Pivot points, a technique developed by floor traders, help us see where the price is relative to previous market action.

As a definition, a pivot point is a turning point or condition. The same applies to the Forex market, the pivot point is a level in which the sentiment of the market changes from “bull” to “bear” or vice versa. If the market breaks this level up, then the sentiment is said to be a bull market and it is likely to continue its way up, on the other hand, if the market breaks this level down, then the sentiment is bear, and it is expected to continue its way down. Also at this level, the market is expected to have some kind of support/resistance, and if price can’t break the pivot point, a possible bounce from it is plausible.

Pivot points work best on highly liquid markets, like the spot currency market, but they can also be used in other markets as well.

Pivot Points

In a few words, pivot point is a level in which the sentiment of traders and investors changes from bull to bear or vice versa.

Why PP work?
They work simply because many individual traders and investors use and trust them, as well as bank and institutional traders. It is known to every trader that the pivot point is an important measure of strength and weakness of any market.

Calculating pivot points
There are several ways to arrive to the Pivot point. The method we found to have the most accurate results is calculated by taking the average of the high, low and close of a previous period (or session).

Pivot point (PP) = (High + Low + Close) / 3

Take for instance the following EUR/USD information from the previous session:

Open: 1.2386
High: 1.2474
Low: 1.2376
Close: 1.2458

The PP would be,
PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439

What does this number tell us?
It simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing the prices higher. And if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. On both cases this condition is likely to sustain until the next session.

Since the Forex market is a 24hr market (no close or open from day to day) there is a eternal battle on deciding at white time we should take the open, close, high and low from each session. From our point of view, the times that produce more accurate predictions is taking the open at 00:00 GMT and the close at 23:59 GMT.

Besides the calculation of the PP, there are other support and resistance levels that are calculated taking the PP as a reference.

Support 1 (S1) = (PP * 2) – H
Resistance 1 (R1) = (PP * 2) – L
Support 2 (S2) = PP – (R1 – S1)
Resistance 2 (R2) = PP + (R1 – S1)

Where , H is the High of the previous period and L is the low of the previous period

Continuing with the example above, PP = 1.2439

S1 = (1.2439 * 2) – 1.2474 = 1.2404
R1 = (1.2439 * 2) – 1.2376 = 1.2502
R2 = 1.2439 + (1.2636 – 1.2537) = 1.2537
S2 = 1.2439 – (1.2636 – 1.2537) = 1.2537

These levels are supposed to mark support and resistance levels for the current session.

On the example above, the PP was calculated using information of the previous session (previous day.) This way we could see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels. By doing so we are able to see the sentiment over longer periods of time. Also we can see possible levels that might offer support and resistance throughout the week or month. Calculating the Pivot point in a weekly or monthly basis is mostly used by long term traders, but it can also be used by short time traders, it gives us a good idea about the longer term trend.

S1, S2, R1 AND R2…? An Objective Alternative

As already stated, the pivot point zone is a well-known technique and it works simply because many traders and investors use and trust it. But what about the other support and resistance zones (S1, S2, R1 and R2,) to forecast a support or resistance level with some mathematical formula is somehow subjective. It is hard to rely on them blindly just because the formula popped out that level. For this reason, we have created an alternative way to map our time frame, simpler but more objective and effective.

We calculate the pivot point as showed before. But our support and resistance levels are drawn in a different way. We take the previous session high and low, and draw those levels on today’s chart. The same is done with the session before the previous session. So, we will have our PP and four more important levels drawn in our chart.

LOPS1, low of the previous session.
HOPS1, high of the previous session.
LOPS2, low of the session before the previous session.
HOPS2, high of the session before the previous session.
PP, pivot point.

These levels will tell us the strength of the market at any given moment. If the market is trading above the PP, then the market is considered in a possible uptrend. If the market is trading above HOPS1 or HOPS2, then the market is in an uptrend, and we only take long positions. If the market is trading below the PP then the market is considered in a possible downtrend. If the market is trading below LOPS1 or LOPS2, then the market is in a downtrend, and we should only consider short trades.

