Trading Signals

WAIT FOR THE TRADE SIGNALS   

For day, short-term, or swing trading, you need to wait for signals and trade by those signals. That seems easier said than done. But it is a common mistake that I have helped traders with, especially when they have jumped the gun, anticipating a buy signal from an indicator such as stochastics. We went over the stochastics %K and %D 20-level line-cross signal. Figure 12.2 shows a detailed description of how to apply the 20 percent line closing signal properly, using the market’s price action while waiting for the close of a time period to keep you from anticipating a trade. It also demonstrates when it is more appropriate to enter a long. If you learn what a true signal is, based on the close of a time period, and if you repeat that successful action, then you will develop the skills needed to have the confidence to consistently apply this method. Ultimately, your performance and trading results will improve.

We discussed in Chapter 3 how to use the stochastics oscillator properly. It is so important. Let’s review: If you anticipated a buy signal based on the stochastics %K and %D hook crossover the first time, you should notice how either of the two closed above the 20 percent line in Figure 12.2. In addition, you did not see a higher closing high collaborate a buy signal. Anticipating without confirming factors or misreading a signal can and usually does result in losses. Notice that the second signal where both %K and %D cross and close above the 20 percent level is confirmed with a higher closing high. This is a confirming signal and will put you in a better mindset and more often than not on the profitable side of the ledger. Remember, your mind can and does play tricks on you when you are trading. That little subconscious voice will tell you to just hang in there, to just keep holding on to the loser, because the market will bounce back. Odds are that fear takes over and you sell out of a long, right on the low of the move. You cannot act on emotional impulse. If you act on impulse and you are wrong, you need to get out immediately once and if the market breaks further against you, because the emotional state of greed got you into the trade and the emotional state of fear will get you out. Usually it is on the low. If you wait for a true buy signal based on the closing price action, you are trading with the current flow of the market. This method of trading, once you see consistent results, will increase your confidence; and that will give you what it takes to become a successful trader consistently over time.

THE RIGHT FRAME OF MIND         

Many times traders subconsciously sabotage themselves inadvertently. Avoid putting yourself in a situation that will cause you to be skeptical or afraid before you trade. A better way to state it is, do not trade while undergoing a major personal setback. This would include stressful events like buying or selling a house, moving, sickness, a change in careers or a loss of a job, a death in the family, or loss of a friend. A breakup in a relationship or a divorce can also cause undue stress. Try to make educated decisions, and make sure you have the time to invest in your work before putting on any trades. Remember that it is alright to be wrong; just don’t be wrong all the time, making the same mistakes over and over again. If you follow a proven strategy, you are already aware that there will be losses. We discussed this in Chapter 11. If you are trading on the edge, not in the right frame of mind, angry, or upset, then you have lost the emotional edge that is needed to stay focused and disciplined.

If you are not trading with an indicator, a plan, or a software program, then write your rules down on your computer screen. This is one method that can help keep you on track when you start trading out of impulse or from an emotional state of mind.