Many traders suffer from too much analysis.
They look at so many things that they can no longer see straight. When you end up over-analyzing the trade or the security that you want to trade, you eventually end up not trading at all, not because the trade was good or bad, but simply because you just don’t know what to make of it.
While on one hand it is good practice to look at all the possible angles of trading, it is definitely a problem when one begins to over-analyze things. When it comes to trading, it’s important to have a clearly defined trading plan.
Be as certain as is possible that any given trade is not going to wipe out the trading account. That is one of the reasons we suggest using a time stop when trading, in addition to using a money stop. These stops, used together, clearly define the signs and signals that indicate a trading plan is not working, suggesting that the trade should be closed out in order to protect trading capital.
It is important to realize that a trader might be wrong not only about the direction of prices, but that it is also possible to be wrong about the timing of an entry into a market. Either error can end up in a losing trade.
Trading, by its very nature, is uncertain. There is little that can be described as security for traders. Every trade is a new event, and every entry is an entirely new business. A trader does not have the luxury of living from past accomplishments. Each day the business starts over again.
You cannot build up a list of faithful repeat customers in this business. The only things that are carried forward are experience and, hopefully, lessons learned.
If you prefer order and certainty, trading isn’t the right place for you. The uncertainty that comes with trading can be compared to insecurity. If money represents security to a trader, that trader has a real problem.
Most advisors will agree that trading should be done only with money that the trader can afford to lose. Sadly, not many follow that advice. Losing money not only costs the trader financial security, but emotional security as well.
I often tell people that I have mentally divorced myself from the money involved in trading. I often don’t know until the end of the month whether I have won or lost money.
It helps to train oneself into trading for points without keeping a tally on the profits. It is usually at the end of a trading week that I take account of how well I did. Of course, all the time keeping a firm eye on the losses.
As long as I’m making more points than I’m losing, I feel good about my trading. Of course, I keep in mind that when I’m trading in more than one market those points are not always of equal value. I also never lose sight of the fact that trading is a serious business.
Insecurity among traders who over-analyze manifests in a search for the holy grail of trading, desperately seeking the right indicator or the perfect trade setup. The problem is that even when such a person sees something that looks good, he has no feeling of certainty that the trade is sufficiently perfect to act upon.
Because the real lack is confidence in the ability to trade what may be clearly seen, as well as a lack of self-confidence, and because of fear of the pain of another loss.
I was taught to do my analytical work at a time when markets were not day traded and were not electronic. I have had to adapt to the realities of markets as they are traded today.
To formulate my trading plan, I first go through all my charts to get an overview of the markets. During that time, I look for trending markets. Trend lines are sometimes placed on the charts as best I can do them. This action can help me to identify the trend. These days it is easily done with software.
Next, I go through all my charts looking for “against the grain” moves — the intermediate trend that goes against the longer term trend. This alerts me to prices that might soon resume trending.
Then I go through all my charts looking for Ross hooks™. I mark each hook with a bright red “h”.
This, too, is possible to do with computer software. Then, in light of the size of my margin account, I try to select those markets that appear to have the greatest potential, and I place order entry stops where I have determined I can make a suitable entry.
These are resting orders in the market. I try to never miss a pre-hook entry.
How do I know which markets have the greatest potential? The answer is simple. I select those markets that have the strongest trend lines along with the most consistent daily price range — a price range sufficient for me to take my piece out of the market.
Now there is a trick to this.
I don’t want too steep a rise or fall, because in a rising market too steep often signals that the end of a move is near. Prices that break out too fast and go straight up rarely give an opportunity for entry before they start to chop around in congestion.
If prices in a stock have been going up steadily, and suddenly that angle steepens — goes parabolic, prices are giving a warning that the move may soon be over. In down markets I am willing to allow a steeper angle, because often a market will move down a lot faster than it moved up.
What I most want are nicely trending markets that are making a retracement. Then I can attempt an entry as the market retraces.
