Hi traders!
Successful trading is often not about unique trading system, it’s about doing certain things over and over again, or I would rather say – not doing them. Many beginner traders often do the same mistakes over and over again and if you would simply avoid what they do (or even do the opposite), you would get an edge on the market.
I created my own TOP-3 list, you can add some more in commentaries to this post. I haven't uncluded money managent here, just chart patterns (market behavior) that traders fail to read properly.
Selling «expensive» and buying «cheap»
Most popular version of this principle is «buying bottoms» and «selling tops». When price suddenly breaks out from some range (say, to the upside) and starts to move rapidly, most traders will sell against this rally. That’s an instinct. If we’ve seen before small volatility and absence of significant price action to whatever side, we tend to deny breakout, we treat to new prices as «unfair» and rush to open a trade. Why in this case most traders are in hurry? They thing that current price action won’t long last and price will quickly drop back to the previous trading range.
Look at yesterday’s example of NZDUSD:
Attachment 10474
It has rallied heavily, and believe me – there were many traders caught in short positions. Price has finally moved back to day opening, but I’m not sure that any short-sellers could benefit from that movement. You can’t enter short position (or long position, any position) if you don’t know your risk, if you are unable to calculate or estimate it. You can, of course, but it won’t be low risk trade, your risk will not be defined (don’t tell me that you know your risk because you have your stop-loss)
So, in most cases shorting against such rally can be only reasonable when market is overbought and ready to liquidate to the downside. Such situations are pretty rare and this topic goes beyond our post.
To avoid catching tops and bottoms, I recommend to switch between timeframes from time to time.
What is cheap for one timeframe trader, may be expensive for other timeframe trader.
Catching the «whipsaw»
The second habit of beginner traders is to be aggressive after big price swings. Let’s say, we had news announcement and market reacted emotionally, We can see whipsaw with significant volatility.
Most traders, who are bored with previous low volatility, think that market is going to move now more rapidly, more aggressively.
But truth is that often market consolidates for 2-3 days after that, nothing happens, volatility goes down again. It’s very easy to be caught in such price action.
Attachment 10476
«Trading near support» (resistance)
Third habit is too much reliance on horizontal lines that are considered to be support or resistance. In fact, support and resistance are often areas, not lines. I mean, real support and resistance areas, not local levels where day traders put their positions.
When support/resistance «line» is already visible for everyone, it no longer provides good opportunity. Many traders can see those lines, they can calculate risk and they will enter either to the short or to the long side (trading breakouts or reversals) placing their stops beyond this line. So, a lot of orders will be concentrated near those lines, and market will not have reason to leave this level – the more liquidity it has near certain level, the less reasons it has to go away from it. The most expectable scenario is «whipsaw» near such «levels».
Attachment 10475
Reply With Quote
Originally Posted by layigold
