How I trade: trading concepts to profit from the markets
|A money-making machine?|
Investing can take a completely different approach from trading, like buying stocks for their cash flow (from dividends and selling option premiums for example) or real estate for the cash flow (from rent) instead of (only) for the capital gain of the asset.
Trading is about buying low and selling high, but also about selling high and buying back lower. This is something I do actively. If you are more into investing, then stick around as well. Many of the trading principles that I will discuss also apply to investing. And nowadays to be a successful investor it helps to approach investing like a trader.
I believe buy and hold is a dead strategy. Trading the way I do is at the other end of the spectrum, but it will help you as an investor to shift your mind into this direction. And maybe you will discover that it is fun to take a trading approach in your investing or even start trading yourself. You can trade small next to your day job, other investments or enterprises.
I do not trade 100% mechanically, so I cannot give you a 1-2-3 step plan to follow without you needing to use your own intelligence, nor would I want to. I believe trading is a skill and a way of thinking. I will do my best to explain how I trade by explaining what things I have learned. But first I will recap the why, what, where and the tools I use for trading.
What motivates me?Remember the first question you need to ask? Well, you need to keep asking it yourself. For me, trading is a mental challenge. It is a problem I need to solve. I need to see if I am able to do it. Why should only Wall-street people be able to make money from the markets? I have a firm belief that anyone with half a brain and the willingness to put in the work, can become a successful trader and investor.
As I am becoming more able and confident in my abilities as a trader I am starting slowly to look ahead at what may be possible in the future. First of all, I love helping others find their way. That is why I am sharing as much as I can on this blog. And maybe I could even write a book on the subject. And if I really feel confident I may even trade other people's money. I am not there yet, but what motivates me is the vision I have that one day I can make a living trading my own account, teaching people how to trade and trade other people's money.
All these things will mean I will be an independent entrepreneur. No more 9 to 5, no boss. Just me and some friends /students/followers making a living together. So every time I have a losing trade or even a losing streak, I see this as an opportunity to learn how to be better and my vision keeps me motivated to move forward.
What will I discuss?I trade foreign currencies and CFDs on indexes, bonds, and commodities. I do this with the broker Oanda using their fxTrade platform. The methods and techniques I will show you can also be used on other asset classes like stocks, ETFs, bonds, futures, and options. Do keep in mind that each asset class has its own particulars like market hours, order types, regulations, etc. Please check out the what to trade article for an in-depth discussion of asset classes. In the coming articles about how I trade I will only discuss the points relevant to Spot Forex and CFDs. Also whatever I explain can also be done with other tools, like the trading platform MT4, CTrader, etc. Please check out the tools of the trade article to learn more about tools to use.
I am a price action trader
|I trade price action|
The way I trade is, I look at the price and based on historical prices I try to figure out the probability of a future trade. This is a technical approach to trading. I incorporate the following concepts into my trading and I will highlight them here and will explain them in depth in the following articles:
- Support and resistance
Areas of support and resistance are areas where price reacts as it approaches, hits or passes the area. There are basically three reactions possible: price reverses, stalls or continues / accelerates. I map out these areas on my charts and plan my trades based on them.
- Japanese candlesticks
I use Japanese candlesticks on my charts. There are many different chart types. Candlesticks are probably the most popular way of plotting prices on a chart as they provide a lot of visual information on how the price has been behaving during the time that the candle has come into existence. If you look at for instance a daily candle it tells a story of what the market did during that day. It shows if the price went up or down, if there was a lot of volatility, if the market was decisive or indecisive, etc. Also, combinations of candles can tell a story of what happened in the market. It takes a lot of practice and experience to read the market like this or in any other way. It also requires some imagination and thinking.
- Price patterns, price behavior, and order flow
When I trade I take into account the traditionally known price patterns. Maybe you have already heard of them. Here are a few common price patterns many traders look out for:
- double tops and bottoms
- head and shoulders
- flags, widget, pendants
When I see patterns like this, I never just trade them, but instead, I try to understand what price behavior they represent and what is the order flow behind them.
- Price trend types
There are only three types of price trends. Markets are either trending up, down or are not trending and are moving sideways. Still, it is sometimes difficult to know in what direction prices are moving right now. Looking back it is easy to see, but right now is all that counts. There are some basic principles that describe trends and I use these to help me understand in what direction prices are moving.
- Risk reward, money management, and position sizing
When I finally understood this and applied it, I stopped losing money in the long run. I say: in the long run, because I still loose on individual trades, but over large series of trades, I either break even or profit. The interesting thing about these principles is that they also apply to non-trading business. It is all about assessing and managing risk first and not getting in over your head.
- Moving averages and the Ichimoku Cloud
I use moving averages as indicators to guide me in my trading. Moving averages smoothen out price moves so it is easier to see where the price is heading. Also, price tends to react to the moving average similar to what it does to support and resistance areas. I also look at a Japanese 'system' of moving averages called the Ichimoku Kinko Hyo. I have found it to show support and resistance areas quite accurately. I do not trade moving average crosses or anything of that kind.
- Tenkan trading
My favorite trading method is what I call tenkan trading. This is a way of entering on possible reversals in price that allow for low risk in comparison to the possible reward. I have started naming this kind of trades tenkan trades because in my mind they are like a movement in Aikido, which is called tenkan. I have been a lifelong Aikido practitioner and I hold a black belt in Judo and Aikido. Tenkan is a Japanese word. Now, my Japanese is bad/non-exisiting, however, I always understood that the word tenkan can be translated into Pivot. And this is exactly what this method tries to do. It tries to get in a position opposite to the latest price movement at the exact moment that price starts to pivot and changes direction. Not every trade works out, but in the long run, I have made money doing this.
- Trading psychology and mindset
I am only human, I am no machine, let alone a money-making machine. So when my money is on the line, it affects me. It affects the way I think and the decisions I make. This is not only true for trading, but it becomes particularly evident when you are trading. So I have rules. Rules that keep me sane and protect me from making decisions I will later regret.
So what did my way of trading bring me this year?
|My Trading Results|
Well, it brought me profit, but unfortunately not yet the consistency I am looking for. The year is not over yet but currently, I am up about 9%. That may seem great, but I have been up almost 30% and I have been slowly losing money since July. It is my money management rules and trading psychology rules that have prevented me from giving everything back to the markets that I had earned. After summer I started to implement a second trading method next to my Tenkan Trading method. I have been losing consistently with this second method, although it looked profitable in backtests. So I will be using the holidays as a time to consider whether I should discontinue this second method. I will surely not explain this method as long as I have not been able to trade it profitably.
In the next article, I will go into how to trade with support and resistance.
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