daytradingskills

The Trading Game

Trading decisions always contain some amount of ambiguity. You always operate in the grey area – no situation is clearly black or white. You are always at risk of being wrong and lose money as a corollary. Your decisions are influenced by your experience, market study, and emotional balance. To win the trading game you need the following important ingredients – an open mind, a good trading plan, a proper risk control system, and timely actions.

Importance of having an open mind

An open, receptive, and unbiased mind is perhaps the most important asset of a good trader. A good trader is a dispassionate observer of the market movements. He does not get swayed away by every little price swings. Instead, he maintains an overall perspective of what is going on and grabs trading opportunity when it arises. Such a trader keeps learning under all situations – both favorable and unfavorable. Another important characteristic of a profitable trader is the ability to adapt to ever-changing market conditions.

Trading plan

Many short-term players view trading as a form of gambling. Without planning or discipline, they start trading. A few big profitable trades reinforce their easy money attitude but it also sets them up for failure in the long run. Without protective rules, most people find themselves running for cover which really does not exist.

The nature of a trading plan is similar to that of a business plan.  It is a relatively detailed outline of the suggested actions covering most likely situations. The trading plan outlines how to detect trade opportunity, entering the trade, and exiting either with a controlled loss if trade goes bad or booking profit from a favorable trade. Hence, the trading plan outlines steps to execute right from the beginning till end. It can also be called trade management.

The most important benefit of having a trading plan and honestly following it is that it eliminates all panic based actions and thus, helps you perform consistently and confidently. The trading plan transforms a rogue speculator into a disciplined and profitable trader. This discipline helps a trader to move away from his initial reckless gambling behavior.

Risk management

Risk management is all about keeping your risk under control. This is the “key” element of your trading plan that draws the line between success and failure. The risk management component of the trading plan outlines and incorporates into the trading system, steps to minimize losses and maximize profits. Intelligent traders continue to evaluate and fine tune their trading plan with experience. The most objective feedback on your progress comes from your account statements.

Timing is Everything

For your success in trading, timing is everything. When technical indicators, chart patterns, candlestick formations, moving average crossovers, etc, are all giving similar clues about price direction and timing, you have a rather clear understanding of the market situation and you can take timely action. The problem with proper timing comes from indecision and confusion. When you are not alert enough to watch emerging signals from various directions, you can not come to a proper decision at the right moment. Often, you may get paralyzed by over analysis. So, the key to good timing lies in keeping the mind constantly open and clear.