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Trading Logic – The Key to Making Huge Profits Fast
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Article
Trading Logic – The Key to Making Huge
Profits Fast
If you trade any financial market, you will be aware
that the majority of investors simply don’t make money.
It’s not because they lack trading ability – investors don’t
make money because they don’t understand trading logic.
A focus on trading logic is essential for any trader who
seeks to make money. Forget, opinions and emotions, and focus
on the reality of the trading environment - you can then apply
trading logic, to make huge profits consistently.
Here are some observations of trading logic, and how you
can use them to your advantage.
The Market Price
Firstly, before we look at anything else, we need to look
at what moves financial markets:
Supply and demand (fundamentals) + Investor perception =
Market price
Therefore, prices are determined not just by supply and
demand - but also by people. So, what does this trading logic
tell us? - Predictive theories don’t work, but odds theories
do work.
There are lots of theories that claim markets move to a
scientific theory - this isn’t true - if they did, then everyone
would know the price in advance - and there would be no market!
Correct trading logic tells us that while we don’t know
exactly where prices are going to go, we can calculate the odds
of a move - by studying price history.
While human nature is unpredictable – driven by the emotions
of greed and fear, there are patterns that constantly repeat
– and this leads us to technical analysis.
Human Psychology Repeats Itself
Trading logic tells us that human psychology repeats itself
- because we can see it in charts.
Although there’s never a perfect scenario, we can calculate
the odds of success of a trade - based upon what happened in
the past. Therefore, by using a soundly based trading method,
we can make money - over time.
Day Trading V Long Term Trend Following
From the above, trading logic tells us that day trading
is futile. Why? - Because human nature is very unpredictable
over short-term time spans. Human nature only becomes predictable
over long-term time spans. Look at any currency, (or any financial
instrument over time) and you’ll see long-term trends - and
they’re the ones you need to focus on.
Emotions are a Trader’s Worst Enemy
Traders hate to trade alone - they constantly seek opinions,
and success, from someone else. As the bulk of traders get it
wrong, they step into the trading majority and find themselves
caught up in a losing mentality.
The only way to trade successfully is in isolation - using
trading logic to look at the facts, not what others think.
Trade Entry and Exits
Trading logic tells us that market timing is futile. Why?
Because you cannot predict - and that’s what market timing tells
us to do. Therefore, you should follow market action - rather
than try and predict it. This means leaving top and bottom picking,
to the losing majority.
Money Management
As we’re playing an odds game, money management is essential
– we must be constantly trying to preserve our capital.
If you lose 50% of your capital, you have to make 100% on
your next trade, just to get back to even - so try not to lose
money in the first place! This is of course difficult - and
involves doing two things:
1. Only trading when the odds are heavily in your favour
- and in many markets, this means trading only a few times a
year.
2. Taking enough risk - so you aren’t stopped out of your
trade, by normal market volatility.
Risk and Reward
Trading logic tells us that risk is a combination of the
following factors:
Market volatility + Trading methodology + Money management
= Risk of trade.
This complex interaction is much more than setting a stop,
or allocating 2% of capital to a trade - which is the way most
traders view it. It involves seeing risk in a different light.
Some trades you make may look risky - but if you have balanced
the equation correctly, the odds will be on your side.
Trading Logic
There are many other examples of trading logic, that we
can look at - but the above covers the most important areas.
To make money, you need to see the markets, and their behaviour,
as they are - not how you want to see them.
Don’t make the same mistake as the majority of traders.
Instead, think logically, and without emotion - and it will
lead you to huge long-term gains.
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