April 28, 2020 The ABCs of Trading the Financial Markets

Some rules that need to be followed when trading financial markets.

It is absolutely crucial for a trader – whether they are just starting out or are experts in trading – to have a proven trading system behind them. Without this, success us never going to be achieved; at least not in an ongoing way. This system needs to be solid, it needs to be tried and tested, it needs to show that losses are minimised more often than not. It should also be trend-following as these tend to offer more successful outcomes. When you are using a trend-following system, there are some definite rules you need to follow.

The Ideal Entry

Traders who are beginning their trading experience might spend a long time – perhaps many hours over many days or weeks – hunting for the perfect entry point for their trades. When they don’t find it they become disillusioned at best and at worst they become completely overwhelmed by the sheer number of possibilities.

The truth is there is no perfect entry point. The best any trader can hope for is to identity a trend as it starts. If they can do this, there is much more chance of getting in at the right point and finishing successfully.

Some of the patterns that traders should be looking out for include:

• double top
• triple top
• head and shoulders
• double bottom
• triple bottom

Each of these trends can be spotted on price charts. Also, if a trader is looking for a reversal they must first find the prevailing trend; it cannot be done otherwise.

Stop Loss Protection

When you are trading the ultimate goal is to make a return, but secondary to that is the idea of protecting your capital. If you can’t win, then at least you don’t want to lose – breaking even isn’t ideal, but it’s better than having your investment wiped out. This is why having a stop loss in place to protect your capital is so important. Your initial stop loss should be based on the reversal that caused you to take the entry point at the start.

That means, for example, that you would need an initial stop loss at the top of a reversal pattern if you entered a short trade in the market. If you entered a long trade, then the initial stop loss would have to be at the bottom of the reversal formation.

Take-Profit

Profit is the real proof of a successful trader, and it’s what separates beginners from experts. The more experienced the trader, the more they know that they should be keeping watch on the take-profit methods rather than searching for that elusive perfect entry point.

The best take-profit method, and the one that should give you the greatest profit overall, is a reversal in the opposite direction. Once the reason for the chosen entry point no longer exists, any possible profits are effectively locked in. There is a big drawdown associated with this technique, and that gives it a big disadvantage – plus the set up just isn’t frequent enough to rely on it completely.

The trailing stop loss is a popular take-profit technique. This way of trading automatically changes depending on the main trend’s direction when the market moves. It adjusts to keep everything in-line. Although the profits gained from this technique may be smaller, there is less drawdown to think about.

Setting pre-determined take-profit levels in order to set the profits and lock them in is also popular. It is possible to work out these levels in many different ways, one example of which is using Fibonacci levels. Again, this technique will usually result in a smaller profit, the drawdown is smaller and that is good for the trader’s psychological wellbeing.

Conclusion

If you want to trade in the financial markets you need a trading system that is solid and reliable. It should rely on trend-following techniques and have clear entry and exit points. There should also be a protective stop loss in place to protect your money. This is the same for forex and stocks.

It is also important to think about take-profit strategies and techniques. This will help to manage drawdown and will keep you trading with a positive mindset. You will be better able, in that case, to determine where the profits will come.

No matter what happens, keeping your capital safe is paramount; you will always find more trades, but once you run out of money, your trading career is over.

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