The psychology behind this approach is simple. We know that for some reason the market stopped there from going higher/lower the previous session, or the session before that. We don’t know the reason, and we don’t need to know it. We only know the fact: the market reversed at that level. We also know that traders and investors have memories, they do remember that the price stopped there before, and the odds are that the market reverses from there again (maybe because the same reason, and maybe not) or at least find some support or resistance at these levels.

What is important about his approach is that support and resistance levels are measured objectively; they aren’t just a level derived from a mathematical formula, the price reversed there before so these levels have a higher probability of being effective.

Our mapping method works on both market conditions, when trending and on sideways conditions. In a trending market, it helps us determine the strength of the trend and trade off important levels. On sideways markets it shows us possible reversal levels.

How we use our mapping method?
We at StraightForex (www.straightforex.com) use the mapping method in three different ways: as a trend identification (measure of the strength of the trend), a trading system using important levels with price behavior as a trading signal and to set the risk reward ratio (RR) of any given trade based on where the is the market relative to the previous session.

About the author:
Raul Lopez is the founder of www.straightforex.comA site dedicated to provide high quality training for Forex traders.

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Fibonacci was an Italian mathematician and he is best remembered by his world famous Fibonacci sequence, the definition of this sequence is that it’s formed by a series of numbers where each number is the sum of the two preceding numbers; 1, 1, 2, 3, 5, 8, 13 …But in the case of currency trading what is more important for the forex trader is the Fibonacci ratios derived from this sequence of numbers, i.e. .236, .50, .382, .618, etc.

These ratios are mathematical proportions prevalent in many places and structures in nature, as well as in many man made creations.

Forex trading can greatly benefit form this mathematical proportions due to the fact that the oscillations observed in forex charts, where prices are visibly changing in an oscillatory pattern, follow Fibonacci ratios very closely as indicators of resistance and support levels; maybe not to the last cent, but so close as to be really amazing.

Fibonacci price points, or levels, for any forex currency pair can be calculated in advance so that the trader will know when to enter or exit the market if the prediction given by the Fibonacci forex day trading system he uses fulfills its predictions.

Many people tries to make this analysis overly complicated scaring away many new forex traders that are just beginning to understand how the forex market works and how to make a profit in it. But this is not how it has to be. I can’t say it’s a simple concept but it is quite understandable for any trader once he or she has grasped the basics and has had some practice trading using Fibonacci levels along with other secondary indicators that will help to improve the accuracy of the entry and exit point for every particular trade.

Free chapters of a forex day trading system can be downloaded at the author’s website in case you are interested in learning more about Fibonacci forex trading.

About the author:
Adrian Pablo; Forex trader and freelance writer.

http://www.1-forex.com

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One of the widely used Fibonacci ratios is the 0.382 ratio. As it can be easily seen on any forex chart, currency prices are continually changing and they follow an oscillatory pattern with peaks and valleys. The limit of the peak is usually called a resistance level while the valley is usually called a support.

In order to find the 0.382 ratio level what you do is, first; measure the size of the drop or rise over your time of interest. Once you have that value you multiply this by 0.382. Now depending on what you are looking at, a rise or a drop on the price of the particular “currency pair” you are trading, you will add the last value you calculated to the total drop or subtract the value from the total rise.

These operations will give you the 0.382 Fibonacci ratio level, either for a rise or a drop on the chart you are analyzing. Once you have the value you can then start planning the strategy you will follow in order to make a high probability profit from this valuable information. For the 0.382 ratio level calculated for a recent rise in the “currency pair” exchange price, your calculated level will be a highly probable support and for the case of a level calculated for a recent drop of the prices your level will be a highly probable resistance.

Knowing this ahead of the market and having the proper secondary indicators, will give you a huge advantage over most forex traders, and that’s something any trader would like they could count on. That’s why Fibonacci trading is so widely accepted over the world, and of course, why it’s so profitable and successful.

About the author:
Adrian Pablo; Forex trader and freelance writer.

http://www.1-forex.com

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So what is forex? Is it something new? The exchange of currencies is said by some to be the world’s second oldest profession and as long as there have been two sovereign states that have issued their own currencies, there has been foreign exchange as a facilitator for trade.

Forex, as foreign exchange has been abbreviated to, has been conducted for centuries and has become a global market with a daily turnover according to a recent Bank for International Settlements survey of $1.9 trillion (billion, billion) per day. Essentially it is a global market place with no physical exchange building where all claims on foreign currencies are settled – between governments, corporations, investors and speculators among others. Banks have traditionally been the middlemen who provide the liquidity to this gigantic market, which incidentally is traded on an almost continuous 24-hour basis.

Then came the Internet and suddenly it became possible for everyone to get a piece of the speculative action. Brokers sprouted up with their electronic trading platforms and high ‘leverage’. Essentially the brokers lend clients funds to speculate with, 100:1 or in some cases up to 400:1 ratio, or leverage. This means that $10,000 can ‘control’ up to $4,000,000 in the market. This is far higher than is possible in the stock market.

Many people have been attracted to the possibilities of earning fast profits from forex. There are often sharp movements that can turn your $10,000 to $20,000 in a matter of minutes. You can also get wiped out, but the lure of a fast buck has turned would-be speculators into out-and-out gamblers.
The Internet has also made it possible for the individual to obtain so-called ‘charts’, that allow them to do ‘technical analysis’ on their own PCs. The theory is that price movement patterns repeat themselves, so if you have a system of analysis, you can predict a future move in the market.

This may well be the case, but it does not address the problems of the psychology of trading – the fear and greed that drives many to irrational behaviour. People are often taken in by the seller of a system, often paying $5,000 for a piece of software that shows a green light to buy and a red light to sell. However, they don’t tell you how to manage your money.

So speculators lose. It has been estimated that 90% of new investors in forex lose their capital in the first year – an appalling figure. What can one do to avoid being a victim? Well, forex is a business like any other business and planning is required. It is also a profession and as such, adequate training is necessary so that you understand fully what forex trading is all about.

Many are prepared to invest thousands in forex trading without really knowing what it is all about. Just think if franchises were offered in a major hamburger chain without the franchisees having a clue how to run a restaurant or even make the burgers. The failure rate would also probably be 90%!
As with all investing, it is all a matter of risk and reward. Investing in Government securities is considered low risk, therefore they carry the lowest return. Increase the risk (the probability of loss on the investment), the higher an investor is rewarded in terms of return. An individual trading forex decides his own level of risk, which should dictate the level of reward. However, in the hands of an inexperienced trader, the two factors are impossible to reconcile, meaning in stark terms that traders cannot control the risk or the reward levels.

People attracted to forex trading often have an unrealistic expectation of what can be earned. To start with an investment of $5,000 and expect to be making $100,000 a year after the first year is unrealistic. It is not impossible; then again, neither is winning the lottery.
If the parameters for trading are laid down and adhered to combined with knowledge of forex trading, success is possible. It does not take much in the way of ‘enhanced’ returns to be able to double an investment. 26% per annum is required to double your investment within 3 years.

Who is going to teach you? There are some very good courses available, but these will only give you the theory, in itself very important. The ideal way is to have a mentor, or guide to show you the way.
Getting mentored is a wise move because it makes it possible to draw on the experience of a veteran expert and avoid making the common mistakes that cause the unwary to suffer catastrophic losses. After a while under guidance, a forex trader will gain the experience

The bottom line is that forex is not in itself a scam. There are for sure scam artists who prey on individuals’ greed as there are in any other business. If it is approached in a sensible and realistic manner and the trader is prepared to work hard, forex can provide a good living both financially and materially.

About the author:
Steve Pickering is founder and owner of Forex Trader Mentor and has been engaged in the forex markets since 1971.
www.forextradermentor.com

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1. LEVERAGE: In Forex trading, a small margin deposit can control a much
larger total contract value. Leverage gives the trader the ability to make
extraordinary profits and at the same time keep risk capital to a minimum. Some
Forex firms offer 200 to 1 leverage, which means that a $50 dollar margin
deposit would enable a trader to buy or sell $10,000 worth of currencies.
Similarly, with $500 dollars, one could trade with $100,000 dollars and so on.

2. LIQUIDITY: Because the Forex Market is so large, it is also extremely liquid.
This means that with a click of a mouse you can instantaneously buy and sell at
will. You are never ‘stuck’ in a trade. You can even set the online trading
platform to automatically close your position at your desired profit level (limit
order), and/or close a trade if a trade is going against you (stop order).

3. PROFIT IN BOTH ‘RISING’ AND ‘FALLING’ MARKETS: On the stock
markets, you can only make money if shares are rising, but in economic
recession and falling ‘bear’ markets, there is little chance of making big money.
Forex is different. One of the most exciting advantages of FX trading is the ability
to generate profits whether a currency pair is ‘up’ or ‘down’. A trader can profit
by taking a ‘long’ position, (buying the currency pair at one price and selling it
later at a higher price), or a ‘short’ position, (selling the currency pair and buying
it back at a lower price). For example, if you think the US dollar will increase in
value vs. the Japanese Yen then you will buy Dollars and sell Yen (go long). If
you think the Yen will increase in value against the Dollar then you will sell
Dollars and buy yen (go short). As long as the trader picks the right direction, a
potential for profit always exists.

4. 24 HRS: From Sunday evening to Friday Afternoon EST the Forex market
never sleeps. This is very desirable for those who want to trade on a part-time
basis, because you can choose when you want to trade–morning, noon or night.

5. FREE ‘DEMO’ ACCOUNTS, NEWS, CHARTS AND ANALYSIS: Most Online
Forex firms offer free ‘Demo’ accounts to practice trading, along with breaking
Forex news and charting services. These are very valuable resources for traders
who would like to hone their trading skills with ‘virtual’ money before opening a
live trading account.

6. ‘MINI’ TRADING: One might think that getting started as a currency trader
would cost a lot of money. The fact is, it doesn’t. Online Forex Firms now offer
‘mini’ trading accounts with a minimum account deposit of only $200-$500 with
no commission trading. This makes Forex much more accessible to the average
individual, without large, start-up capital.

Please visit the author’s other trading sites to learn more about forex trading:

http://www.daytrade-forex.com

http://www.daytradeforex.com

http://www.daytradeforex.com/products.htm

http://www.professionalforextrading.info

http://www.professionalforextradingonline.info

http://www.successtrading2000.com

http://www.successtrading2000.com/forex

http://www.tradecurrency.ca/education.htm

http://www.shortterminvestingsite.com

About the author:
My name is Cynthia Macy and I’ve been trading various markets for over 12 years. I now concentrate on the forex market, as it has several advantages over trading
other markets. If you’d like to learn more about forex trading, visit:

http://www.daytrade-forex.com

Request the ‘Trade of the Week’ to see actual trades using our trading methods and strategies.

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A move that starts at one band normally carries through to the other, in a ranging market.

A move outside the band indicates that the trend is strong and likely to continue – unless price quickly reverses.

A trend that hugs one band signals that the trend is strong and likely to continue. Wait for divergence (when the price is flat or rising or falling, but the MACD is going in the opposite direction…the price will break out in the direction of the MACD) or a Momentum Indicator to signal the end of a trend.

I use the BB’s for indication of when a breakout or breakdown is imminent. When the outside bands get very narrow, it means the price is consolidating and is getting ready for a breakout, either up or down.

At this point, it’s dangerous to have a position because you don’t know if it’s going to break up or down. When the bands get very narrow, it’s almost better to close out your old positions, even at a loss, until you see a clear direction. If you don’t want to close out an old position at a loss, at least hedge it. See more about hedging later in the Advanced Day Trade Forex course.

The BB’s can’t tell you which direction the breakout will be, the Chaos Oscillator (MACD) and Momentum will do that, and I always trade in the direction the Momentum and Chaos (MACD) are going.

Sometimes when using the slower timeframes, I use the outer BB’s as targets for my limit sell price. If the bands are really wide after a big move, I use the middle band as my limit target price.

Bollinger Bands are designed to capture the majority of price movement. When prices move beyond the upper or lower band, they are considered high (overbought) or low (oversold) on a relative basis.

More On Using Bollinger Bands:

First, the BB’s can be used as I mentioned before, as price targets. If the bands are narrow, the price will be jumping up & down within the two outer bands. As mentioned before, this is not the best time to be putting on a trade,
as the trading range is too narrow, unless you can make a decent quick profit in a 1 or 5 minute chart.

If the range isn’t too narrow, you can ride it up and down and book pips. I only attempt this in a 1 or 5 minute timeframe using the 5/9/18/50 EMA’s. Don’t do it if you can’t make at least 5-10 pips up and down. The danger is in whipsaws.

Most of the time, unless the bands are too narrow, you can make trades by literally bouncing off the outer bands.

This is called “The Bollinger Bounce”.

When placing a trade, just set your stop at the outer BB and your price target limit sell order where the other outer band is.

If your trade rapidly approaches the limit price and all your indicators say that the price movement is just getting started & not likely to quickly reverse on you, then you should first either remove your limit price & let the price run, or, raise your limit price another 5-10 pips. Then raise your stop to either your entry point or past it, to lock in either breakeven or some profit in case the price suddenly reverses on you.

This is definitely what you should do in a price breakout. If the price keeps going up in an extended breakout, you just keep adjusting your stop upwards to lock in more profit (this is called a trailing stop, more later on this subject) and keep raising your limit also.

A Super Advanced method of using BB’s is to use two sets of BB’s, both with the middle band set at 18. Set one BB to a standard deviation of 3 and leave the other standard deviation at 1. This gives you 6 short term support/resistance lines to work with. Your initial stop and target are the outer bands, and your inner bands are used for your trailing stop and short term resistance and
support. You can also trade off the two inner bands.

This method is very similar to using Fibonacci OR Average True Range (ATR), but is much easier to use and understand.

Pleave visit the author’s other trading sites for more trading information:

http://www.daytrade-forex.com

http://www.daytradeforex.com

http://www.daytradeforex.com/products.htm

http://www.professionalforextrading.info

http://www.professionalforextradingonline.info

http://www.successtrading2000.com

http://www.successtrading2000.com/forex

http://www.tradecurrency.ca/education.htm

http://www.shortterminvestingsite.com

About the author:
Cynthia Macy has been trading various markets for over 12 years but now concentrates on the forex market. To learn more about forex trading, visit:

http://www.daytrade-forex.com

Request the ‘Trade of the Week’ to see actual trades using the trading methods and strategies.

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We’ve probably all had the same thought at some time or another, as we trudge off towards another day at work – the same work we’ve been doing day in day out for years – “surely there has to be a better way?” Slaving away to make somebody else rich just doesn’t seem right somehow, but what alternative? Setting up a new business, or buying an established one, are both expensive and risky prospects. So how can the disenchanted employee ever hope to make the switch from wage-slave to total independence?

Those are thoughts I had almost every day, before I quit the safety of full time employment and decided to strike out on my own. I asked myself the same question day in and day out; surely there has to be a better way. What about the internet, I wondered, isn’t that supposed to be bringing new and exciting opportunities to all? I researched a lot of so-called work-from-home opportunities that promised untold riches, apparently mine for the taking just by sitting in front of my PC. Needless to say, in reality those schemes turned out to be about as fulfilling as, well, filling envelopes for a living. No, I knew there had to be another way – something real – something where I could be in control of my own destiny.

