In this thread, I hope to explore one of the most important questions that any trader should be asking:
- How do I know what good and bad trades look like?
- What does a lagging indicator really tell me about the market?
- What makes a leading indicator different and when can I trust it?
- Am I trading "on purpose," or "just to make a profit?"
- What does success as a trader really look like?
- Can I really go from $5k to $100+m as a private individual trader?
- Trading a lagging indicator, just because it is there!
- Trading a lagging indicator, just because divergence was present!
So, what's left to trade?
The trusty Leading Indicator!
- When you trade a leading indicator, you are actually trading that which can be mathematically derived as having a specific probability ranging between low, medium or high.
- When you trade a leading indicator, you by definition will always be in position before the market.
- When you trade a leading indicator, you by definition will always have probabilistic control over your risk, because you will always have a clearly defined stop level that is not merely guessed at, but probabilistically derived as a key component of the indicator itself (built-in risk control).
- When you trade a leading indicator, you are by definition taking a contrarian position with respect to lagging indicators.
- When you trade a leading indicator, your results are immediate with respect to the time-frame selected (one of my favorite bi-products).
First, what does a good trade look like? Simple, a good trade is any trade in which the trader walks away without losing capital. But, a good trade, while never a bad trade, is not always an optimal trade and optimal trading is what separates the men from the boys and the women from the girls.
So, what does a bad trade look like? Even more simple. It is one where the trader walks away with less trading capital than they had before they entered the position. Losing capital is never fun, but hey - it is going to happen, even to the best traders. But, a losing trade, while never a good or optimal trade, should not ever become a catastrophic trade where irreparable damage is done to either the trading account, or the trader's psyche.
So, clearly, the key to successful trading, is to make more optimal trades, than bad trades and zero catastrophic at any time. Doing that, places the trader on the correct side of the equity curve. But, how? How is this accomplished in a world of Bucket Shops, unreliable trading platforms and an apparent failure rate of nearly 95%! Seems like a very daunting challenge, but success is not merely wished for, it is planned and strategized as a matter of routine business for the wise trader.
The key to long-term trading success, is to consistently link good trading decisions with good money management, without becoming jaded or allowing ego to push the confidence level to the point of psychological disconnect from the realities of calculated risk. If you can manage that bundle, then you can be a successful trader, long term.
On my next visit to this thread....
- Defining the scope of a good trade
- Managing the psychology of a bad trade
- Creating a path towards growing capital on a routine basis
Until then, take a look at this video but be sure to lower you speaker volume (warning!) to something you care withstand without driving yourself crazy. The key to using leading indicators is to understand that come and go in the form of patterns, dependent upon the frequency of inputs into the market at any given time. Change the frequency, alter the emergent pattern of the market and vary the trade expectations.
The thing to understand here, is that embedded within the dense fog of what appears to be random market chaos, there resides a very structured universe containing many different patterns that repeat with varying degrees of regularity and uniformity. Failure to understand this phenomenon about the markets, is failure to optimize good trades. And, after all, it is the optimization of good trades that lead to long-term trading success.