All too often traders and investors get caught up in popular strategies such as "red light/green light," "buy on the dip," or "stop and reverse SAR." They start trading and investing as soon as they have learned the new strategy taught at a seminar, trade show, or webinar. If they are lucky they may make modest profit during the first few trades, then suddenly they have a series of losses. They struggle and work harder, trying to force the strategy they learned to work. They become frustrated or angry at the market, market makers, Wall Street and anyone else they bump into.
Their losses go from a string of losses to chronic loss syndrome. This syndrome is a series of losses with an occasional profitable trade which continues to encourage them to keep trying. They go to more free weekend seminars, watch more free webinars, and wander around more trade show searching for answers. They are sure that it is some magical trick, or something they are missing that is causing the losses.
However the problem is much deeper than that, and it starts with the notion that a strategy is all that is needed to trade and invest successfully. Strategies are taught first because they are all in public domain, meaning they are free for anyone to learn. Also they are an easy subject to present at a free seminar. They are short, to the point, and make it seem as if the retail vendor, broker, or speaker is has the answer to their trading and investing problems.
The real culprit is the lack of a trading and investing process. A trading and investing process is not difficult to learn and in fact, makes trading much easier and simpler than struggling to use several strategies and guessing all the time, or waiting for some news event to try and jump into a stock to scrape perhaps a dime of profit from all that work.
What is a trading and investing process?
It is a set of rules with parameters and a complete process that you follow every time you trade and invest. This begins with how you find stocks, analyze stocks, select the best stock to trade, risk analysis, point gain potential, and risk to reward ratio. It includes using the proper order, the proper stop loss, the proper trailing profit stop, to exiting the trade with the most profit possible. It is about having a trading style first with a complete process, and an understanding of the 6 market conditions. Then it is applying the appropriate strategy for the particular market condition that is currently underway, and the strategy most suitable for the stock selected.
A trading and investing process is not just watching the major indexes, but also determining market conditions. The indexes only include a small number of the thousands of listed stocks. What happens beyond the index component stocks is far more important because index stocks are bought for charters, mutual funds, and by smaller investors, whereas the underlying stocks that are best for short term retail trading tend to lead the big blue chip stocks.
Indexes are a part of the overall analysis but they do not provide a complete analysis of what is going on in the markets. Using news, indexes, and guru opinions is what causes most of the losses for retail traders. Using a trading and investing process eliminates the problems that result from insufficient trading preparation and inadequate analysis.
Written by Samory Borry
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