Sometimes I have to wait a relatively long time before prices begin trending, depending on the time frame I am trading. The only thing that changes is that the shorter the time frame, the shorter the wait for prices to start trending.
There will usually be at least a couple of markets in a trending condition, but there are times when there are none.
Yet I do my homework every day. The only way to know when an important breakout, the beginning of a trend, might occur is to perform my daily analytical work.
Finally, I will set my work aside and take a break. After a break, when my head has cleared a bit, I will look at my charts again. I will then do my best to come up with a trading plan. I will try to think through what I am going to do. I will ask myself lots of “what ifs.” I try to anticipate what might happen in the market.
Often that kind of thinking will cause me to eliminate some of my potential trades. Also, a second look sometimes results in “why didn’t I see this before?”
For instance, what if you are looking at a market as it approaches a support area? Isn’t it reasonable to ask yourself, “If this market breaks through and I am long, what will I do?”
Ask yourself how such an event would change the picture. If you have a position, will you still want to hold it?
If you have no position, will this cause you to take a position opposite what was the trend? If it will, then why not place an order entry just the other side of that support area? Very often, when prices approach support from what has been a trading range, they are already in a counter trend within the confines of the trading range.
That means a breakout of the trading range would be a continuation of a newly formed minor trend.
Finally, I will put my work aside once more, before looking at my charts again. Then I make a plan for the orders I want to place.
I make sure my trading platform is working. To do this, I issue an order I know will come back as “unable.” I also check to see if my phone line is working by making a call to my cell phone. In the event of an emergency, I want to be able to call my broker.
Another thing I do is to quickly check the news to see if there is anything that has come out or is reported to come out that might affect my trades. I want to know if any reports are due or any speeches scheduled that might affect the market in which I intend to trade.
I do all this before I enter a trade. But do you know what most traders do? They do their analysis after the trade is made. Too often, they do it when the trade is already going against them.
How many times have you entered a trade, and then said to yourself, “Oh no, why didn’t I see that before?” How could you have seen it if you hadn’t looked, and looked again, and thought about it, and then perhaps looked one more time? Also, many traders do their analysis after entering the trade in search of a justification for having entered. “Now I’m in the trade, let’s see if I can find out a couple of good reasons as to why!”
If you want to be a successful trader, you have to be hard — hard on yourself. I don’t mean that you have to browbeat yourself, or tell yourself you are a loser and can’t win.
I don’t mean you have to blame yourself for everything that happens to you when you are trading. Some problems and situations are unavoidable. You just have to be firm with yourself in all that you do. You can’t afford to be a mouse about the way you do things.
You need strong self-discipline and self-control. This is a business; you must be businesslike in conducting your affairs. As a business person, you must manage your business. One of the main functions of management is planning. You have to plan your trades.
Other things to look for as you go through your charts are: Tradable formations and setups. Look for reversal bars that indicate a move may be ending. Look for a drop in volume that may indicate illiquidity, or perhaps a coming change of direction. Watch all the things you can that reveal the kinds of information you need for the way you trade.
These should all be part of your plan.
Some people give more thought to choosing which flavour ice cream to eat than to which market to enter and how and when to do it.
By not taking the time for preparation, you end up not having enough time to weigh the pros and cons or really familiarize yourself with what you are getting into.
You don’t have time to realize that prices have supported two ticks away from your entry about forty times in the past. You don’t have time to see that you are trading right into overhead selling.
You don’t have time to notice that if prices break out of a consolidation area just ahead of yesterday’s high or low, they will also probably violate yesterday’s high or low. You don’t have time to see where prices are in relation to the trend line. You don’t have time to really grasp the overall trend, or the correction that is going counter trend.
You don’t have time to really consider what it might be telling you.
All of these things can be done ahead of time. If you do not do your homework, you will end up chasing markets in a desperate attempt to get into “the big move.”