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Trading Lessons
The Smart Profits Report: Issue #349
Tuesday, August 29, 2006
Trading Lessons: Catching The Market Waves for Stress-Free Trades
By D.R. Barton, Jr.
Advisory Panelist, Mt. Vernon Research
While it’s easy to remember trades that evoked big emotions - where we snatched victory from the jaws of defeat, or struggled for a win against all the odds - it’s less easy to remember the more mundane winning trades. That’s because they’re so effortless that our mind tends to file them away as boring and uneventful. But just because they’re underrated doesn’t mean they should be underappreciated since they can teach us key trading lessons.
Easy trades happen for a reason - often times when a trading system or strategy gets us into a trade we believe in at the right time. The market then takes care of the rest. It’s just like riding the waves of the ocean: When it’s done right, it’s effortless.
Last week, I talked about the great time I had body surfing at Myrtle Beach recently, and looked at some of the analogies between surfing and trading. We continue this comparison today, focusing on how to apply “wave” logic for easier trading success.
Catching Market Moves the Easy, Low Stress Way
I believe the ease with which I catch a wave has a direct relationship to catching a great, easy trade. The key to the best entry and an easy ride is in the three-step setup. First, I fight my way through the surf to get out to the optimum spot. I then wait for the proper amount of “pull.” Last, I choose a wave that hasn’t already started to break. If I do those three things, then catching the wave is pretty easy.
Getting in on a great trade is very similar. First, I need a workable plan that will help me find the best trade and entry point. Then I need to have the patience to follow it through. That way, I’ve set myself up to catch great, effortless trades more frequently.
Three Trading Lessons from the Waves
When catching waves, one of three things can happen - all of which can be applied to trading and teach us some lessons:
The Wave/Trade Goes Nowhere: The wave pushes me a few feet but I end up where I started. This happens when there’s not enough “pull” or if I have poor timing catching the wave.
- How to React: When this happens, I can either stick with it or I can bail out and go back to wait for another, better wave. Adopt this same philosophy to your trading.
The Wave/Trade Moves My Way Immediately: Obviously, this is the most desirable outcome. I hit the wave just right and ride it into the beach.
- How to React: Same logic applies to trading: Enjoy the ride! I’m not thinking about the last wave that didn’t work out, or the next wave that’s coming. I think our trading activities would be better if we could focus on the trade at hand and not worry about how bad that trade four days ago was, or about whether we would every get a move like this again. Stay focused in the moment to get the most out your trades.
You Catch a Poor Wave/Trade: If I catch wave too late, it can break on top of me and crash me down into the sand. Not pleasant. I’ve also experienced waves that intersect the one I’m riding from a different angle. This is usually generated by the wind. This contorts me and disorients me while slamming me into the sand. Even worse!
- How to React: These are the trades that figuratively knock us into the sand. How do you respond to trades like these? Do you get back up and calmly look for the next trade? Or do you sulk and play the “poor me” game? The most important thing to remember is that we all catch a bad wave or a bad trade. That’s part of the game. It’s how well we respond to those unpleasant episodes will dictate how well we play the trading game - and how much subsequent success we have.
Outside Forces Working Against Your Trading Plan
It’s these outside forces that pose the most interesting problem. In the financial world, your trading plan can get hit by any number of factors. For example, how well prepared are you for an unexpectedly early Fed rate hike? What about really bad or really good news out of Middle East?
Even a good trade can be punished for reasons that are outside of our control and current point of view. Make sure you visualize and prepare for the best and worst-case scenarios for all your trades, and it will help you overcome these events.
That’s it for this week. I hope your next trade is an easy one!
Great Trading,
D.R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- If you missed the first part of my message comparing body surfing to stock market trading last week, you can catch it in here: Smart Profits #347: Surfing the Markets: Two Ways To Combat Choppy Waters In The Markets.
- Speaking of waves and water, do you know what the options term “underwater” refers to? If not, find out in our handy Smart Profits Glossary.
Related Articles:
- Trading With Confidence: How You Can Develop More Confidence In Your Trades
- Understanding Option Trading: Cut Your Losses… And Watch Your Gains Run
- Portfolio Diversification: Falling In Love With Investments Can Cost You Millions
The Chart of the Week
The Russell 2000 Index, represented here by the iShares Russell 2000 Index ETF (AMEX: IWM) is in a major volatility contraction. Watch for a breakout to either side of the “triangle” being formed.
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