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Trading 101

Trading 101: What Can You Achieve With Trading?

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You might be wondering what the heck is wrong with us to ask that question? Well, of course, people are trading for profits, right? The answer is way more layered than that and it’s much less obvious than a new trader would imagine. Also, believe it or not, answering that question is the first step towards success in the market. Why? Because in the long run, only conscious traders remain successful (or at all present for that matter…) in the market. Consciousness means knowing your long-term goals and acting upon a plan to achieve them. That implies knowing the possible benefits and dangers of trading. In this post, we will focus on the pleasant part of the equation, the benefits.

Trading as a Self-Awareness Course

When you start trading, whether or not you realize it, you are signing up for one of the most effective self-awareness programs. And by the time you are a seasoned trader, one thing is for sure, you will be more observant, objective, and self-conscious than ever. You could think that this is some kind of metaphor, but in all honesty, you will probably really have to change your way of thinking. Of course, everyone is different, and some people are naturally closer to the right mindset, but generally speaking most people are wired to lose money with trading.

Controlling your ego and suppressing your fear and greed is the name of the game. Trading requires simply looking at opportunities as they are, not in the light of your previous trades, your need for profits, or your fear of losses. The good news is that if you learn these skills they will be helpful in every part of your life, not just trading. It’s no coincidence that great entrepreneurs are way more often successful traders than the average. Objectively looking at options and choosing the best outcome is a universal skill, and one that all successful traders share; acquiring this skill should be goal number one.

Short-Term Profits vs Long-Term Success

Short term or long term?

That sounds nice, you might say, but when do you get to count your profits? For that, patience is required. Because knowing if you are successful in trading or not in the long run is simple—if you are making profits consistently in all kinds of environments than you are successful, period. Long-term the market provides this simple, yet very robust verdict.

The short-term evaluation is the tricky part. Are you having stellar winners, and virtually no losers? You must be the next guru you might think. In reality, that usually means that you are on a roll, or you have a lucky streak. Projecting those winners to infinity inevitably leads to disappointment and regret. This means that counting profits comes after looking at your trading in the light of your strategies and your trading plan. If you are sticking to them then you will be successful in the long run, if not you will most likely fail.

The Art of Losing

The art of losing money

A highly successful trader said that the most important thing that he learned in his career is losing. Losing trades are an inherent part of this business, and dealing with them is what separates successful traders from the rest. So, one of your biggest achievements for you will be to learn this art. Letting go of losing trades seems like a simple thing, but in practice, it’s probably the hardest part in sticking to a trading plan.

“It will come back…” “I will hold it until it gets back to even…” Sounds familiar? All traders experience the sensation when a trade goes negative and the ego switches into denial. Of course, sometimes you get lucky, and it really comes back, but the point is that you acted against your strategy and your plan. Taking small losses is a great skill; sitting out huge losses is not.

Acting on Probabilities

Sticking to a trading plan requires objective thinking and courage to face uncertainty. Besides of the skill of taking a loss, accepting that nothing is certain might be the other game changer for traders. Trading is a business of probabilities. That is very hard to the ego, as it means that you will have losing trades even with the best strategies and perfect discipline.

The problem with this is that people are generally “programmed” to avoid danger and uncertainty. Numerous studies show that even when the possible outcomes would favor a risky strategy, people tend to choose the safer, seemingly less risky way. Evolutionally this makes sense; if you have a little chance of a bear killing you somewhere then you would rather not go there, even if there are beautiful berries. In trading, this is a losing mentality.

Choosing the best outcomes (with the most probable profits) without listening to irrational fear will lead to success. And again, this decision-making process will be with you outside trading, driving you to more optimal decisions in work, business, and personal life.

Getting to Know the System, and How to Hack It

Hacking the system

When you are already capable of following a plan and do whatever is necessary, the fun part begins. You will start to notice patterns, familiar situations, and obvious opportunities. The financial system is huge with enormous amounts of capital moving every day from one asset to another. That opens up a vast number of chances for the individual investor to profit from.

For example, the technical trends that you analyze are often products of the capital flowing into an asset like a natural force. Would you step in front of an avalanche because it’s half way down the mountain? Would you trade against a trend because it’s already up “so much”? It’s basically the same thing. With trading, you can achieve the objectivity that is needed to jump into a long-lasting trend and stick to it as long as it lasts. Not standing in front of the avalanche, but actually surfing on it all the way down.

On the other extreme, you find scalpers, daytraders who are sometimes only in the market for a few hours, minutes, or even seconds. But the mindset is the same, they see the opportunity, apply their strategy to it, and follow the plan. As simple is that, but in order to be able to recognize and harness these chances, you have to be ready to act as soon as you need to. It’s easy to see that day-trading is

Trading vs. Investing or Trading and Investing?

