Why do some traders seem to be more consistent, while others are constantly unsatisfied with their results? Consistent traders have spent hours perfecting their trading strategies, and leave little to guesswork. They know when a setup is occurring in their favor, know where to enter the market, and they know when to exit. They make few trades, but the trades they do make have a high probability of success, and are executed as part of a comprehensive trading plan.
Whether you are new to trading the markets, or a seasoned veteran, there are three skills that must be mastered to achieve consistency in your trading activities:
Trading Skill #1: Know Which Direction the Market is Moving
Is the market moving up (bullish), down (bearish) or sideways? This is the most critical first step in assessing a market, and while this may seem obvious, many traders really don't know which way the market is headed at any given point in time. And though there are numerous tools available to plot trends, reversals, and breakouts, determining market direction can be confirmed with the aid of a few simple indicators.
- Bollinger Bands help indicate the direction of the market If the bands are moving upward 45 degrees, then the trend is bullish. If they are moving downward 45 degrees, then the trend is “bearish”. If the bands are moving roughly horizontal or parallel, then the market is moving sideways.
- The MACD (Moving Average Convergence Divergence) confirms if the market is in a bullish or bearish condition. If the MACD is above the moving average and above the zero line, lets paint the bars green to indicate a long bias or bullish condition. Let's color the bars red if the MACD is below the zero line and below the signal line to show that the market has a short bias or bearish condition. And if the bars are black, then the markets are in transition and neither in a bullish or bearish condition.
- The RSI (Relative Strength Indicator) shows the relative strength of a market move. If the RSI is above 70, then there is strong bullish strength in market direction. If the RSI is below 30, then there is strong bearish price movement.
The cumulative effect of these indicators working in concert with one another can be a valuable aid in helping you determine if the market is moving up down or sideways. And once you can reliably make this determination, you will have mastered the first step in improving your consistency as a trader.
The chart below shows how the Bollinger Bands (BB), MACD, and RSI combine to help show the direction the market is heading in: up, down or sideways. And now that we have determined market direction, we can focus on selecting the best trading strategy to use!
Trading Skill #2 Select the Best Strategy
Once we have determined the direction the market is moving in, we must now select the best trading strategy to use. When the market is moving up or down, this is considered trending market condition, and the best strategy to use is a "trend-following" strategy that is designed to take advantage of a breakout move. The key to implementing a trend-following strategy is timing:
- Enter too early and you run the risk of getting quickly stopped out on a false move
- Enter to0 late and you will be chasing a market that is getting ready to retrace
- Enter when the market has properly revealed its direction and you are best positioned to take advantage of the move
If the market is moving sideways, this means that prices are fluctuating in a narrow range and have found equilibrium. These can be choppy conditions and are ideal for a scalping strategy that is designed to take a quick nibble out of the market. The key to a successful implementation of a scalping strategy is location:
- Look for areas of support and resistance to place an entry that fades the direction the market
- Use this same support and resistance as protection between your entry and stop loss
- Enter early in a sideways move as the markets will seek to breakout and find new areas of pricing equilibrium.
Since the markets with be either trending (up or down) or moving sideways, it is critical that every trader have a mastery of at least one trend-following strategy and one scalping strategy. This way you will be ready to trade the markets regardless of the direction it is moving in. And by the way, most of the times, the markets are moving sideways, so if you only have a trend- following strategy in your arsenal, you may have wait hours or days for trend-following entry, or risk getting chopped to pieces
To see a more detailed presentation on trading strategies for trending and sideways moving markets, please click on the link to the free webinar below.
Trading Skill #3: Use Trade Management to Minimize Risk and Maximize Gains
Now that we have determined the direction the market is moving in, and have selected the best strategy to use, its time to look for the best market entry point. As discussed earlier, timing and location are critical in the correct implementation of any trading strategy. Get in too early and risk a false read and getting quickly stopped out. Get in too late and fall victim to the inevitable market entrancement against you. By being either too anxious (early entry) or cautious (late entry), you will run the real risk of a losing trade. The key is entering right at the point where the market has revealed its true intentions with a predefined profit target and stop loss. This skill requires practice and finesse to properly master, and can be enhanced through proper chart reading and market awareness:
- Market indicators and strategies will help spot technical entry signals - but not every technical entry signal is a good entry
- Awareness of support and resistance levels, major economic news releases, and activity in confirming markets will refine entry points
- Using limit orders (as opposed to market orders) will help you establish where you want to engage the market and on your terms
- Pre-defined and tested profit target and stop loss settings will help remove emotion and anxiety once you are filled in your trade
- Once in a trade, never widen your stops to give the market more room to move in your favor, this will only lead to a larger loss
- Accept that fact despite your best efforts and hard work, that no trader or strategy is infallible, and that you will have losing trades
- Use sound risk management techniques to protect your trading account and limit your exposure on any given trade
Mastering these three (3) fundamental Trading Skills is the foundation for any trading plan designed to yield consistent results. Without these skills, a trader may as well be flipping a coin or tossing darts at the markets, and will more than likely be punished for their half-baked attempts to trade the markets.
To learn more about how to master these three trading skills and see how these techniques are applied in markets, please watch the following video recording:
View This FREE One-Hour Recorded Webinar Here: