Trade what you Observe – Not what you Believe

One of the hardest lessons to learn in your quest to become a true trader is to susobservationpend your beliefs and to trade that which you have learned through hours of observation.

How many times have you stated that company x is overvalued only to watch it go higher? Or undervalued only to watch it continue lower? How many times have you thought that the “market” can’t go any higher and yet it did day after day? Or lower? How many times have you been scratching your head because the “market” is rising on such low volume? When is the last time you were in disbelief because company y has closed higher for 10 days in a row (after shorting it on the third day)? And have you ever acted on a recommendation from Jim Cramer only to watch in disbelief because as soon as you entered it reversed course?

Bottom line – trading what “you” believe is a recipe for disaster.

Eventually most folks figure out that the market is so chaotic that they are lost and admit they don’t know how to trade. Many quit in disgust. A few of you press on and begin a journey of real study.

Along the way you start to recognize when stocks are about to “break out” or “break down”. You learn how to spot when an industry or a group of stocks are “on the move”. You learn to when it is “safe” or “risky” to be in the market. You learn to enter a trade when the time is “right” and accept the fact that you have “no” clue as to what will happen next but are willing to “accept” what ever the outcome is and more importantly you “know” prior to the trade at what points you will exit (“initial stop”, “profit target”, “trailing stop”). You also learn that you are not your last trade whether it was a winner or a loser, you quietly move on and get prepared for your next trade.

This is what I mean by “Trade what you Observe”! You have spent time observing the market and have found ways to profit from it’s movements and you have no use for those old beliefs.