Knowing when not to be in the market is one of the points where trading spills over to the realm investing. Even hardcore value investors use trading skills to exit positions; although sometimes they won’t admit or even realize it. Warren Buffet, who is strongly against trading strategies, instinctively uses his truly great timing skills. He famously said: “Be fearful when everyone is greedy and greedy when everyone is fearful”. It’s not just a great advice for investors, but also a perfect commandment for traders, although on different time-frames. He also correctly exited positions when he saw parabolic moves in his holdings, which more often than not are the signs of trend exhaustion—another great trading skill.

The takeaway is that with an open mindset, trading will not just simply help you to short-term profits, it will help your investment positions and investment decisions as well.

Financial Independence: Building Wealth

Building wealth

So, we finally arrived at the point of counting the profits. As a trader or investor evolves and gets better in decision making, acting upon probabilities, and sticking to the plan, a whole new dimension opens up. By the time you are a successful trader, the savings that you turned into working capital is growing to serve your and your family’s financial goals.

Wherever you are on the scale between a passive investor and a day-trader who is trading for a living, the final achievement will be wealth. Also, you will realize that this wealth will be dynamic and stable at the same time; dynamic because it will always have the potential of growing thanks to your skills, and stable because your decision-making process assures that you won’t choose silly choices.

We all heard about the “winner’s curse”, the stories of lottery winners who ended up worse off than before their lucky day. This has everything to do with the decisions that they make, the way people generally look at capital, and the lack of consciousness. If you build your wealth organically, through successful trading, investing, or any other business for that matter, you will always have the ability to grow even if disaster strikes. Your skills will be your real wealth, rather than money or possessions.

Our final advice is this: Set learning skills as your final trading goal rather than making profits.

Previous article: How to start trading?

Next article: Trends and a Basic Trend Following Strategy

Images from Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 347 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Trading 101

Trading 101: 4 Reliable Chart Patterns in Crypto Trading

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Graph

In our previous piece on chart patterns, we pointed out that the way to use patterns is to judge probabilities that a certain move will happen rather than to view them as some holy grail in the market (which unfortunately doesn’t exist to my knowledge).

Although they aren’t holy grails, chart patterns are some of the best tools we can use to trade the markets with a surprising degree of accuracy. For example, some estimate that a well-known pattern like the head & shoulders have an accuracy of more than 80% when it is complete. Very few indicators can match that!

In this article, we’ll go over the 4 best chart patterns to use in crypto trading, teach you how to spot them in the charts, and show you how to trade them.

1. Head & shoulders pattern

Since I already singled out the head & shoulders as the most accurate pattern, let’s start with this classic chart pattern that most people have heard about and probably have an idea what should look like.

head and shoulders

The head & shoulders pattern generally signals a reversal in the market, as it is essentially a failed attempt of a trend to move higher. As we know, an uptrend is defined as a series of higher highs and higher lows, but in the case of the head & shoulder, the last trend wave fails at making a higher high and higher low, and a new downtrend is initiated. The opposite pattern, known as an inverse head & shoulder, signals a shift from a downtrend to an uptrend.

Since the head & shoulder is so well-known by now, and the logic is based on simple trend trading, it is often considered to be the most reliable pattern in trading. It can often be easier to spot on a line chart as it can help you filter out all the clutter otherwise found on candlestick charts.

2. Bull flag

This is a continuation pattern and is also considered one of the most reliable bullish patterns we have. Sometimes also called a pennant or a wedge, these names all essentially refer to the same thing.

Bull flag

The bull flag is formed when price enters a consolidation phase following a strong uptrend. What really happens when price is consolidating is that the market is gathering momentum for the next burst up. It is a natural part of a trend where those who have been with the trend from the beginning are taking the opportunity to realize some of their profits, while new traders are entering the market and positioning themselves for the next run-up in prices.

3. Cup and handle

First introduced in William O’Neil’s book How to Make Money in Stocks, the cup and handle pattern is a bullish chart pattern that is very well-known in the stock market, but also appears to work well in other markets.

According to O’Neil, the pattern should span a period of 1 to 6 months in the stock market. In crypto, where everything moves faster, this period can safely be cut in half. For the pattern to be more reliable, we would ideally want to see a significant rise in trading volume near the end of the handle as price begins to rise. A buy order should be entered as price breaks above the high made by the right side of the cup.

The logic behind the pattern is the same as for the head & shoulder and trend waves: the cup represents the bottom in the market and the handle creates a higher low, which by definition means that an uptrend has started.

