Extract from Short Swing Trading                   


 

This is a short extract from the book Short Swing Trading
by David Graeme-Smith.

Some of you must be thinking why do I need to devise a complete set of rules that tell me when to enter, where to put my stop loss and when to exit every trade, especially if it might only be right half the time.

Perhaps you think like this:  “I can see from the overall look of the chart that the price is going up or down.” Or “I get a strong feeling which way the price is going”.

OK, maybe you are particularly gifted but my guess is that you have bought this book because you do not possess such a gift.  You are more likely to be a normal human being and have the same emotions and feelings as the rest of us.  Here is what the vast majority do that have not got a clear strategy to work to:

This may seem pretty obvious at first but it is important.  The figure below shows the FTSE 100 Index.  As you can see, prices go up, then down, then up again, then down again.  All you have to do is buy when the price is low and sell when the price is high!  Easy, right !!!!

updownup

However, most people do completely the opposite!

WHY?  Because trading goes against our natural instincts.  What usually happens is that you see the price going up strongly so you buy at A below because when the price continues to shoot up, you want some of the action.  There is nothing worse than seeing the price rocket up while you are sitting on the sidelines.  Then, soon after you buy, the price starts to drop.  You are sure it is going to be a small drop and the price will then bounce and resume the strong push up to new and greater highs. 

updownupABCD

Unfortunately, the price continues down and your losses mount.  You start to feel uncomfortable with the loss and you are mad that you have been caught out while everyone else must have made loads of money.  You are still sure you are right so you hang on a while longer.  The price carries on dropping and you decide that if it drops any more you will have to get out.  It does and you sell at B for a loss that is much larger than you would have wanted but you fear it is going to continue to go lower. 

Then, soon after you sell, you see the price move up strongly again and you wish you had hung on but you are left licking your wounds.  You are now even more angry because you have missed out on the rise that would have made you profit. 

updownupABCD

You want to get your money back!  So, you re-enter at C, just before the price starts to fall again.  Given your past experience, you hang on through the next dip and it pays off, you are now showing a small profit but it drops again so you hang on again at the next fall but it carries on falling.  You sell at D for a big loss and blame the market or believe you have been really unlucky.

You have suffered two losses when you should have made good profits.  You feel angry that the market has done this to you.

This is exactly what most people do without a
clearly defined trading strategy!

Remember that it was you who made the trading decisions based on the emotions of fear and greed – no one else.  And the market doesn’t even know you exist let alone engineering things to make sure you lose.  Remember that fear includes the fear of being left on the sidelines when you could be making money.

Trading emotionally is a recipe for disaster.

The way to overcome the fear and greed decisions is to trade to a set of rules (your trading strategy) that tell you what to do and when to do it.  The more mechanical we can be when we trade the less we are likely to let emotions get the better of us.

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End of extract from Short Swing Trading.

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