And then one morning on the train to work, I read about a couple of Wall Street boys who had struck it rich thanks to some huge bonuses, and were now going it alone setting up their own day trading shop. That was when I discovered day trading, and I realised that this was exactly the opportunity I had been searching for. I decided there and then that I was going to make a full time living from the stock markets, whatever it took to succeed.

The advantages of day trading as a job are numerous to say the least; there is no boss to answer to, no customers to satisfy, no suppliers to let you down, no waiting for invoices to be paid, I could go on. In fact, I will: trading is a location-independent activity – I can work from anywhere with an internet connection, which effectively means anywhere in the world with a telephone line. I regularly trade from my laptop whilst travelling. I can trade when I feel like it, and take time off when I like, which means I can spend quality time with my family.

Now let’s get this straight, trading can be a risky activity, there is no doubt about that. So is driving a car to work, but the risks of getting from A to B on four wheels are well understood and are managed accordingly, to the point where we don’t think twice about getting behind the wheel. And in the same way, provided a trader is disciplined in their approach to the job at hand, and understands the associated risks of the work, so those risks can be managed.

On the subject of risk, day trading is almost unique in that it can be learnt and practised with absolutely no financial risk at all, by means of paper-trading – that is – trading using freely available simulation software. Thus in the same way a trainee airline pilot won’t be let loose into the skies without having learnt and rehearsed their skills in a simulator, so a new trader can employ the same technique before they start trading real money. I “sim-traded” before I gave up the day-job; it made it easy to leave the safety-net of a monthly pay check knowing from my simulated trading sessions that I could already make money in the markets.

And that brings me to the most satisfying aspect of trading for a living; money. On an average day trading the Nasdaq, it is not unusual to make more money in a couple of hours than I used to make in a whole month working full time as a wage-slave. There are bad days of course, days where things just don’t work out, but they pale into insignificance over the course of a week or a month. It certainly took some intensive studying and a lot of practise before becoming a consistently profitable trader. But the end result of that hard work is an immensely valuable life skill that nobody can take away, and which allows for incredible freedom.

Since I first started trading, the learning curve has become even easier for the aspiring day trader, with a multitude of new websites, training courses, and books all covering the subject. I envy anyone starting out in this business today – they certainly have many more learning aids available to them than I had at the same point in my own career.

So is day trading the ultimate work-from-home job? No. I firmly believe it’s the ultimate work-from ANYWHERE job!

About the author:
Harvey Walsh is a full time Nasdaq day trader, and part time trading tutor. He trades from his home, or indeed wherever he happens to be when travelling. He can be contacted via his website: http://www.day-trading-freedom.com

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1. Trading with money you can’t afford to lose.
One of the greatest obstacles to successful trading is using money that you really can’t afford to lose. Examples of this would be money that is supposed to be used to pay the mortgage, bills or your child’s college tuition. This is sometimes referred to as “trading with scared money” and there is a very good reason for that. Ultimately what happens is that when someone knows in the back of their mind that they are risking the rent money, they trade out of fear and emotion versus logic and no emotion. If you are in this situation I highly recommend that you stop trading until you earn enough to put into an account that you truly can afford to lose without causing major financial setbacks. You can start with as little as $2000 and trade stocks under $30.

2. The need to be “certain”.
We all have the need to make sure that the trade we want to make is going to be a good one. Therefore we look for signs that will give us a confirmation to enter. This can come in several forms, for example… Tuning into CNBC or the Wall Street Journal to give us news that our stock is on the move or waiting for a couple of extra days to make sure that the stock is really flying and just not on a false breakout. Other traders will get opinions from friends, family or broker. Others will wait for ten technical indicators to line up and give the “green light”.

All of these are okay to a point, however the big mistake to avoid is taking so much time that you let the trade take off without you. Interestingly, what ends up happening as a result of waiting too long is that you actually increase your risk. This is because as a stock moves higher and higher there are fewer buyers left in the market and it can come tumbling down until more buyers step in. It is like a game of musical chairs; eventually someone gets caught without a chair.

