The Importance of Price Reading
Submitted: 28 Jun 11 16:51

It is amazing how traders make their trading decisions based on news that is published on either news or journals. The fact is that news is never new. It is also peculiar that a trader should make his trade based on the assessment or projections of market analysts, only to find that with every analyst that says market is going up, you can always find another that says the opposite. The problem is that actually none of them will be wrong, as very often, they will not put a time horizon for their projections, and thus at some point in time, they will always be right.

To look at the ebb and flow of the market, there is no better way than to see a simple price chart. You do not even need an indicator. Every market participants’ decision is reflected on the chart and it makes no sense that a trader should look everywhere, study every indicator, and not put what the chart is actually doing as the topmost priority in his decision making process. Every resistance, every support level tells a story.

Trading can be simple. A price that is oscillating upwards continuously means you should stay on the long side until subsequent peaks starts to taper off, and the converse is true. If price is going side way in a congested channel simply means no majority of the traders are agreeing on the price and you should wait until price breaks out of the range. By using simple price patterns, and investing enough screen time to identify various patterns that is able to repeat itself with some level of consistency, it is more than adequate to equip yourself with the tools to trade successfully.



Probability and Risk / Reward Ratio in Trading
Submitted: 21 Jun 11 17:31

A trading system very often is based on long standing observations of market behaviour. Market participants changes but crowd behaviour never. That is the reason various market patterns can repeat itself with high reliability. If a trader observed/noticed a certain market pattern, he may then place his trade based on the pre-cursors/sign of that pattern. Then as the market moves, there will be a good chance it will be moving in the trader’s favour.

There will never be a system which is 100% accurate. A system with a >70% accuracy is considered a very good system. The trader will be profitable as long as he follow the system. In this example, it is assumed the system has a reasonable risk to reward ratio. (Risk to reward ratio is the amount you are risking for a gain. 1:1 means you are risking a dollar to get a dollar).

On the other hand, a 30% accuracy may not be a bad system either, say if the risk to reward ratio is 1:5. So out of every trade, you expect to get $500 for every $100 wagered. So in a distribution of ten trades, you will lose 7 trades and win 3. But you still ended up positive (3 X 500 – 7 x 100 = 800 profit).

Do not be fooled if one claim to achieve a 90% accuracy when you need to risk 500 to get 100.

Yes, trading can be compared to gambling. But a good trader plays the house, the unprepared trader plays the player.