Hurst Cycles Trading Software - Accurately Forecast Nifty and Stock Cycles

Wednesday, May 14, 2008

How Important is TA in Your Trading or Investment Methodology?

Wanted to post a discussion on this for quite some time but never got around to it.

Ask yourself above question..And note down the answer. Then read below.

Technical Analysis, Chart reading, Chart skills etc account for JUST 30% of our trading success. This might come as a shock to most people reading this but that is all. Even if you know very basic TA, you can still work your way around in the market.

Now what are the 2 other parts that are most important in your trading technique?

- Money management and/or Position sizing
- Pshycological wellbeing within yourself and with the market

Many a time we spot a perfect setup in the chart and we know if we take it, we will succeed in making a truckload of money...But after the trade is over, we realize we made a lot of big mistakes and the setup that just could not go wrong went wrong big time and you lost a truck load of money instead of making it.


To quote Dr Alexander Elder(read the book 'Come into my Trading Room' - Will be useful for both novices and veterans alike) - Successful Trading consists of the 3 'M's -

Mind - This is psychological wellbeing. If you have fear, hope or greed clouding your judgement, you need to get out or just dont take the trade. In other words we need to be as mechanical as possible when doing trades. Keep emotion totally out of the markets. They just do not go together. Sometimes we become very emotional due to the amount of money we have hanging in there and in cases like this, do not put so much money in. I know of many ppl who are successful when trading very small amounts or are excellent paper traders but it comes to actual money, they fail miserably...This kind of ties in with the next M.

Money - This is the art of money management and position sizing. i.e for your amount of capital, you should know how much you should leverage or risk. There is no real or easy answer to this. You need to know what is your risk level. And what is the reward potential. You should know your risk-reward ratio in order to know whether the trade is favourable.
Also always be ready to cut your losses and run. Be always ready to admit you are wrong.
A retail investor having a capital of 2 lakhs, engages in trading 1000 option contracts or 500 Future contracts is asking for sure blowup of the trading account.

Now all of above will seem very boring to most but money and risk management techniques are the most important thing you can ever learn in relation to trading. The rest will follow.

Method - The 3rd M. This is technical analysis and charting. This is what most sites, tutorials, gurus etc focus on and they rarely give importance to above. Why? Simply because they know that this is interesting...People begin to calculate what their potential profits are on seeing a setup...But they rarely ever calculate potential loss...This is the weighing of risk and reward and determining if a trade is likely to succeed.

Please note - I am not saying the art of TA is not importance..It is very..But it is only a third of the overall picture. So read up on money management and work on improving your emotional setup and wellbeing...Believe me it will be time well spent.


No comments: