Imagine that you are a doctor and a patient visits you. Instead of conducting a full check-up, you just put the person on the table and start operating. This doesn’t sound good, does it?
…well, neither does trading without any analysis.
The thing is…we may choose between thousands of different ways to start trading, but there are always a few crucial points to consider. We have all heard stories about people who approach trading as if it were gambling. They rely on emotions, luck, and intuition to determine the future of their finances. However, although this method is wrong and dangerous, what do you believe is the missing component?
If you just took a coin and chose the head as a sign to go long and the tail to go short, you would have a 50-50% chance of succeeding, right? Well, it depends. With knowledge of the market and indicators, a developed toolbox, and proper analysis, this ratio would immediately change.
We need to have a clear idea of where we are going to set our take profit and stop loss and what our risk-to-reward ratio is going to be. These points cannot be determined randomly. We need money management to know how to manage any trade, from entry to exit.
Many professional traders will condemn any vague, unclear approach because, as traders, we can have a much greater chance of winning with the precision and clarity that come with knowledge, analysis, and money management.
No matter which strategy you apply in trading, money management should come first. Calculate your risk properly and do not let the trade run loose.
Traders may prefer lower or higher time frames, trying to make the most out of the chart analysis. Technical traders are going to rely on different tools to gather information about the market. However, to know whether you should enter a trade or not, you can do the naked chart reading as well and still know exactly what you should do to succeed.
Naked chart traders do not use algorithms but focus on what candlesticks are telling them about current market activity. Although these traders do not use any indicators in this case, they still need a developed skill set to generate wins and limit losses.
As naked-chart strategy requires traders to interpret price action signals, they need to determine the overall market direction and read various patterns. Indicators may not be relevant in this trading approach, but managing one’s emotions and attitude is as important as in any other trading style.
Some aspects of trading are universal. Whether you are a technical trader or a naked-chart one, you will need to learn to analyze the market and yourself.
We know how the trading world offers abundant possibilities. Needless to say, trading comes with its own set of risks. That is why some affluent people are keen on seeking advice from experienced traders to ensure a good return. Nowadays, we are also seeing a rise in automated trading (i.e. expert advisors or trading robots) that aims to alleviate the entire trading conundrum and achieve profit without breaking a sweat.
With this approach, traders are free of having to manage each step of the trade themselves. They, however, need to invest in this ready-made system and, preferably, consult with a trading manager as well.
Now, regardless of any easing that comes with purchasing EAs, people still need to understand the strategy that their robot is using. These traders may not be complete or independent, but they must analyze how the EA they chose works.
You may not care about who is running the state or which report is coming out next, but you still have the task of realizing how you are going to manage a new trade. How do you know that something is a signal or not? How are you going to tell if you are in an uptrend or downtrend? Which strategy brings you the best results? The questions may go on and on, and you are the only one who can answer them.
Based on everything we said above, there is no trading without some form of analysis.
To earn a profit, you need to know the key points in your trading, including your maximum risk and potential reward. What is more, earning a sustainable income should also push you towards understanding what triggers you to behave irrationally. For example, your leverage may be too high or too low, but without assessing the whys, you cannot progress any further. Any algorithm you develop can also help your trades run smoothly and prevent future losses.
Some professional technical traders will say how trading is based on three key concepts – money management, trading psychology, and technical analysis.
Now, even if you are not a really big fan of indicators or prefer a different approach, you need to build experience, as it will help you eliminate future mistakes and manage your emotions better. Yet, to get to the point of having a comprehensive perspective of your personality and the market, you still have to carry out thorough testing.
You need to see in advance if your chosen strategy is going to yield results. And, even if it does, you might react differently once you start investing real money. Try to obtain a 360 vision of everything – the market, your involvement, and any tools you may be using.
This is why, whichever time frame or strategy you are using, you need to backtest, forward test, and real-life test your system.
Imagine a situation where you finally started making money, but you suddenly, out the blue, take a few really bad losses with the price hitting your stop loss.
What do you do?
You must assess what went wrong – was it emotions, technical analysis, or something else. How can you improve your trading without recording what you were doing? The only thing that matters at the end of the day is the bottom line. Compare your total wins and losses and see if there are any loose ends.
Trading is more about protecting your account from losses than about sole winning.
You can always use a demo account to see how your approach is working out for you. Any trader with experience will advise you to take notes on every trade you take, including all entry and exit points, indicator settings, and other key information concerning the trade.
Personality tests are also an invaluable tool for traders to get the gist of some negative beliefs that are deeply rooted in your subconscious. You do want to know if there is a part of you that is blocking your prosperity and growth. Finally, understand that whichever approach you take, trading is all about analysis, of yourself and what you do.
You are free to make your own selection of your trading style or even entrust a trading robot with your finances, but do not for one second believe in easy money with no involvement on your side.
Your trading is like a flower bud – you need to devote time, effort, and energy to see it grow, and bloom. Sometimes, you will use less water and more fertilizer to accommodate the changing seasons, but you will always be present, monitoring the development from the seed to the full-blossom stage. If you wanted to take yourself to the next level, you might consider attending a florist competition. That is when you would further build your skills and might even learn how to cut and decorate flowers.
Still, the one thing that connects all the different stages of this process is analysis. Some people are blessed with a green thumb, so they know intuitively what to do to help the flower grow. However, to be an expert, everyone needs to include a detailed assessment of factors affecting their success in their chosen field.