Trade Smarter, Not More

One of the most crucial aspects of trading I have learned over the last 8 years is knowing when “to sit on my hands.” Trading isn’t about taking as many positions as possible, but rather it’s about taking high probability trades. Probability plays a big role in trading. You can have the best risk:reward ratio on a trade, but if the probability of success is very low, all your effects are likely wasted…like buying lottery tickets. Trading is about discipline and only taking trades which have a high probability of success. That doesn’t mean you won’t have losing trades, you still will. But by putting as many factors on your side before you take a trade, you’ll be trading smart…and smart traders are more likely to succeed than traders who just make random trades hoping to hit a winner. Here are some strategies for being a smart trader.

Trade with the Trend

Trading with the trend is an overused phrase, and unfortunately that means many traders don’t utilize this information effectively. Many traders know they should focus on making trades in the same direction as the trend, but two key problems arise when they attempt to follow this.

  • They wait too long. A trend, especially intra-day ones, are likely to reverse by the time you feel “confident” about the trend. Therefore, you need to act on trends early, as these are the high probability times to trade.
  • No realizing that a trend has actually reversed. A trader thinks they are trading with a trend, but actually they trading against the trend since the trend has shifted.

Trends move from up to down to sideways, and therefore it is crucial trades understand which phase is occurring. Understanding trends is therefore pivotal. While the concept is basic, few traders understand the ebb-and-flow of trends. Capitalizing on Lower Highs and Higher Lows and Trading the “Mini-Channel Breakout” provide some methods of staying on the right of the trend (at least most of the time) as well as some information on trends.

Utilize a Trade Trigger

In order for a trade occur, something that you recognize should be occurring. Once you see a price pattern you know–that typically results in another type of behavior, such as an asset rising or falling–you should utilize a trade trigger to initiate the position. Examples of triggers include: a breakout, a move past a certain price, or a pattern completing such as a candlestick engulfing pattern.

Each strategy you use may have a different trigger(s) based on what works for the strategy. The benefit of a trade trigger is that it forces you to act. When the market creates your trade trigger, you don’t need to question when you will make the trade, you do it right then. If you don’t have a trigger you may wait too long, or make a trade too early before the market has given you adequate evidence of what it is likely to do next.

By having a trigger you are forced to wait for viable signals, because your trigger should be based on a sound strategy and the trigger doesn’t occur unless there is a good trade-setup for the strategy.

In Capitalizing on Lower Highs and Higher Lows I provided a trade trigger for that specific strategy; it involved a breakout of a small range. As soon as the price broke the range we were watching, a trade was taken. Lines were drawn to provide an exact price for our entry. Figure 1 shows an example of this type of trigger.

Figure 1. EUR/USD 15 Minute Chart – Trade Trigger

figure 1

Find Your Trading Balance

My tendency is to over-trade, especially if I am day trading. For others though, it may be to under-trade. The former is when you make trades which aren’t based on any sort of trading method or strategy–you are basically trading just to trade. Over-trading often occurs out of boredom. You are watching your screen and waiting for a good trade setup, but lose your patience and just start to hit your buy and sell buttons.

Under-trading on the other hand is when you are too hesitant to make the trades you should be making. If you have a strategy but don’t consistently apply it out of fear, likely you’re under-trading your strategy and not seeing its (or your) full potential.

The key here is to first establish a set of rules you will trade by. Without some sort of guideline for how you will trade, all trades are shots in the dark and therefore there is no benchmark upon which to base your performance and improve.

With a set of rules in place, you then need to follow it.

If you over-trade, have some sort of distraction close at hand so you don’t make foolish trades when you’re bored. Play free money poker for example; something that lets you watch the market, but keeps you occupied so you are not wasting money on “boredom trades.”

If you under-trade realize that you have spent time working on your strategy (hopefully) and now it is time to trust it. If you can’t trust it, trade it on a demo account or “paper-trade” it until you are comfortable.

Final Word

Not everyone trades the same way, but there do seem to be common themes among successful traders. Namely, they can identify trends and trade with them. Their trades aren’t random; there is some sort of catalyst or trigger that initiates each of their trades. And finally, they use a strategy that they are comfortable with and follow it to the letter, not under-trading or over-trading it. If I am struggling in any of these areas, I step back and don’t trade until I have the issue worked out. Trading smart is not only about understanding the market, but also ourselves and our personal tendencies…and then being able to find a solution.