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Guidelines for Successful Trading

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Introduction

To achieve a successful trading profession is more than a couple of good trades, and a fancy template in the trading platform, nor a social media trader’s fashioned lifestyle.

In this educational article, we’ll present a set of guidelines to aid in building a successful trading plan.

The Right Trading Mindset

Trading in financial markets must be understood as a decision process, which, when developed systematically, tends to provide consistent results.

Robert and Jens Fischer, in their work “Candlesticks, Fibonacci, and Chart Pattern Trading,” define a list of rules or guidelines that can aid investors in its decision-making process. These guidelines are as follows:

Self-knowledge 

If the investor feels uncomfortable when it is in the market, this could be indicative of an incorrect positioning in terms of position size or market side.

Ego by a winning streak

An increasing ego encouraged by a winning streak, especially in the first trades, could drag the investor toward huge losses.

Hopping when things go wrong 

Many traders tend to let run the losses expecting a market reversal to the trade direction, and they usually close a winning trade too soon, with a small profit (fearing a loss), which is a recipe for disaster. To solve this issue, traders must plan every trade in advance,  with a pre.defined stop-loss and profit target before opening any trade.

Losses are part of the business 

Investors must be aware that it is impossible to have 100% of winning trades. 

Avoid Martingale position sizing

The increasing the size of the position when the market and the trade moves against you is the path to bankruptcy.

Trading systems could fail

There is no trading system that could provide 100% of winner trades. However, losses will increase when the investor jumps from one system to another. Each strategy has its advantages and disadvantages. The profitability of any trading system will depend on the market conditions, and the investor must learn to live with the potential risk of his trading system.

Diversify the risk

Independent of the profitability associated with a trading product, the systematic diversification of risk could give the investor a smoother equity curve growth than when considering only a single trading asset.

Making Money by trading is a long road 

The consistent and profitable trading in financial markets is the result of a systematic work taking months or years where results obtained can confirm the rentability of each trading system.

The importance of a trading plan

Successful trading is not to make money quickly; it is related to the capability to make profits consistently long term, independently of changing market conditions.

A comfortable trading strategy

The trading strategy must provide the investor with similar results in real-time than on paper-money or in the back-test mode. If the approach does not offer the same results in real-time, the methodology must be revised.

The importance of discipline

The most important characteristic of successful traders is discipline because they limit their decisions to their established trading methodology.

The Importance of Number Three

In the financial markets, there exist a vast number of ways to analyze it technically, for example, chartist formations, Elliott wave, or candlesticks patterns. However, those ways to analyze the market have in common, and it is number three.

  • In Elliott wave analysis, when the price moves in a trend, this develops three movements in the primary trend’s direction. 
  • The most popular chartist pattern known as Head and Shoulders has three tops (or valleys) and two valleys (or tops.) When the price reaches its third valley, the price action tends to break below the previous two valleys and continue a downward (or upward) sequence.
  • An ascending triangle corresponds to a continuation pattern, in the bullish case, three valleys, and two tops. When the price action touches by the third time the top, the price surpasses the previous two highs and continues its earlier move and continues its primary trend.

In the following figure, we observe a set of patterns that follows the characteristics of “three.”

 

Conclusions

In this educational article, we presented a set of guidelines to develop a trading mindset that can support a profitable trading methodology along time.
We also exposed a group of chart patterns that correspond to a simplification of three moves, which could support the analysis and generation of trading opportunities in the real market.
In the following article, we will present the basic principles of a trading strategy.

Suggested Readings

– Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons, Inc. (2003).

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