Seven Deadly Sins of trader
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    Seven Deadly Sins of trader

    Dear friends! We offer you a digest of Yuri Kim, which is called "Seven Deadly Sins of trader." In the same thread specific market situations are mentioned that cause the wrong reaction of beginners. However, even experienced traders fall into these traps. Therefore, each time before the deal opening it is useful to consult with these principles.

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    Last edited by Patkhak; 01-28-2013 at 09:12 PM.

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    1st Mistake. Buying at the top

    A huge number of traders enter the market at the moment of it's time to go out, regardless of whether the extent they trade with. In terms of the Elliott wave theory, it usually happens at the end of the third or fifth wave. Although in each case still has a chance to take profits from the continued growth of the market, but the probability of a decline in these moments is usually very high. As a result, a small time trader enjoys the return transaction, but soon sees a decrease in quotations leading to a loss.

    If it happens at the end of the third rising wave, the trader is doomed to suffer, because the price moves by the laws of the fourth wave, where the intricate movement within the side or slightly downward price range throw it in the hot and cold: the position constantly changing, moving it now to profit, now to loss. When it's boring, the trader gets a loss or a small gain, followed by a surprise seeing as the price is going to new heights, and his deal could give good returns.

    If a trading position is opened in the end of the 5 th raising wave, things even worse: the price trend may change at any time and will not return to the entry point in the foreseeable future. Perhaps, this is the worst variant of all existing, though morning after comes quickly, but the price of the lesson is often very high. However, according to this scenario, things are going with all the losers, and the huge number of new traders

    Why it is so? There are several explanations.

    The first is a strong opinion that the market movement must be accompanied by volume. There is a grain of truth. Indeed, if the price increase is not supported with the volume, it indicates reluctance on the part of new traders to enter the market, so trading is executed mainly between its current members and a number of newly arriving and departing players.

    It is quite within reason to suggest that the growth - a double edged sword, because if someone buys someone must sell. And there is a mature idea: could the volume growth on the growing market be a sign of reaching the top? Indeed, the volume is a leading indicator for the assessment of future price movements. It is one thing when the volume increases as the market breakthrough of serious resistance level, and quite another – at the moment of price at the top of the chart, where nothing prevents prices move in any direction. In the first case, the volume is really friendly to buyer, while the second - it is more the enemy.

    The second explanation lies in the people's tendency to forget all sensible reasoning when they are seeing strong growth of prices. They think that they do not have time and could not catch the tail of luck, which have smiled to someone who bought shares. These traders rush into the market, and of course - will receive damages soon. This category of investors often provides the growing volume, which we constantly observe at peak prices.

    In fact, both explanations are equivalent. But what’s to be done? Let's us think a little bit. What does the volume mean? This figure shows us the number of shares or futures have losses within periodic intervals. It’s one thing, if the price was changed on to 0.5%, and quite another when it is moved on to 5%. Apparently, the net change of the volume is not so good an indicator as it may seem at first. The only way out of this situation – to use graphics excluding the volume from consideration with a focus on price movements, adjusted by volume.

    So how to avoid this common mistake - buying at the top?

    The answer lies in a few simple rules:

    1. Never buy at increasing volume when prices are at the top end of the market and there is no compelling reason to further price increases.

    2. Buy in a growing market, supported by a volume, only in case of resistance level breaking.

    3. Always remember: your buying is against selling, where the trader closes the long position or open a short one.

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    2nd Mistake. Sale at the bottoms


    Lots of traders are fenced in selling at the bottom, and their number approximately equal to whom buy at the top. Curiously enough, but this case is a mirror to analyzed above: the same high volume, combined with strongly falling prices. Again, if we are to base our analysis on the volume that supports the trend, or fall under greed, seeing how others earn on the market falls, you'll probably lose.

    Of course, the volume increasing can be interpreted as the flow of insightful and knowledgeable traders confidence in further decrease of the market. Maybe it is the case, but with a short position you will be at odds to stand correctional headward market movement that can be very intense and to close the deal without loss. And then You’ll see the new price drop. Also, do not forget, many of these traders hedge their positions by option or intermarket spreads, and therefore can withstand appreciable movement of the market in both directions without any fear of getting damages.

    As for the main trading public (ordinary investors, traders, and a number of investment fund managers) who are not burden with knowledge about the tools available on the market, - they are subject to the emotions and nurtures a market panic. Generally it has a peaked hollow, like the ”V” letter, supported by volume. Traders who sell in this situation, taking a short positions on the trend, soon will face a price reversal, and will be average out their position with trembling hands, or close with a loss. Selling traders, getting rid of long positions, almost immediately will regret, observing the rapid recovery of the market.

    How to avoid this mistake? On this account, there are rules comparable to the earlier stated:

    1. Never sell at increasing volume when prices are at the bottom of the market, especially when all the support levels are passed, and there is no compelling reason to further price declines.

    2. Sell on the declining market, supported by volume, only if there is a break through a support level.

    3. Always remember: there is buying against your sales, where the trader close a short position or enter to a long position.


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    3rd Mistake. Growth leaders sale

    Very often, the trader opens a short position in case of the object of his attention, the stock or futures showed rapid price growth, and then do the pullback. A huge number of traders suppose: it is - a signal of an impending “bears” attack. To their great disappointment, after a period of calm and movements in the price range, the price will uprush soon.

    Of course, correction trade is a good strategy, often bringing good profits for traders, who determined the possible market behavior accurately. But it must never be forgotten that trade is carried on against the current trend. Hence it appears that to open a position based on the downward correction – is a long-range business in case of good pullback only and provided that trade is carried on from the exact adjusted resistance level, which has shown its resilience.

