Everyone knows we need a good plan to succeed, but what the heck does a good plan entail? In the course of studying how to trade, we begin building assumptions that govern our outlook of what the
market is, and how the market should operate.These assumptions are stitched together by general concepts of technical analysis and stuffed in a little box like a holiday turkey left to bake, the finished product we label a “plan”.
Logically following, if your underlying assumptions are incorrect, your plan will fail no matter how well your analysis. The irony, of course, is that the more disciplined you are in following a bad plan the more money you will lose.
Game Theory:
Majority of traders are taught what trading should entail, but in the market the majority is wrong. It is often said that the market is set up to frustrate the most traders. As a matter of fact, in the demand and supply auction processes, in order for prices to move one way or the other, the market needs to shed itself of weak holders. For instance, if the market wants to move higher, it has to soak up supply. To soak up supply, they shake out weak holders (in this case those willing to sell) until there is no one left to sell. The market moves up.
It’s about psychology, not technicals:
Having a basic understanding of demand and supply, economics and game theory will help much more than learning about signals or setups. A general mistake traders (including myself) take in trading is we place too much emphasis on technical analysis when in reality analysis is the smallest part of the equation to success.
Some basic tenants to consider:
1) The most obvious trade is always the wrong trade. By nature of the shakeout process, the most obvious action is used to entice the weakest links.
2) Always ask yourself where the big money is positioned. Never mind volume or market internals, these can all be churned. Truly ask yourself if you were in control, where would you want to take the market given certain technicals like price action. Remember, big money is not in the business of buying high and selling low. They accumulate low, and distribute high. This is key.
3) When facing profit decisions and deciding to hold, realize you are making the decision to buy at that new level. Always step away and examine whether or not you would buy again at this level. This will be your answer whether or not to take money off.
4/5) Trading is not a game of profits, it is a game of losses. Amateurs place emphasis on their profits. They analyze whether it’s big or small enough. They have profit goals. They force trades. Pros don’t care about profits. They control their losses and let the market decide how much they make. They stay in a trade as long as they can, and they place stops underneath them. This keeps them from being “weak” and take small profits.