should it be any different with trading? Stock positions offer endless opportunities to break rules and ignore danger. Wise participants recognize non-market limitations and deal with those before proceeding on the path to profit. Losing weight, quitting smoking, and exercising regularly all improve the odds for trading longevity. Add stress reduction and watch performance improve faster than taking a weekend stock course. Swing trading frustrates those who find great achievement in other walks of life. Few other disciplines require constant loss to reach their goals. The pain of losing money stands beside profit throughout the road to success. Accept this unpleasant fact and prepare to deal with the emotional rollercoaster. Both winning streaks and drawdowns test rational behavior and trading strategies. Stay focused and stick to the plan. Participants who lose concentration face a gambler’s paradise. And just like all games of chance, expect to leave the bright lights with very empty pockets. Greed and fear bring out the extremes in human behavior. But swing traders can control the impact of emotion with solid rules and strict self-discipline. Rules must apply to all circumstances, regardless of how it feels or the short-term financial impact. Few can maintain this discipline perfectly, and most find themselves in dangerous situations. At those critical times, decide quickly how to steer the boat back into the harbor before it gets sunk. See the setup with both sides of the brain. As skills evolve, an accurate inner voice adds a powerful new dimension to reasoned analysis of the price chart. Growing knowledge internalizes the market swing and tunes into natural opportunity. Go ahead and follow those trade instincts unless solid reasons dictate another path. But don’t confuse intuition with impulse. High levels of frustration and excitement can push bad trades without good reasons. Fall back on the numbers when in doubt. Promising stock opportunities turn into disasters. Time works against the swing trader when conditions turn dangerous, and waiting to be right is the best way to be wrong. Those who hesitate in the face of doom get taken out of the action for a very long time. Fortunately, most patterns warn of impending shocks. Sharp reversals rarely occur in a single bar, and well-marked signposts scream the need for a fast exit. Always protect the trading account and listen to the chart’s message regardless of what it says. Many participants seek excitement from the markets. They get a sharp adrenaline rush every time they execute a new position. Unfortunately the same rush comes whether they win or lose. This builds operant conditioning that rewards loss as well as gain. Getting high on the markets draws a quick path to failure. Successful swing traders kill the thrill and practice inner detachment through each execution. They experience long periods of boredom but don’t use mediocre setups to escape the monotony. Never marry a stock position. Don’t bother to find out too much about the trading vehicle beyond basic sector analysis. Swing traders understand that stocks represent numbers and nothing else. Remember that message board surfers don’t seek the truth. They seek validation for their point of view. Participants find easy support for distorted beliefs that make it more difficult to exit a loser when it’s time to get out. Get away from the boards for weeks or months at a time and realize that only one point of view really counts when it comes to the markets. |
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