    Actually, the growth leaders stop its price movement with the sole purpose - to "settle" than to go higher. Its correction may happen not as a result of the price down movement, but due to the sideways. On the chart, it looks like a clot of price bars, located in a relatively small range, which arose after the impulsive and rapid price movement. Yeah, the growth leaders pullbacks also occur, but to stop its movement is not so easy. Therefore the following rules will be useful:

    1. Do not get short for the growth leaders, hoping for a strong correction - most likely it will be not so significant

    2. Trade with the use of strategies optimized for break.

    3. Whereof sideways is longer after strong price surge, than more likely the market will ascend, breaking through resistance at the top range edge.

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    Last edited by Patkhak; 01-29-2013 at 11:01 AM.

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    4th Mistake. Growth leaders buying

    Buy the recent growth leaders – is the same mistake as its sale. It seems absurd, but actually it is true in fact. Why? The answer lies in deciphering the behavior of the growth leaders, the most frequently observed in the market. Common sense us to suppose that prices can not rise forever, but there is almost no limit to this, so the only thing they need before to continue moving up – is to"settle." But the problem is that this period may be of some length, spread over weeks, so the effect of getting long may not be very large, even if the buying was successful and trade was in the profit zone all the time.

    Rules to avoid 4th error are easy:

    1. If you see easing down and pullback, do not rush to get a position per the growth leader in the trend.
    2. Use stop-orders meant for execution after breaking through resistance levels.

    3. Buy using a limit order not earlier than the third impact with the support that has pooled to this point and while being consistent to a flat and previous growth momentum.

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    5th Mistake. Fall leaders buying

    Fall leaders buying is inverting of growth leaders sale. What can you expect from a stock or futures contract which is in a downtrend? Nothing, except a slight correction. It often turns into a sideways trend, after which prices continue to go down. To be successful in correction trading, it is necessary to buy with a good support, and thus accurately guess that here is the base, even local.

    Therefore, the rules are as follows:

    1. Not to get long positions by the fall leaders, hoping for a strong correction -it is unlikely to be significant.

    2. Trade using strategies meant for penetration.

    3. The longer period of the sideways trend after strong price falls, the more likely the market to go lower, breaking through support line at the lower range edge.

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    6th Mistake. Fall leaders sale

    Fall leaders sale is inverting of the 4th Mistake. It is not easy to stop fall leaders: the market definitely has an inertness, and even if it reaches the objective bottom, the remnant driving force of the downward trend is able to "put the squeeze" price on the lower level. The very core of wrong decision is ineffective use of deposit. Sideways flat is able to go on for a long time, days and weeks, then go in the direction of the previous down trend. The most critical point is the third impact of foundation.

    So, the rules to avoid this situation are following:

    1. Do not rush to get position by the fall leader of the trend, if there is a movement slowing and price recovery.

    2. Use stop-orders meant for getting short position after support levels breaking.

    3. Use the limit order to sell after the third impact of resistance, which is existed to this point, consistent to a flat and previous fall momentum.

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    7th Mistake. Buying of past growth leaders, recently fallen

    This error is a consequence of beginner trader’s greed. It's not a secret, beginners often come to the market, having heard of super-profits received from the phenomenal growth of the Internet companies. Acquainted with the graphical analysis, a trader fascinated keep watch over such actions as YHOO, AMZN, AMCC, JNPR, WCOM, LU, QCOM. In his mind he calculate the profit if had bought the shares in 98, 99 or even in 2000. Therefore it is no wonder that all the same movements to dizzying heights are expected. These assumptions are supported by persistent myth that "prices always go back." But it is doubtful whether such a rule is valid with the same force.

    Currently we deal in an entirely different market: the world has changed, it’s struck by the high technology, which are difficult to evaluate correctly. Therefore, the rules are true for General Electric (GE) can not be true for Yahoo. Specifically, commodity market is the most "civilized" for this matter - it is much more likely that the goods price will be not much lower than its long-term historic lows.

    In the stock market you should always remember: if for some reason the price dropped significantly after the strong growth, well then there were substantial reasons for that effect. And it can have consequences that will result our investment to the shares buying at the full devaluation - namely, zero. If you think this is rare, you're wrong. Every business has its beginning and end, and in our ultrahigh-speed century everything becomes much faster, so, it would be foolish to expect a speedy recovery positions of the companies that have lost their setup.

    Putting of the fundamental view, we can formulate a framework for the shares, which’s price had fallen heavily after the phenomenal rise: the price is to move and show it’s "vitality," but not be in a stagnant state. In case of "vitality" behavior, we can still hope for a good upward movement, but in case of visible stagnation it is hardly possible - there are no enough impulse and so necessary force favoring motion.

    Of course, the stock is able to grow at 30- 50 percent in a short period of time, but the risk of losing its positions is extremely high. But in general, these shares certainly go through a long period of being in the stage of depression that can last for months or even years before they start to move up, if ever happen.

    In this regard, the rules for avoiding 7th mistake, as follows:

    1. Do not rush to buy the stock that used to be in favor, but now much reduced prices to that from which it started to grow.

    2. In case of buying such shares You should consider it only as a short-term trading.

    3. Buy using a limit order after overcoming the nearest resistance and fixing prices above it, but with pullback to it.

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    These is a good compilation. Success in Forex is not so easy as some people may wrongly think. It requires a lot of knowledge and smartness. A trader is responsible for his losses and profits. He should make the best use of his knowledge in a disciplined way to earn profits in Forex.

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    Buying and selling on the bottom it has become common mistakes made by traders in general, as they attempt to follow the trend, and the trend has often forget that the end of the movement that will do the reverse direction. Perhaps this can be avoided by investors who already understand the characteristics of the market that will do the reverse direction.

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