Traders who wait and wait and wait to make extra sure are usually the ones buying the top tick just before the stocks sells off. They then beat themselves up thinking they picked the wrong stock. Odds are it had nothing to do with their selection, just bad timing.

The thing to keep in mind is that there can be no absolute certainty in any given trade. All we ever can do is take a very educated risk along with a leap of faith!

3. Spending profits before you make them.
Nothing is more exciting then getting into a trade that blasts off and puts you into a highly profitable situation. This can cause major problems however, because this type of trade puts you in a highly euphoric state and leads to daydreaming about the huge profits still to come. You say “Wow I’m already up 15% in two days; I’ll be up 50% in a week and probably double my money in no time!” Then the next thing that happens is you are deciding on the great new car you are going to buy or perhaps telling your boss that he can stick it… Well you get the idea!

The real problem occurs as you get caught up in the daydream and expectations. This causes you to not be prepared to get out as the market sells off and eats up your profits because you have convinced yourself of the eventual outcome and will deny the reality of the situation.

The simple remedy for this is to know where and how you will take profits once you enter the trade. Also, realize that the market will only go up as long as it wants and not how high you think it should go.

4. Forming an opinion.
I’m here to tell you that the market does not give a damn about you or your opinions. Even if they are based on painstaking research or from a “Wall Street Guru”, it doesn’t matter!

5. Three 4-letter words that will kill you! HOPE—WISH—PRAY
If you ever find yourself doing one or more of the above while in a trade then you are in big trouble! As I have already said, the market doesn’t give a damn. All the hoping, wishing and praying in the world is not going to turn a losing trade into a winning one.

When you are wrong just use a simple 4-letter word to correct the situation-SELL!

6. Not sticking to your plan
A big source of trouble arises when a trader starts to deviate from their strategy. Maybe for a week they will trade according to one set of rules and the next use something entirely different.

This flying by the seat of the pants always ends up backfiring. This is because the trader can never be certain what is working and what is not.

You must never deviate from your methodology once you start. As long as it is a good one statistically there is absolutely no reason to change it. The way to make money from it is to trade it over and over again to exploit the edge it gives you.

One thing to also be aware of is that a trader is most vulnerable to switching approaches after a few loses. So, pay special attention at these times.

7. Not knowing how to get out of a losing trade.
It’s amazing how many people I have talked to who don’t have any clear escape plan for getting out of a bad trade. Once again they hope, pray wish and rationalize their position. As I keep saying the market does not care what you think. It does what it does and when you are wrong you are wrong!

The easiest way to keep a bad trade from going really bad is to determine before you get in, where you will get out. You can use a dollar amount or at some target point such as the low of the previous 15-minute bar.

***Make sure you don’t get the “stunned deer in the headlights syndrome”. This is where you see the stock fall to your stop loss point, but you are unable to take action. Maybe this is due to fear or disbelief that you are wrong, but unless you get out ASAP you could end up I major financial trouble!

8. Having an ego.
I have seen a number of individuals enter the trading game that were extremely successful in other business ventures. Because of this they had a fairly big ego and thought they couldn’t fail. Their egos became their downfall because they couldn’t except that they were wrong and refused to bail out of bad trades.

Once again, whoever or wherever you came from does not concern the markets. All the charm, powers of persuasion, number of diplomas on the wall or business savvy will not budge the market when you are wrong.

9. Falling in love with a stock or trade.
Let me give you an example of what I mean. Back in the spring of 1999 EFAX was a really hot stock. I waited to buy it on a dip and did so at $19/share. It started to move up strongly and life was great!

After a while though, it started to come back to my entry point and then below it. Here’s the problem. For some reason I really liked EFAX and sort of became attached to it. Ultimately I couldn’t let go of it even though I knew I should. I justified and rationalized why my dear friend should bounce back, but it never did. I finally had to break off my love affair when the stock hit $9. (Ouch!)

The moral of this story is never fall in love, let alone get married to any stock. It can cost you dearly!

About the author:
Mark Crisp
The Momentum Stock Trader

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