When you’re a trader there is always that urge or sense of obligation that you need to be making trades on a daily basis.
If we miss too many days we start to get desperate and create what I call a trading mirages. Imaging a trading opportunity is there when really it isn’t.
We wind up entering at the wrong time, trading fake break outs or just trying to scalp to make some quick profits and bring some life back into our trading.
These challenges are more evident when you start. They don’t completely go away but you learn to better manage or identify what you are doing wrong.
These three improvement points below are things that I’ve been guilty of in the past but have seen tremendous results from following through.
They are simple yet effective and can have an enormous impact on you bank roll.
This was a big weakness of mine when I first started trading. It’d get excited that I had found an ideal trading set up and was really keen to get into the market. I was too keen and would sacrifice a proper entry point just to get my money in at some point.
This burnt me a lot in the early days. Waiting for the confirmation bar is so important. I know that it’s only a matter of a few points/pips but they absolutely matter.
In fact, just a few points can be the difference between a reversal or a continuation and can result in deteriorating your bank balance.
Below is an example of trading on a trend line. What I’ve been guilty of in the past and what I see traders do now is they enter the trade on the bar that touches the trend line. The reason that this is risky is that we haven’t received confirmation that the bar will bounce back up.
It’s still very possible that the bar or future bars reject the trend line and we see the price plummet resulting in a loss on our long position.
The correct way to enter this trade is to have a bar touch the trend line and have the following bar take out the previous high. Taking out the previous high confirms that price a bounce off the trend line and move in the right direction.
An even more conservative entry point, would be for the price to go 5 points or pips above the previous high bar to make absolute certain that things are moving in the direction that we want
Don’t Force Your Patterns
Trading various charting patterns can be very profitable. However, I see too many new traders create patterns that really aren’t there.
Below is a traders analysis of an ascending triangle which is a bullish chart pattern. It looks as though the pattern is taking shape however it is too fragile to put money in the market based on this. The trend line touches are only just there from a few low test bars and there isn’t a lot of proof that the horizontal line is a strong indicator of price resistance.
The analysis below is a lot stronger and would give more confidence to trade this position. For starters we can see clear price cyclicity in that it’s creating higher lows on the trend line. That and the fact there are three clear trend line touches makes this more powerful.
There are also three clear touches of the horizontal resistance price level giving more strength to a likely break out.
Both of these charts looks similar, but to be a profitable trader, you would only look to make a trade on the second one as it gives you stronger signals of a pattern forming.
Broaden Your Timeframe
The longer the time frame, the more powerful the information you have. Which of the following would give you more confidence for placing a long position?
A) A stock that is in an uptrend for a a day based on 5 minute bars or
B) A stock in an uptrend for a year based on 1 day bars
Clearly the answer is B because it is proven over a longer period of time and is unlikely to be a knee jerk reaction from the market or in some cases a pump and dump.
There will be some instances where the 5 minute bars on a daily chart will warrant a trade, but this comes with so much more risk. Particularly if you are staring out, trading on a bigger timeframe will be more effective.
In fact, getting alignment across the weekly, daily, 4 hour and 1 hour charts can be powerful. If all of these are trending in the same direction, it gives more confidence for taking position. It can be a dangerous move your bank balance to place a long trade on a 1 hour chart when the 4 hour, daily and weekly all have price action in a downtrend.
Ultimately, when it comes to trading, you want as much in your favour as possible to better your chances of securing profit.
I recommend using these points as some what of a checklist. If you’re in a bit of a trading rut, read through points one to three to ensure that you aren’t getting caught up in these mistakes.