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 Trading Habit #14

“Successful trading is about consistently doing the difficult thing so often that it becomes second nature.” – Richard Weissman

The easy trade is usually the losing trade. When a trader feels the most comfortable entering a trade to get on board a trend it is usually close to the end. It is difficult to take entry signals with great risk/reward ratios because of deep dips in price because they are usually due to fear in the market. The best dip buying opportunities happen at key support levels that price can only be driven to due to the extreme fear of an event that may lead to triggering a plunge in prices. The vast majority of the time the feared event does not happen and the biggest rallies occur when the perceived end of the world does not occur. Traders and investors will say they want to buy a key support level or big pullback and even have a specific price target but so many times the pullback and dip occurs only because of a huge amount of fear in the market that the potential dip buyer gets so wrapped up in the fear that they cannot take their entry signal that they wanted because their emotions override their entry signal. Maximum reward buying opportunities happen at the height of false fear that has little bearing in the reality of the future price of what is falling. Of course fear is not a signal in itself fear is what creates trading signals as price reaches extreme oversold levels, key long term moving averages and old price support zones.

The other difficult entry to take is to buy a breakout to new highs out of a price range. The initial break out over resistance will feel like you are buying too high, chasing, or buying late. A big trend up to new all time highs can only happen after a breakout to a new price level. Momentum traders and trend followers’ best trades are usually the ones that they enter at an initial break out into a new price zone and then it trends over weeks and months to higher and highs or lower lows for days, weeks, or months.

The two most profitable ways to trade is to buy extreme lows that are caused by unfounded fears or to buy breakouts or momentum at the beginning of a big trend and ride it all the way to big profits, both are very difficult to do due to the emotion of fear.

All the things that make a trader profitable are difficult to do. Buy initial strength, short initial weakness,  buy breakouts, sell breakdowns short, let a winner run with a trailing stop loss, cut a loser short and accept you are wrong early, buy high sell higher, sell short low and cover the short lower, trade price regardless of opinions and predictions. Financial markets can be counter intuitive because when things appear to be the most obvious is when the opportunity has passed and the buyers and sellers are already positioned in the same direction. Opportunity exists in the state of uncertainty when the majority is waiting to see what will happen and where price will go next, price will generally go in the direction that causes the most financial and emotional pain to the majority because the majority is usually wrong in the long term. The majority of traders and investors get on the bus late and off the bus late and the profits go to the early birds that fly in based on trading signals and trade the traders that are going to be late to the party.

This is a chapter from my book Trading Habits.