much better buy signal. You must have a quantifiable,
external reason to buy a
dip that puts the odds in your favor based on price action and not because you
hope something good will happen.
Fear is one of the internal trade signals that completely undermine a trader’s
ability to be profitable. There are two ways to be profitable, have more wins than
losses or have big wins and small losses. A high winning percentage system
should have wins and losses equal in size to make your system profitable.
Likewise, having big wins and small losses can allow even a small winning
percentage
system to make money, provided there are enough large enough wins.
Huge losses will make you unprofitable regardless of big wins or a high winning
percentage because you will give back your profits from your winning trades,
and eventually destroy your trading capital.
Fear can signal a trader to take a small winning trade while the profits are still
there before it disappears, making it difficult to have any big wins. Exit a trade
based
on a trailing stop, time stop, or because a price target is reached rather than
give into your fears. It can also make a trader miss a valid entry signal because
they are afraid of losing money.
Greed can believe in your entry signals too much and often wants to trade with
too much position size. Greed is confidence gone wrong. Each trade signal you
use should be designed
to put the odds in your favor, but even a great trade
signal is not a guaranteed win, it’s just a possibility with a good probability.
Many great trading systems only have 60% win rates. The key is how the trader
manages to keep the 40% losing trades small while maximizing the winning
trades.
Greed can also blind a trader from taking the profits off the table when their
profit target is reached. Greed for gains after the risk/reward
ratio has skewed
against the initial entry can lead to losses when a trend reverses. One of the most
expensive things a trader can do is not take profits at their target as the market
reverses, instead waiting for the price to recover after it’s too late. Greed wants
to trade big and stay in winning trades forever. Your trading plan has to override
your greed, control position size, and have a strategy
to take your profits when
they are available.
One of the cornerstones of my teachings is that emotions are terrible trading
signals. Emotions want to buy falling knives at the beginning of market
corrections and bear markets instead of waiting for the market to find key price
support levels. Signals are created to give you a quantifiable reason to do the
opposite of what your emotions are telling you to do.
Your trading success will be largely based on your ability to approach the
markets in a systematic way using a trading plan to utilize
profitable buy and sell
signals that fit your market beliefs and methodology. You need a good external
guide that you follow regardless of what your emotions are telling you to do.
Trade your signals and not your feelings, opinions, or emotions.
Reactive technical analysis versus predictions
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