Another issue is traders do not understand
the product they are trading. They are
unaware of the fundamentals that impact the
product which impacts their potential to
profit from trades or cut losing ones early
when fundamentals change. Correlations
between various products or asset classes can
also be very useful for this. If a trader is
trading a contract such as the S+P its useful to
know the companies that impact the index
the most. I always suggest learning the top 10
companies or make a list of the top 10%.
Imagine holding a long position and positive
news breaks regarding one of those
companies. It provides you the insight to add
to your long position or remove your sell order
as there is probably a lot lore profit to be
taken from that trade! Alternatively, if the
news was a negative it would give you the
opportunity to exit your position early or even
revers it!
Why Most People Fail at Trading!
When day trading, if you are considering
taking on a position near the day’s high or low
it is necessary to analyse regarding where to
place your stop loss. It may be due to your
risk/reward ratio that by entering a trade too
early you will be stopped out at or near the
current high or low. This should be avoided as
the level may continue to hold. It should
require that the existing high or low to be
broken to trigger your stop loss, therefore, it’s
important to calculate this BEFORE entering
the trade as there is nothing worse than being
stopped out at the high or low of the day!!
Risk/Reward Ratio for short-term trading and
how to build a position.
As a pro trader, when I am considering a trade
and identified my entry price, the first thing I
do is calculate where to place my stop-loss as
then I can assess if I can afford to take the
trade on. How much will I lose if I am wrong!
Once I have established this I analyse where
the market may get to in my favour and if this
is at least twice as much as the possible loss
then I will take the trade on, if not, I will not
execute the trade as my minimum
requirement is 2:1 for my risk reward.
Sometimes I may have to settle for a little less
and other times if I sense there is more profit
in the trade, I will move my take profit higher.
I believe in building positions and exiting the
position in similar manner. I deal in zones
rather than an exact entry price. First, I will
identify where the support or resistance is and
then enter some orders just ahead of that
price. If I wait for the perfect price, I may be
disappointed as it may get close but then
rejected before I manage to get my position
on and then that is a lost opportunity.
Therefore, I prefer to break my orders into 3
levels. Let’s imagine my support level is 33. I
will enter buy orders at 38, 36, and 34
providing me with an average purchase price
of 36 if I manage to buy all three levels. I am
prepared to lose 8 points on the trade and
therefore I place my stop-loss at 28. If it is $5
per point and I buy 5 contracts at each level,
then I would lose $5 x 15 x 8 = -$600. If the
market turns and moves into profit,