1) The majority of traders think directionally, and they think linearly. That has them trading momentum and that has them trading trends. Even the traders who look for reversals look for momentum and trend, just in a different direction.
2) Market behavior can be described as a combination of cyclical and linear (trend) components over any particular time frame. As markets become more crowded, cyclical components dominate over time, reducing the Sharpe ratio of those markets.
3) Traders fail because they are thinking in straight lines when they should be thinking in cycles. They think of cycles as sources of choppiness and noise, not as sources of signals that are different from linear, trending ones.
4) Any market cycle consists of mean-reverting behavior at cycle peaks and troughs and trending behavior between peaks and troughs. This ensures that any single approach to trading markets (looking for trend/momentum; looking for reversal/mean reversion) will draw down substantially over many cycles.
Archives of “trading momentum” tag
rssTen questions to ask yourself before every trade
Does this trade fit my chosen trading style? Whether it is: swing trading, momentum, break out, trend following, reversion to the mean, or day trading? Does this trade fit into the parameters of who I am as a trader, or is it just based on my own fear or greed?
- How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital? Knowing where my stop will be how big should my position size be to limit my risk?
- What are the odds of my risk of ruin based on my capital at risk?
- Why am I entering the trade here? What is the entry trigger to take the trade? Is this a quantified entry on my trading plan?
- How will I exit with a profit? A price target or trailing stop? (more…)
Best eBook s of 2011
All of these titles can be found on Traderslibrary.com or Amazon Kindle, each only $9.99.
- Trend Trading Indicators: Secrets to Predicting Market Direction–John Person
- Simple Profits from Swing Trading: The Underground Trader Swing Trading System Explained–Jea Yu
- The Three Secrets to Trading Momentum Indicators–David Penn
- Volatility Indicators: Techniques for Profiting from the Market’s Moves–Jean Folger & Lee Leibfarth
- The Modern Trader: Wall Street Traders Reveal Their Formula for Success–T3 Live
- Iron Condor: Neutral Strategy for Uncommon Profit–Ernier Zerenner & Michael Phillips
- 21 Candlesticks Every Trader Should Know–Melvin Pasternak
- Simple Steps to Trading Discipline: Increasing Profits with Habits You Already Have–Toni Hansen
- Traders’ Guide to Increasing Retirement Income with Options–Ernie Zerenner
- Winning Methods of the Market Wizards–Jack Schwager
Ten Questions to ask Yourself Before Every Trade
If you are just randomly trading what you like with no real underlying system, method or planning then unfortunately your odds of success in the long term are slim. Trading a winning methodology is what creates an edge in trading.
Consistently trading a robust system or methodology enables you to trade in a way that historically wins, controls risk, and does not bring your ego and your emotions into your trading in a destructive way.
Ten questions to ask yourself before every trade:
- Does this trade fit my chosen trading style? Whether it is: swing trading, momentum, break out, trend following, reversion to the mean, or day trading?
- How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital?
- What is my risk of ruin based on my capital at risk?
- Why am I entering the trade here? What is the trigger to trade?
- How will I exit with a profit? A price target or trailing stop? (more…)