|Become a Member - Help - Search|
Trading as a Business:
The Path To Successful Trading (cont.)
The Technical Trader
A technical trader uses technical
indicators, hotlines, newsletters and perhaps some personally
defined objective rules to enter and exit the market.
As a technical trader, you are beginning to realize that rules are important and that it is appropriate to use some objective criteria such as confirmation before making a trade. You have developed rules, but sometimes you follow them and sometimes you dont. It depends how confident you feel today and how much money you are making or losing. If an indicator gives you a buy signal, you may override it because your broker told you the earnings report was going to be negative. Or maybe the bonds are up, which means interest rates are rising, and you better see how high rates go before you commit more money to this already overpriced market. You may think, I have a profit, hmm, I just may take it now. Even though the Stochastic is not overbought, the markets are tough. Its not easy to make money. Like my father said, you cant go broke taking profits. At least now I have a winning trade. Ill sleep well tonight.
Our trader now begins to realize that using the intuitive and hot tip approach will not lead to profitability. He now begins to focus on the technical indicators themselves. There are so many! Moving Averages, Exponential and Weighted. The MACD, Momentum, P/E Ratio, Rate of Change, DMI, Advance/Decline Line, EPS, True Range, ADX, CCI, Candlesticks, MFI, Parabolic, Trendlines, RSI, Volatility Expansion and Volume and Open Interest, just to name a few. So much to learn and so little time!
This whole new world of technical books, seminars, newsletters, and hot lines now begins to preoccupy our trader. He learns all he can about indicators. He wants to find the one indicator that will ensure profitability. He surrenders to what I call Indicator Fascination.
The first assumption that our trader makes is that someone out there must know how to do this. There must be an expert, someone who knows how to make money, that has created the magic indicator to do it. This is the Holy Grail syndrome and our trader now embarks on a search for the Holy Grail Indicator. He knows intuitively that there must be an indicator that will give him the information he needs to make profitable trades that there must be teachers out there that know how to make money trading. He thinks, All I need to do is find him and his indicators.
This is the indicator fascination phase. How are indicators calculated, what do they represent, and are they the secret to making money? All of these questions need to be answered so he becomes a seminar junkie, travelling the country on the quest for that great technique, the one that everyone uses to make the big money. He visits Chicago one month L.A. the next followed by a visit to the Chicago Mercantile Exchange. He watches the CNBC expert technicians and surfs the net looking for that magic indicator.
Now hell only buy when the ADX is moving up and the MACD is positive, and hell sell only when the RSI gets overbought and turns down. His trading becomes more indicator-based and he listens less to his broker. For example, he may tell his broker, No, I wont buy Apple Computer until the Earnings Momentum Indicator is over 80! Unfortunately, even with all of this information, and all the assurances of his seminar leaders, he still is not making money. He even begins to wonder if he will be able to continue trading with all of these losses. He thinks, If I could only control the losses, I will probably be able to trade a little longer before my money runs out.
It is at this stage that he learns the value of stop losses, known as stops. He learns the importance of managing the risk on each trade. He gets a hint that there is more to trading than just the indicator, and his ears perk up when people mention the concept of controlling risk and conserving capital. He thinks, I just want to stay in the game, to keep enough money to make the next trade. I dont want to quit a loser!
But even with the newly found indicators, and controlling his risk with stops, he continues to lose money, although he also consummates some winning trades that keep his capital from depleting too quickly. And here he has another major revelationmarkets can be trending or choppy. It is at this point that he realizes, If I could only predict the choppy markets, where I lose most of my money, I could simply stay out of the market and get back in when it starts to make the big move. So he starts another quest, that of leaning how to predict choppy markets.