The Psychology of Trading and Buy/Sell Signals
“There is only one side of the market and it is not the bull side or the bear side, but the right side.” — Jesse Livermore
The only way to profit from stock/currency, even if the value of that stock/currency is really high, it is by buying and selling at the right time. Every trader has a different motivation of buying or selling. One of the most logical reason to buy a stock/currency is because you think that will help you make money. On the other hand there are plenty of reasons why you sell a stock/currency. It can be because you need cash, you think that the price of that particular stock/currency will go down, you want to invest in something better, some news you heard about etc. Everyone who takes part in the market has one single motivation: to make money, whether that is a big investor, an experienced trader, a day trader, growth investor, trend followers, it’s simple, they want to make money.
Patience, control over losses, risk exposure are some of the most important things, a good trader should have. If traders can control their risk and position sizing they will hardly suffer drawdowns. It is believed that over 90% of active traders in financial markets do not make profit in the long-term. A great number of errors that traders and investors do are emotional ones. If you want to profit, the first thing to do is stop buying or selling without a strong reason. A trader with too much pride will not understand the need for exit signals, pride keeps a trader in losing position just because he/she doesn’t want to admit they are wrong. One of the most expensive things a trader can do is not taking profits at their target as the market reverses. Your trading plans have to disallow your greed, by having a strategy to take your profits when they are available. One of the worst thing you can do is to predict what will happen next. That is completely a waste of time and also energy, so traders and investors must have a pre-set price that will stick to, so they can realize they are wrong and change their course, instead of losing money. The point of having a signal, is to have an external event that forces you to change position in the right direction.
Trading is about putting the benefits in your favor with the best entries for the market that you are investing in. Your buy and sell signals are only one third of your trading, you must have the discipline to understand your signals, and risk only a small amount of your total trading. Entry signals are useless unless you are willing to take them. Every trader must have the skill to accept a loss, when they have been proven wrong. Another big mistake new traders do, is trading to large due to overconfidence. Each position size must be inside the range of how much you are willing to risk on any trade. Great traders have an average returns of about 20% a year with drawdowns under 10%. So firstly understand your goal for returns and then work on a system that will help you create those returns. An important thing to know and to always remember is: Do not get out of a trade until your signal tells you to, but when it does, then get out!
The cost of doing business as a trader is commission costs, which means that if you are a day trader, you have to calculate your potential round trip commission cost for a day, weeks and months. Your type of trade signals will tell you how much time you spend in front of the computer everyday. A day trader may need to look at the screen all day waiting for his signal. Swing traders may trade once every few days or weeks, and so on. The important thing is to create signals that you are able to take with your current life commitments. Trading has to fit your personality, it is not about good habits it is also about loving what you do, so you need to find a methodology you are passionate about, one that you are willing to give your time too.
An important thing while building your own signals is, knowing that there is no one solution that fits everything. Some indicators that can help you on building your buy signals are: moving averages, price, price versus previous day’s highs and lows, chart patterns, trends, candlesticks.On the other hand price targets, trailing stops, ATR stops or time stops can help you on building your selling signals. As we have mentioned earlier signals are only one third of your trading system, the other two thirds, risk management and your psychology are more important. The most popular system for stock market participation is buy and hold investing. But the problem with buy and hold system is the huge drawdowns during bear markets and financial crisis that can stay underwater for a long long time.
One must be care when trading. Also to avoid impulse buying.