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ASX 200 INDEXm

 

Hurdles to profitability.

Worry or concern that a trade will be a loser is a major hurdle to profitability.

Professional traders understand that the goal of trading is to make money, not to be right. Making money in the markets requires losses — a lot of losses. Most traders I know are right no more than 40% or 50% of the time — this means they are wrong and take losses on 50% to 60% of their trades. Being wrong is part of trading. It comes with the territory.

My default frame of mind as I enter any trade is that it will be a loser. One of the major mistakes made by novice traders is that their bet size is much too large — often they risk 5%, 10% or more of their capital on an individual trade. At this bet level I, too, would be worried about being wrong. Betting 10% of your capital on each trade is a sure way to wipe out your trading account. Someday I will explain why statistical probability will lead to ruin, but not today.

The main objective here should be firstly trade management but also portfolio management

It is the fear of losses that leads many novice traders in search of holy grail trading systems that promise to be right on 80% or more of the time. Good luck with that one. If you are in possession of such a system and it delivers on the promise, then you are smarter than am I.

If the fear of losing characterizes your trading, then I offer a couple of thoughts. First, settle on how you plan to trade and handle risk management, (then paper trade for a year or so).
Second, when you begin to trade real money, risk no more than 30 to 50 basis points on each trade.

There is a fine line between being fearful of the markets and having a well-deserved respect for how much damage the markets can deliver to carelessness. You need to be on one side of this spectrum or the other. Being on the side of fearfulness is something than can be overcome — and that is the good news.

CIMIC GROUP LIMITED

The principle of Polarity

Polarity is where it all begins. This is supply and demand 101. We talk about momentum and we talk about trends. We use words like Fibonacci, Divergence and Moving Average. This is all fine but all of these are only a supplement to actual price analysis. Price is the only thing that pays. So price, by definition, is the most important technical indicator that exists.

The Principle of Polarity states that once a Resistance (support) level is breached; it changes its nature and becomes Support (Resistance) the next time it is approached. This happens due to change in Demand and Supply. When a resistance (support) is breached, it is because the demand (supply) had superseded the supply (demand) at that price level, thus breaching it.

In the future, when that level is approached by the price again, the same behaviour is anticipated, and the resistance (support), this time becomes the support (resistance) as new buyers (sellers) come in and again change the demand-supply balance.

What happens is that history essentially repeats itself, but the role of price at that level changes from resistance to support and vice versa.

From Edwards and Magee almost 70 years ago.

…here is the interesting and the important fact which, curiously enough, many casual chart observers appear never to grasp: these critical price levels constantly switch their roles from Support to Resistance and from Resistance to Support. A former Top, once it has been surpassed, becomes a bottom zone in a subsequent downtrend; and an old Bottom, once it has been penetrated, becomes a Top zone in a later advancing phase

Support becosmes resistance

resistance to support