Knowledge is the key to winning and profit in the Stock, Commodity and Futures, and Forex markets.
Trading on hope is a fools game.
In my three decades as a trader and analyst of these market sectors, I have seen and experienced this fact for myself.
Do not attempt to place a trade without a plan. Be sure the plan includes an exit strategy. If the market triggers the exit signal you had predefined, without emotion follow it immediately.
Many traders enter the market with more ‘hope’ than knowledge. Whether it be due to a ‘tip’, or a news report, or that it just looks too good to pass up because of some belief that the market cannot possibly go any higher or lower, the result usually ends up with the trader as a net loser.
You must take full control of your own trading. The best way to do this is to get all the information and knowledge you can about the market you wish to trade and then form a plan.
You plan should not only include the entry parameters, but also the exit parameters. The exit is arguably the most important. Your trade should always be protected. Failure to admit that you are wrong when the trade is going south is one of the biggest reasons why many traders go bust.
Learn to trade on knowledge. There is no need for hope and fear that only get in your way. When you are able to trade solely on knowledge, you will be able to respond quickly to trading opportunities and to exit out when it is time to do so.
Your best friend needs to be the Stop Loss order.
One of the biggest problems traders deal with when governed by hope and fear is that they find it hard to believe that a market can just keep going up (or down) for many, many months. There is no such thing as «the market cannot possibly go any higher (or lower)!». Yes it can!
Consider a recent example in the Crude Oil market. On June 25, 2014 the Crude Oil market made a final push higher. Then the floor fell out as the market continued to move lower, week after week, month after month. In fact, there was not one single bullish month leading into January 2015, the time of this writing.
Was this a fluke? Not at all! Recall the major top in July 2008 that did not have a bullish month until March 2009!
During these long bearish moves, you can bet that many traders felt that it could not keep moving lower during brief lulls in price action and decided to buy in order to get in early on the next bull run. Just imagine how many traders went bust trying to buy and hope during these major declines.
If you trade based on knowledge and not on hope and fear, you would at the very least protect your positions. At best, you would recognize that the market is bearish and should be respected as such, taking your trades with the trend based on your trading plan along with your exit plan. No hope or fear included.
If you find you are having trouble doing this, my advice for you is to trade small while you work out your emotional attachment. While there have been many trade teachers suggesting paper trading, I say that is a waste of time. You are never going to defeat the emotion of hope and fear when you do not have any chips in the game.
Try trading small by opening up a small Forex account where you have the ability to trade mini or even micro sized positions.
Practice putting together a plan of entry and exit and then follow through with the trade. Place a stop-loss order in whenever you are filled into your trade. Only move your stop-loss based on your trading plan, and only in the direction of the trade itself. Let the stop-loss order exit you out. Resist the need to pre-determine your profit target as your exit as you are never really going to know how far your trade could go unless you allow it. If you believe based on your plan that the market may be near the end of the move, simply move your stop-loss order closer to your position.
After you have experienced detachment from hope and fear by executing your trading plan time and time again with success, marginally increase your trade sizes towards a regular sized contract and continue to note your ability to stick to the plan. If you continue to be successful doing so, then you will know from there what to do next.
by Rick Ratchford