| |
At Wave3,
we are always striving to learn and improve. We didn't know
the first thing about trading when we started. Infact, we weren't
trading at all. We just happened to jump into the market during
the strongest bull market in history. We were just plain lucky.
It wasn't until we built and lost two small fortunes
that we decided to really understand the complex world of financial
markets and the fine art of trading. The more we read the more
we understood that we really knew nothing about the markets,
how they are structured, how they operate, how they are influenced,
or how to trade them. Additionally, with just a little basic
digging on the Web, we came to realize that we had committed
every cardinal sin of trading over and over again.
The World Wide Web offers a multitude of cogent
information regarding trading, investing, money management,
research, fundamental analysis, technical analysis, mechanical
or computerized trading systems, etc., and we've studied and
applied a great deal of it. Our conclusions may surprise you:
1) Trading successfully, as with so many
other of life's endeavors, is really very simple. One
must master only a few basic concepts to make a profit. There
is nothing mystical or magical or lucky about it. Anyone can
learn to trade profitably. Having said this, it is important
to note that the vast majority of traders, estimated at 90%,
lose money. It's difficult to state exactly why. It could be
that most do not understand the basics of trading, but I think
it's more probable that they lack the patience, mental toughness,
and discipline to overcome their fear and greed and stick to
their strategy.
2) The most important aspect of trading
is money management. Again, the most important aspect
of trading is money management. Once again, the most important
aspect of trading is money management...drill it into your head.
So just what is money management? It is the practice
of balancing risks with rewards in an attempt to maximize returns.
More specifically, with sound money management techniques, we
can calculate our risks and expected returns, calculate the
size of our positions, limit our potential losses, and maximize
our profits. Of these, cutting losses is probably the most important.
Take care of the losses and the profits will come.
3) Becoming a successful trader requires
a paradigm shift in auto-psychology. In our opinion,
getting one’s mind straight is the second most important aspect
of trading. One must put his ego on the shelf, know when to
run with and against the herd, learn to accept being wrong (often),
conquer the fear of losing, exercise extreme patience, resist
the urge to hoard small profits, and have the mental toughness
and discipline to stick to one’s gameplan. Think it’s easy?
It’s not. No matter how you slice it, we’re still human, and
that is a real weakness in trading. Most importantly, there
can be NO WISHFULL THINKING in trading. Wishfull thinking causes
us to disregard the facts, and more often than not, this is
deadly. When you can enter and exit trades without emotion,
you’ll be on the right path.
4) A financial chart is a living representation
of all the psychological, emotional, fundamental, economic,
and political forces in play at any single point in time.
Apathy, frenzy, fear, greed, market manipulation, corruption,
supply, demand, insider influences, analyst expectations, P/E
ratio, earnings, debt, forward guidance, etc. are all represented
graphically by two fundamental indicators: price and volume.
Everything we need to know to form a trading opinion is already
represented in the financial chart. Considering this, we believe
that the ability to read and analyze financial charts, commonly
refered to as "technical analysis" is the third most
important aspect of trading.
5) Financial markets do not move at random.
Price moves in waves, alternating between trends and counter-trends
(consolidations) which are recognizable, repeatable, and often
predictable. These waves are fractal in nature, with smaller
waves inside smaller waves inside smaller waves, etc. Recognizing
that markets move in disecrete, orderly, often quantifiable
trends and consolidations is, in our opinion, the fourth most
important aspect of trading.
6) Developing and sticking to a proven,
robust mechanical trading system is the fifth most
important aspect of trading. There are as many systems as there
are individuals. We’ll show you several, but you really need
only one (perhaps two) preferably that you built, tested, and
trust. The key is to use your system consistently. Incidentally,
the coveted “Buy and Hold” strategy is not valid in today’s
market environment, unless you are prepared to hold for decades
and lose the majority of your capital in the process. Read our
tutorials in the How Price
Moves page to better understand why we think so.
7) Financial markets are driven much more
by psychology and emotion than by financial fundamentals or
news. We have seen thousands of examples of equities
rising well above any reasonable historical fundamental evaluation,
only to rise further again and again and again in a frenzy of
speculation. The same is true for stocks that fall and fall
and fall into oblivion. Additionally, we see no true correlation
between price movement and news or events. Infact, one of the
market’s favorite axioms in a bull market is “buy the rumor
sell the news”.
Our conclusion is that the study of financial
fundamentals and events, commonly called "fundamental analysis",
while certainly interesting and quite helpful in understanding
the underlying qualitative economic and presumed political forces
at play, provides no useful information regarding WHEN to buy
or sell. Only a well interpreted financial chart can suggest
this. Also, there is just no way we can understand what is going
on inside the heads of every trader and investor in the market.
Everyone has his/her own opinion. For every piece of
data or news event, there is a bullish or bearish way to interpret
it. That is why we concentrate on the charts first. They don't
have opinions. They only show facts. So now matter
what you THINK, no matter your OPINION, it is wise not to disregard
the FACTS. Consequently, in our opinion, fundamental analysis
takes a back seat to technical analysis.
8) There is a Holy Grail in trading,
but not in the form that most people will recognize or even
want to see. There is absolutely no way in the universe to know
or to predict exactly what the financial markets will do at
any given time. However, there are scenarios when the probabilities
of outcome are high and the reward/risk ratios are attractive,
and with some basic money management techniques to protect us
if we are wrong, we can find abundant opportunities to profit
consistently in the financial markets.
Each successful trader has their own Holy Grail.
Our Holy Grail is not foolproof. It is often wrong. It is not
a specific indicator, trading strategy, wave theory, chart pattern,
mathematical model, or voodoo ritual. It is a process, a philosophy,
a discipline, a business...a specific way of seeing the market
and acting within it. It leads to consistent trading profits,
which 90% of traders never achieve. That’s Holy Grail enough
for us.
9) Living life is much more important
than trading...you know, things like love, dreams,
faith, growth, family, friends, charity, and how you spend your
most valuable asset, your time. We really enjoy trading, but
also consider trading as a means to pay the bills while providing
a degree of personal freedom that we didn’t have before. Most
will not have the enthusiasm for trading that we have, and we
do not recommend chucking everything aside to become traders.
Our hope is to provide our opinions and hard lessons learned
to you so that you can hopefully grow financially, leveraging
our experience and know how, while you spend your time doing
what really makes you happy.
We hope the above observations are helpful to
you. Please take the time to dig further into the tutorials.
We’ll be updating them often.
|
|
|