Trend Trading can be the most lucrative type of trading there is, the trader that is able to manage their position and emotions will be very successful.
#1 Forget the News and Trade What You See
You need to trust what you see, price and chart patterns are accurate reflections of the underlying conditions and fundamentals. You cannot have sustained price trends without supporting economics and fundamentals but these days with 24 hour a day news and amount of instant information available on the Internet its very easy to lose focus as to whats important and whats really important is PRICE.
Ignore the day to day noise from all the “News” like Unemployment reports, ISM, Home Builders etc, those things will scare you out a great position or worse take a position based on them and wonder why you are losing money. Those reports are not going to change the underlying trend of the market. The market is never wrong, so if you see a pattern of higher highs and higher lows the trend is up! Trust that and ignore everything else.
#2 Don’t Put Too Much Stock in Market Correlations
You will see days when the US Dollar is weak and the market is up or interest rates go up and the market is down. Correlation is not causation, meaning that one does not cause the other, it may just be a coincidence. It is not the basis for a trading strategy
Just as soon as everyone is noticing the supposed correlation, it will change. People and markets change and so will the correlations you see. So forget trying to outguess the market based on yesterdays correlations.
#3 Don’t Over trade or Over Think a Position
The temptation to exit a trade too soon and take profits will be overwhelming. Managing your risk is one of the most important skills you can learn. The temptation to ignore it to try and make more money is some you must learn. Successful trading will force you to look inward and face your fears, and do things that are counter-intuitive.
One of the hardest things you need to learn is to sit tight and do nothing when you have a profitable position. Just let your profits run until it becomes obvious that its time to cash in. Have a set place where you will take profits if the trade starts going against you, then move it up as the trade continues in your favor.
This way you will not need to look at the trade every few minutes to see how its doing. Do not search out articles to support your position or worse look for reasons to take profits. If you can learn to just sit tight and let your profits run, you are well on your way to becoming a successful trader.
#4 Buy Corrections in Up trends and Sell Rallies on Down trends
This one of the most important rules for the successful trader. No matter how strong the trend, there are always intraday or intraweek corrections that provide opportunities for the trader to open a position or add to a position. Many times these reactions will be as a result of some bit of news whether company specific or a general economic report that came out.
It helpful to know when the important economic reports come out and be prepared to take advantage of a reaction as a result of short term trader getting scared out of a position. Use these opportunities to buy the dip or sell the rally.
#5 Don’t Try to Pick Tops and Bottoms
We want to feel smart and think we can pick the top or bottom of a move. More often that not prices will continue in the direction they were going. A trend will tend to continue much longer than anyone thinks. Don’t try an pick the exact high or low, its a fools game and more money has probably been lost trying this than anything else.
It seems like its a low risk trade but if you keep losing money on low risk trades you will still go broke! Professional traders do not do this, they just try and get the “meat” of the move, typically the top third of the move because trends ten to accelerate near the end and thats when the most profits can be made in the shortest amount of time.
Professional Traders rely on trends or momentum in their trades. There is typically lower risk with a momentum trade than with a top or bottom picking trade as you will have the trend in your favor. Buy Low/Sell High is good advice BUT better to Buy High and Sell Higher.
Please see my reviews on recommended Stock Picking Service Newsletters:
Dan Zanger – Chartpattern.com Review