4. Rectangle

The rectangle is a similar pattern to the bull flag and trading channels, where price appears to be “stuck” between two imaginary lines on the chart. The more touches we have between these outer lines and the price, the more reliable the pattern is considered to be.

The rectangle is a trend continuation pattern, and often becomes a waiting game for traders since it is difficult to tell exactly when the price will break out of the pattern. However, the pattern is fairly reliable at predicting the direction price will break out in. The rectangle can be either bullish or bearish, depending on the direction of the preceding trend.

The pattern can be traded either by placing an order when price is close to the lower end of the rectangle with a stop just below the lower line and then waiting for price to break out. Alternatively, you can place a buy order just above the upper end of the rectangle in hopes of catching the trade as the price breaks out. The danger with the last option is that fake-outs where price spikes up just to fall back down do occur quite frequently. As always in trading, taking a slightly more conservative approach may serve you well over the long-term.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 37 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Trading 101

Lessons from The Turtle Traders

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turtle traders

For those of you who haven’t heard about the so-called turtle traders before, I’ll give you a brief recap here: “The turtles” were a group of laymen traders who were chosen more or less randomly to be coached by two of the pioneers in trend-following trading; Richard Dennis and William Eckhardt.

While Dennis, who had already made more than $100 million in the markets, were convinced that anyone could learn to trade, Eckhardt argued that Dennis was a gifted trader and that it would be extremely difficult for someone else to replicate his success. Unable to come to an agreement, the two men figured that the only way to settle the dispute would be to conduct an experiment where they would teach ordinary people their own trading system, and then measure the results.

As the story goes, the turtles became hugely successful, and Dennis was proven right.

Their story became known to world mainly through Michael Covel’s books Trend Following and The Complete Turtle Trader, where he shared some previously unknown details about the very simple trading strategies and methods used by “the turtles.”

Although the turtle experiment took place back in the early 1980s, the lessons learned from the experiment are as valid in today’s crypto market as they were in the commodities market Eckhardt and Dennis were trading in back then. In this post, I therefore wanted to share some of methods used by the turtles that can hopefully help you improve your own trading performance as well.

If you are interested in learning more about the methods the turtles used, I recommend reading Covel’s book to get the full story.

ATR as stop-loss

Using the Average True Range (ATR) indicator as a trailing stop-loss is something I learned from Covel’s book about trend following and that I’ve used successfully over the years, as I wrote about in another post about a trend following trading strategy.

Generally, the idea of using trailing stops in trading is that it allows you to ride the trend for longer, without taking on unnecessary risk. It is also in the very essence of trend following trading that traders should not try to predict where a trend will start or stop, but instead simply react to what the price is telling them. In this context, if the price breaks through the ATR line you have drawn up on the chart, it is telling you that the trend has ended and it is time to get out of the trade.

The ATR is calculated based on the volatility of the asset, which means that perfectly normal market movements will be classified as noise, and only extraordinary movements to either side will lead to price breaking through the ATR line.

TradingView has a very useful built-in indicator for using the ATR as a trailing stop called “ATR Stops.”

Maximum 2% risk on each trade

Since the turtles used the ATR as their stop-loss, the risk in terms of pips on each trade would naturally vary depending on the asset they traded. However, by adjusting their position size, they still managed to keep their risk at no more than 2% of their trading account on any one trade.

Pyramiding

Pyramiding is the concept of adding to a winning trade as time passes. This is pretty much the opposite of conventional value-based investing wisdom, where it is usually preached to buy low and sell high. The turtle traders, on the other hand, were not afraid to buy high and sell when things were moving against them (buy high, sell low).

The turtle traders usually didn’t move in with the full position size that their risk management allowed on the first order, but would instead spread out their orders and buy more as the trade moved in their favor. For example, they would enter an order with a position size that kept their risk at 0.5% of their capital as a trend started to form, and then enter new orders as the trend continued until they reached the 2% risk that their system allowed for.

This protected their downside if the trade moved against them from the start while at the same time enabled them to ride the trends until the end.

Reduce risk during losing streaks

The turtles were very aware of the emotional drawdown that follows a loss in the market, and they understood that because of this, losses tend to follow each other and create losing streaks from which traders sometimes never recover.

Because of this, Dennis and Eckhardt introduced a rule saying that if an account is down by 10%, the trader must adjust his risk as if he has lost 20%. With a smaller trading account left, the trader would then be forced to reduce his risk on each trade in order to stay within the maximum 2% risk allowed on each trade.

Not only did this save the turtle traders’ trading capital, but it saved their emotional capital as well.

