The world of trading has witnessed an enormous change in the last decade. The rapid development in field of computers and internet now allow private traders to participate in the world largest financial market – the FOREX market. This market exchanges over 1 Trillion Dollars each day – and provides the sophisticated trader countless opportunities to profit. This is done via analysis of price, also known as Technical Analysis. Once a secret art used by gifted traders, Technical Analysis had turned into public knowledge, allowing traders to profit from market movements from the comfort of their own homes. Nevertheless, the mass of knowledge also created a need to filter the excessive information into clear signals – buy and sell. This book aims to teach the practical side of Technical Analysis – from identification of patterns to exact entry points. This book is written exclusively to help you to achieve your trading goals, whether you are a beginner at the markets or have traded for years. Technical Analysis has many more faces and tools to guide your way, and this book does not pretend to cover all these.
However, if you are seeking clear, straight-forward rules for trading without wasting time and money – this book is for you. The main trading methodology is based on Charts and Price. These were proven to be the most consistent trading signals in the long-term, and have given traders early signs of trends since the beginning of the 20 th century. The patterns you will learn here have occurred repeatedly for decades – and will appear forever. This is what makes them so powerful. Nevertheless, the exact rules for trading chart patterns are a mystery to most traders. Traditional charting books lack the definition of entry points, and give merely a general definition of patterns. These books do not provide the essential knowledge needed for consistent and profitable trading of chart patterns – which is even more crucial when trading intra-day. In this book you will find specific and clearly defined entry-points, designed to maximize your profits with low-risk trades.
Foundations of Trading Success In this chapter I will describe the most important foundations of a successful trader. These are also the elements which most people (95%, to be exact) fail to comprehend and implement in their trading. After reading this chapter you would have made a great step into becoming a successful, consistent winner. Success Element 1: The Trader Mindset Most failing traders believe that the reason for their failure is analytical skills that are not fully developed. Some think that the reason is lack of equity, and with more funds they can be more successful. It is rarely true. In fact, the major reason for failure in trading is improper mindset. Self- sabotaging mindset is the key for all trading illnesses. How many times did it happen to you that you deviated from your system for no reason, just to later realize that sticking to it would have yielded much greater profit? How many times did you close positions early or enter not according to your rules? Numerous times, for sure. A trader with proper mindset can achieve great results with a simple trading system and a very small equity – and gaining this mindset should be your primary goal. What is a trader mindset? Mindset is simply what you believe in – your beliefs regarding trading, success, and consistency. In order to ensure a proper and effective trading mindset, we will now instill helpful trading beliefs and remove the ones that cause you to fail. Limiting Belief 1: A winning trader wins 100% of his trades This is a common belief that prevents many traders from achieving trading success. It is a false belief – as no trader wins 100% of his trades. I want to emphasize this idea as it is crucial: No traders win 100% of his trades. The reason for this lies in the fact that trading is an endeavor that involves probabilities. Each trade has two outcomes - win or loss, and each outcome has a probability for occurring. A winning system simply has more probability of winning than losing, and it by no means wins 100% of the trades it signals. Any news event in a remote country can affect the market and your trade – and you can do nothing about it. There are many hidden variables involved in each trade which you cannot predict, and each one can cause you to lose. What is the good news? You don't have to win 100% of your trades to be profitable. The solution to this apparent paradox lies in quality of your trades - the amount you lose versus the amount you gain in each win. If you win twice the size of your losses, you will be profitable even if you do not win 100% of your trades. The next example will demonstrate it. Let's assume you are risking 1% of your equity of each trade, and gaining 2% on each win. Let's assume you have an average win probability of 50%. If you had taken 10 trades, you will now be with 10% gain on your equity. You see how the high quality of the trades (which will be later defined as Risk:Reward Ratio) compensated on the mediocre win percentage. Remember this example:
The belief that a trader has to win 100% of its trades to be considered profitable causes many traders to lose confidence in their system, usually at its first loss. Many traders may change or alter their winning system, due to momentary losses that have nothing to do with their profitability. A good friend of mine suffered from this belief. He traded a system I instructed him to (which will be described in the following chapter), but ended up losing money. He began by winning several trades, but a few losing ones totally wrecked his confidence, and he discarded the system as ineffective. Had he realized the fact that some losses are inevitable, he would continue trade this system and next profits would have covered his losses – and much more. Beware of such perfectionism in trading – it usually does more harm than good. Perfectionism is good as long as you channel it towards thorough study of past trades and improvement. Another unfortunate result of this false belief is constant, infinite search for the perfect trading system, referred as the 'Holy Grail'. Trader may possess a very profitable system but will stop trading it as he believes that it is not profitable enough. Helpful Belief 1: Losses happen. It is a part of the business and does not influence my system. From now and on, you must accept your losses as 'part of the game'. It is hard to continue trading a system that produced losing several losing signals, but this is what consistent traders to on daily basis. This is the essence of consistent profits in the market – sticking to your system. It is not easy to remain detached from markets or systems that cause you to lose money. It is very tempting to add more indicators or confirmations to your system, or even to ditch it completely, looking for the next Holy Grail. Please don't do that. Accept losses as being the cost of making business, and remain completely confident of your system. Success Element 2: The System The second most important element of a winning trading career is the System. Trader must have solid rules for entering, exiting, taking profits and setting stop loss for each trade he takes. He must have iron-solid characteristics for determining what signals are weak and should be discarded, and what are the best signals he must take without hesitation. 'Why do I need a system? I just trade based on what I see on the chart'. Common mistake. A trader in his early career has no means to analyze the markets properly, due to lack of experience. Any discretionary trade he will take is of high risk and his chances of losing are very high. Only after 1-2 years of chart experience, one may develop a 'feel' for the markets. Until then, I advise you not to trade discretionary trades. Restrict yourself to trading patterns which you know well to identify and trade. I will teach you strong chart patterns in the next chapters. It is important to realize that any attempt of trading discretionary trades without thorough experience is practically doomed. I know many people who struggle endlessly with the charts, trying to get the 'feel' for the markets. Eventually, some may get it, but the process is very slow. It would be much easier to learn the markets while executing a simple strategy and earning a living. A few words about trading systems: I don't believe in indicators. I have traded and tested almost all indicators available, and almost none seem to work for the long-term. MACD, RSI, and CCI - they all seem nice in retrospective – but when one trades with them, his account will suffers. That is why the system I am going to teach you is based solely on charts. The chart patterns I am going to teach you are as old as the markets themselves. They appeared from 1900 to this very day, and have proven themselves as the most profitable method of trading and speculating in the world markets. Next chapter 2-The Basics of Charting
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