FINANCIAL FOCUS
Trade the System
In this installation of Financial Focus, we will discuss the topic of “Trading the System.” As always, we will provide some education and commentary for the inexperienced and/or uninformed.
In Chapter 6 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we discuss “Risk Management” as an important part of any investor/trader’s financial approach to the markets.
One key to Risk Management, ironically, especially when short-term trading, is to pay NO attention to your profit/loss during an open position. What? Pay no attention to the money? – that is correct (not a mistype)! Professional traders always trade their system, and pre-determine where they may take profits and/or losses, to erase any type of emotional reaction to price moves.
This concept may seem counter-productive but it is really the opposite. Most investors and traders spend a significant amount of time learning and researching market analysis, technical charts, price action, cycles, and more. They develop their own system and understanding of Support & Resistance lines, seasonal strength/weakness, and sometimes take advanced courses to fine tune their skills.
Have you ever missed out on further gains during a winning trade? Have you ever turned a winning trade into a loss? Have you ever closed out a position right before a major move in your preferred direction? If the answer is “yes,” then you are likely trading the MONEY and not the SYSTEM.
For long term investors, it is wise to periodically take profits. Longer time period charts allow for more time to decide your next move or strategy, and one of our favorites is to sell half the shares if the equity price doubles, which preserves the initial capital and leaves only the profits to fluctuate – ensuring NO possible loss.
However, for shorter-term traders, the system that you spent so much time developing should be the main focus. Once a live position is open, it is human nature to desire a “winning” trade. It is easy to then lose focus on the reason the position was opened in the first place, which was most likely due to the perceived favorable chart set-up. It is at this point that following the system, and not the money, is most important.
Your system should always include pre-set “mental” stop losses (as we consistently stress), target exit prices for gains, and, for advanced individuals, a plan to add or subtract shares at certain levels. It should not include “salvaging” a winning trade just before it pulls back to almost even, or randomly taking profits with total disregard to price action. That practice will restrict your potential for higher winning trades. It should also not include giving up on a trade too soon (unless price has hit your pre-determined stop), as it diminishes the belief and confidence in your approach, and results in more losses. A systematic, non-emotional, approach to short-term trading in a necessity, as well as a risk-reward plan (usually about 3 to 1), which is also discussed in our publication.
It is extremely important to realize that any investment or trade, especially in the equity markets, is ALWAYS vulnerable and can change at any moment. Watch for those reversal pivot points and indicators, that you have studied, and make buy and sell decisions based on those parameters, rather than particular dollar amounts.
For additional discussions and education, please continue to visit our BLOG section here on ASTRO-FIN, where we provide periodic updates on a variety of topics.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.