Keep it simple

Lastly, it is important to remember that the exact trading system the turtles used was relatively simple and straightforward. Trend following trading is often like this, and it has been proven over and over again that simple and robust systems beats complicated strategies. As Richard Dennis was quoted as saying in the Market Wizards book:

“I always say that you could publish my trading rules in the newspaper and no one will follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick with those rules even when things are going bad.”

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 37 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Trading 101

Trading 101: Determining and Trading Trend Strength

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Trend-following trading remains the most popular approach to trading in the retail segment, both in crypto and other markets. However, before taking positions in the direction of a trend, it is crucial to determine if the trend is gaining or losing strength. As trend traders, we need to make sure we are only taking trades in trends that are building up, and not those that are fading.

While we have covered the basics of trend-following trading in the past, and also revealed several trend-following strategies, we will here focus on how you can determine if a trend is worth trading, using both systematic and discretionary tools.

Trend waves and pullbacks

Studying trend waves and pullbacks during a trend forms the basis of a discretionary approach to determining trend strength.

In a trending market, small pullbacks signal strength in the trend. If each pullback is getting increasingly smaller as the trend continues, we can say that the trend is picking up momentum. Another thing we often see in strong bullish trends in that the pullback is not really a pullback, but rather a sideways consolidation of the price. This indicates that bulls are strongly in control of the market, buying up even the smallest dip in prices.

On the other hand, as pullbacks get larger and occur more frequently, we can take it as a sign that the trend is losing momentum and the price may reverse into the opposite direction soon.

Moving Averages

Moving Averages are probably some of the best-known tools for trend traders, and for good reason. They are incredibly simple to use, and can provide powerful signals in almost all markets.

The most common way to determine trend strength with Moving Averages is to apply two Moving Average lines to the chart; one slower and one faster. For example, combining the 20 and 50 period Moving Averages is a common strategy among swing traders in both forex, stocks, and crypto (the lower the period setting of the Moving Average is, the faster it reacts to changes in the price).

In a strong uptrend, we should have the faster moving average staying consistently above the slower Moving Average. If the distance between the two moving average lines grows, it means that the trend is gaining momentum, and if the distance between them shrinks, the trend is losing momentum.

If the two lines cross over each other, this is often taken as a sign that the trend is about to reverse. Many successful trend-following strategies follow the simple logic of buying an asset when the faster Moving Average crosses over the slower one, and selling an asset when the slower Moving Average crosses over the faster one.

Price rejection

What we call rejection of higher or lower prices in technical analysis is most easily spotted using traditional candlestick charts and looking for long wicks sticking out either above or below the “body” of the candles, as in the screenshot below.

Price rejection

In this chart, we can clearly see that we had a strong bullish trend and that the price attempted to extent the trend further, but repeatedly got rejected by the market. After four attempts at going higher, this market lost all bullishness and went into an extended downtrend.

Relative Strength Index (RSI)

As the name implies, RSI is an indicator that measures strength. In just the same way as we define an uptrend in price as a series of higher lows and higher highs, the RSI line should also make higher lows and higher highs when the market is trending up. In non-trending (range-bound) markets, the RSI generally moves sideways and stays between readings of 30 and 70.

As trends come to an end, we sometimes see divergences between the trend of the RSI and the price itself. For example, price may be making a new higher high, while the RSI line fails at making a new high, or even makes a new lower high, as we have two examples of in the screenshot below:

RSI divergence

Average Directional Index (ADX)

This is the classic trend indicator that many traders still use. The indicator consists of a red line and a green line and it basically says that a green line above a red line means we are in an uptrend. In the opposite case, a red line above a green line would mean that we are in a downtrend. If the two lines are close together it means that the market is not clearly trending, but rather stuck in a range.

Trend-following strategies sometimes make use of the ADX indicator in combination with Moving Averages to find strong price trends to ride. The ADX could then help determine the strength of the trend while for example cross-overs of two Moving Averages could serve as entry and exit points.

Which one should you use?

Perhaps unfortunately, which specific indicator to use in your trend-following trading really comes down to personal preferences. There is no right or wrong indicator to use, nor is there any right or wrong way to combine indicators and create your own trading strategy.

That said, most traders try to avoid combining indicators that are measuring the same thing. For example, ADX, Moving Averages and MACD are all considered trend indicators, while RSI and Stochastic are considered momentum indicators. In other words, you could combine Moving Averages and RSI, but should avoid combining Moving Averages and ADX with each other.

Experimentation is also fine, but instead of trying to learn how to use lots of different indicators, a better strategy is generally to use a few and become an expert at them. They are all powerful in their own way, it just comes down to the trader to master them.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 37 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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