The Trading Edge, 15% of the equation

I will presume most of you are familiar with technical analysis, as a way to analyze and try to forecast future price movement. The way I see it, technical analysis provides a conceptual framework with which to organize the chaos of the auction process which is the market. TA will aid in analyzing the supply and demand forces that will ultimately determine the traded price.(present and future)

Following is what I think are essential building blocks to mastering this art of technical analysis and its application for the budding daytrader.

(This is a work in progress, so I hope you will bear with me)

1 Trend. The adage among traders is 'Trade with the Trend'. 'Buy low Sell high'.
Trend is defined as a series of higher highs and higher lows (uptrend), or correspondingly a series of lower lows and lower highs.(downtrend)

2 Markets will trend (make directional movements) only 40% of the time. The other 60% is spent consolidating with the battle between the supply and demand of the buyers (bulls) and sellers (bears)

3 Dow theory provides a good framework from which to analyze the markets. Consolidation is where the 'big boys' do the trading, accumulating the position they want to take. When the other side of these accumulator's positions near exhaustion, the market makes a breakout and start trending. In effect, there will be 3 types of trade the trader can execute in the quest for profit.

• The accumulation phase
• The breakout from that accumulation phase
• jump on the trend sometime after the breakout and try to catch a piece in the middle.

In reality, the daytrader (small fry) will only realistically participate in the latter 2 of the 3 types of trade. The trader thus seeds this trading edge to capture these trades with a higher degree of probability.

Herein technical analysis will provide the tools to organize the trader's effort to gain this trading edge.

Fear and Greed, the Trader's Nemesis

Fear and Greed

The most important aspect of successful trading is to overcome the psychology involved. Trading is 85% mental and 15 method. Fear and Greed are always emotions to overcome, which if not controlled, will interfere with success.

Fear

Types of fear traders experience:
Fear of losing
Fear of taking a trade
Fear of not taking enough trades and missing out
Fear of being wrong in trading decision
Fear of having to make a decision
Fear cannot control the market
cannot control themselves.

Fear reduces ability to focus on objectivity.
sweaty palm and rapid heartbeat doesn't help the process of trading. These fears will sabotage the trading decision and execution process, resuting in undesirable outcomes such as missing a trade altogether, entering the trade late etc.
How to overcome this fear? Need to develop confidence and through practice. The important tools are to know oneself and develop an effective trading plan.

Greed

This is the other evil emtion of trading What happens to a trader is that the exits after entering trade, are based on greed-there is an urge of wanting to max out profit for every trade. Have to have mindset of being consistently profitable ie take the profits when they are there. Nobody however good can sell the top or buy the bottom of every move. Profitability will come from consistency in following trade plan keep emotions under control. Trading is a business, not Las Vegas or a roulette wheel.