Wednesday, November 9, 2011

Fewer, better trades.


One of the biggest errors for new traders is overtrading. Overtrading will eat away at your profitable trades and overall prevent you from being consistent. One of the first goals of a trader should be to reduce the number of trades taken per day to about five. Think about this: How many major directional changes do you expect in a day?

Reduction in the number of trades allows you to focus on larger moves instead of flip-flopping on every other bar. If you are a new trader, this will also help in limiting your losses.

The first step you need to take is to eliminate limit entries. There are some legitimate limit entries in price action trading, but trying to save two ticks should not be one of them. The skill level of market reading necessary to be able to consistently win at limit entries is very high and I am not too proud to admit that I'm not there yet. If you want to trade limits, remember that you should be entering only on bar closes and not where you fantasize the price may turn mid-bar.

The second step you need to take is to only enter on signal bars with a strong close and little overlap. The only exception to this is a 1Rev at ema, 1PB and any with-trend entry on a soft-trend day. If your strong signal bar does not trigger, let it go. Even if it gives a strong inside bar with an equally strong close, at this point its in overlap. The only exception to this rule is a FF after a large move.

The last step is to only trade proven setups such as A2, W1P and so on. "I think this will move up now" is not a proven trade. You may have noticed patterns that look reliable but they may not be tradable for various reasons. You should first attempt to trade them on SIM and then try with small size about 100 times before you can add them to your proven list.

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