1. Ownership 2. Planning 3. Working 4. Analyst 5. Artist 6. Trader
The first three stages are obstacles, while the second three involve the process of learning to trade. Today's lesson covers stage 4 of the six stages: analyst.
When I ask a client whether they see themselves first as a trader, or an analyst, the response is predictable. Most men say trader while most woman say analyst. The correct answer is analyst first, trader second. Women tend to understand the need for planning before taking action while men tend toward action...or as my father often said: boys will be boys. And herein lay one of the difficulties in learning what should be a straightforward process: analyzing a market first, before taking a trade signal. It is a rare person who can both craft a viable plan, and then execute it. This is why in most firms there are executive teams who plan for growth, and a marketing department which is responsible for detailing that plan, and an advertising and sales team assigned to execute that plan -- not to mention a compliance department to keep an eye on everybody. A plan without execution, or vice versa, is no good without a lot of luck; and professionals do not rely on luck. It needs to be the same in your trading. The plan is your market analysis and trade selection - your methodology -- and the execution is your trade entry and management. A self-taught trader needs to handle both of these diverse tasks simultaneously - and don't forget about the compliance aspect, i.e. trade and risk management!
Like most of us learning to trade, I had to learn the hard way that we need a solid methodology and a trading plan before we can take action. I also quickly learned that I am risk adverse. I do not like risk, and like losing even less. While I generally prefer acting to planning in most other aspects of life, I favor planning over acting in trading. Because I know this I make sure I am well prepared before taking action - pulling the trigger on a trade. Many of my clients are more action orientated when it comes to pulling the trigger on a trade. I'm a good match for them because they know I'm always working on improving trade selection to cut down on risk. They realize that between my planning and their acting together we make a stronger team than if they were on their own. If I have a client like me, who is somewhat risk adverse, and steeped in planning, we wouldn't make as good of a team because we would not complement each other. We can help such a client out by providing a fair spread, and showing him how to measure pattern and direction, but what he really needs is the confidence, i.e.: lack of fear, to pull the trigger. The only way to do that is to observe our demonstrations and then replicate that in a demo account. Easier said than done, given peoples penchant for ownership - see Stage 1. Planners, those who are inclined more toward analysis than trading, unfortunately are also more prone toward ownership.
The best market analysis is generally provided by a trading method that is straightforward and simple. Regardless of the level of simplicity it must be effective, and the way to measure its effectiveness is to demo trade it in live markets through the different economic environments the global economy puts us through. In our estimation you will need a method that provides objective output based on market generated information only, i.e.: price. It needs to be empirical - there is no room for theory's in live trading. You need to build your method on market generated information only, i.e.: the opening, high, low, and closing price of the bars, or candlesticks on a chart, because those 4 inputs encapsulate how a market priced in all natural, financial, and societal occurrences or developments to that point in time. The chart, and not your opinion, or a pundit or market strategist's opinion is going to give you the best measurement of the current fundamental environment. And most important the method providing your analysis must differentiate between a balanced market - counter-trending market-and an unbalanced market - trending market. You need to know when to trade direction and when to trade both long and short. You may not know it yet but most of us are handicapped when it comes to seeing both sides of a market. The individual who is comfortable going long in the Asian session and short in the U.S. session is rare. Once an individual decides which side to trade from - long or short - it is not easy to get them to shift gears and trade in the opposite direction. This is because our mindset is out of touch with how markets move. For example the market's nature is chaotic and tends toward disequilibrium. When you throw up their hands and say, This market is CRAZY! when a market does the opposite of what you thought is should, you are right, though the correct term is manic. While we as individuals experience our ups and downs it is unlikely we could ever coordinate our moods with that of the market's gyrations. However if we understand that the underlying structure of the marketplace is chaotic, and that we've been raised to behave in a steady, reliable manner, it becomes apparent why market movement seems to confound newcomers. Our mindset and the markets underlying structure are definitely at odds. You are very likely going to need a method of analysis that is NOT aligned with how you think! Once you start to grasp this conflict between how you were raised to think and behave, and how price action behaves, you start to see why trading psychology is such an important subject, despite what you thought about it before you read today's lesson. By following a viable method, that is taking every signal it generates in up, down and sideways markets you are going to be asking yourself to do the opposite of what you think, which is a tall order. It is extremely important that you decide now that it is not you making the decision to buy or sell but the method you use. You are not there to figure out which way a manic market is going to move next. Professional traders are not in the business of forecasting.
Though you may not like it at first, you're an analyst, a tool, whose job is to do what the market and the method tell you to do. And that is when trading can become an art form.
Trading involves substantial risk of loss and is not suitable for all investors!
Jay Norris is the Director of Forex Learning at IBUniversity.com and author of Mastering the Currency Market, McGraw-Hill, 2009 and Mastering Trade Selection and Management, McGraw-Hill, 2011.