Trading has the reputation of being a complicated and difficult skill to master, because the trading mindset goes against the hard-wiring of our brains. However, there are a few points that you must follow which make the entire process simpler than you think. Here is a plan that can act as a guide to successful trading.
1. Finding the Major Trend
Yes, it is that simple. Although your instincts will want to ignore this, following the trends in the market is the best way to ensure your success as a trader. You can find a major trend by looking for a trade where the 20 period moving average (MA) relates to the 200 period moving average (MA). Pick any moving average and stick with it.
Now, let’s assume that the 20 MA is more than the 200 MA, you will want to be biased LONG. But, if the 20 MA is below the 200 MA, you will want to be biased SHORT.
If the price is below both of these (i.e., the 20 MA and the 200 MA) and it’s in a losing position, you should move out of all LONG positions period. Similarly, if it is above both of these, and it’s still in a losing position, you should move out of all SHORT positions period.
Even for counter trends, the same rules apply. If the price is on the wrong side and the trade is going into loss, you should exit instead of holding onto it.
2. Defining a Counter Trend Pullback
Buying within a pattern can help you anticipate a breakout. You should only buy pullbacks that are lower in a bull trends, and should only short pullbacks that are higher in a bear trend. Flags and triangles defined by simple trend-lines can help you find these in charts.
3. Setting the Stop Loss and Profit Target
Lastly, you must find the stop loss. This is the point where you think the market should not get through, which you can use to set a position size according to the level of risk.
You can adjust the target based on the information you get from the market, i.e., how long you have been in the trade, or how far the trade has gone against you since you entered.
Though investors can have different approaches to trading, this is the plan that I follow, and the plan that has suited me best. Using these steps as a guide to trading, you can begin your venture into the world of stock trading.
Yours in Trading,