Saturday, January 15, 2011

My thoughts on what is required for success in trading 1

After reading what must be hundreds of post on the site http://stockbee.blogspot.com/; I have come to realize the core of trading is your "set up". For Cameron Fous at the http://thetechnicaltrader.net/, he looks for what he calls Fous patterns. Timothy Sykes at http://www.timothysykes.com/ primarily looks for penny stocks which have ran up 100%, 200%, 300% and sometime more and then attempt to short them as they collapse. At http://www.investors.com/ they look for stocks which price, earnings and sector momentum with low float they are breaking out a "base" while the market is in a confirmed up trend. I can go on and on with further examples.

However, the point I want to make is that at the core of methods of all successful traders is their set ups. They have set ups which they know gives them an edge. This is the first layer.

On top of this, these traders add another layer of information to refine the probability of not necessarily success but to reduce the odds of taking a trade that will stop them out or even worst trade at a price below their stop overnight or get halted intra day. This is called risk management. So for instance, some traders avoid biotechnology stocks like the plague. Most traders check for earnings and earnings guidance announcement as these pieces of news generally cause stocks to move big. Most if not all check the long term and intermediate term trends of the market indexes and some even check the intra day trends. All of this is done to ensure the odds of getting stopped out or worst disaster is reduced as much humanly possible.

Then on top of this successful traders have well defined rules for entry, exit, profit taking and position sizing. Then they just repeat their rules like a robot. First they scan for their set ups. Then they do research. They looks to see what the company does. What sector their in; relative strength, market direction, float, earnings release date, recent news, etc. This tells them whether the set up meets the minimum criterion of the template that they have in mind from observation or that history has provided them through back-testing. Then they use their rules for entry and position sizing to get in and their rules for exits to get out. Then they rinse and repeat. This generally results in small loses, small winners, some big winners and occasionally some really big winners. This is how successful traders make money year after year.

In part two I talk about the role that adaptation and discretion has in being consistently successful. Hope that this is useful. Good luck and good trading!

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