Looking For The Holy Grail of Trading Stocks?

Looking for the holy grail to trading stocks?

Looking for the holy grail of technical analysis?

Most will tell you it doesn't exist. But it does. Does it exist in one specific trading system? Nope. Is it a magical technical indicator? Nope. It must be a chart pattern then, right? Not even close.

Yet there it is - right in front of you.

The problem is that your perception of it is flawed. You think that you are going to find a the perfect system, strategy, or indicator and never again have a loss in the stock market. That will never happen. There is nothing that can achieve that goal because there are too many random variables that affect the market.

There are, however, two different factors that we can combine together to come up with what can be defined as the holy grail of trading stocks. Ready?

We can divide it into two parts: Technical Analysis and Management

Technical analysis

Who are the most profitable traders in the world? Anyone? The most profitable traders in the world are the market makers and the specialists. They have consistently made money since the market was created. So why are they so successful?

They are successful because they trade opposite the crowd. They are always on the other side of the orders. When you buy, they are selling to you. When you sell, they are buying your shares. They know what you are going to do next. How? Because human psychology doesn't change.

Hundreds of thousands of traders came before you and made the same mistakes over and over. These novice traders sell into support and buy into resistance and the smart traders profit from them.

The holy grail of technical analysis is to first identify the novice traders because they are the ones you will profit from. In order to consistently make money trading stocks, you need these traders to make the money for you! Without them you would not be able to make any money at all and the stock market wouldn't work.

You profit off of the mistakes of others.

The big name institutions do the same thing, just on a larger scale. They accumulate shares of stocks in bear markets and sell them off to the public during the course of a bull market. They profit off of the novice investors.

So how do you identify the novice traders? Just look at any chart and you will see them. They are the ones selling after significant selling has already taken place into areas of support. They are the ones buying after significant buying has already taken place into areas of resistance.

You must buy when the novice traders are selling. You must sell when the novice traders are buying. You are doing exactly what the market makers and specialists do on a day to day basis. You are trading opposite the crowd, yet the crowd is helping you to become one of the few traders that actually succeed at short term trading.

Isn't it ironic that new traders search for the holy grail of technical analysis only to find out that it had to do with THEM all along?

It's all about management...

Earlier, I said that there are "too many random variables that affect the market". That's why it is impossible to avoid losses while trading stocks. There a bad earnings reports, global problems, terrorist attacks...the list goes on and on.

So, in order to protect yourself from these happenings, you need an extreme self management, money management, and trade management policy in place. This brings us to part two of the holy grail...

You biggest enemy in the stock market will always be yourself. Not anyone or anything else. You are human and you have emotions that will get in the way if you do not know how to manage them. You can be excited, nervous, scared, greedy, happy, and fearful. All of these emotions can cause you to lose money.

How do you prevent this from happening?

You must have a plan ahead of time. You must know exactly what you are going to do before you get into the trade when emotions start running rampant. But a plan is not enough. You must have the rock-solid discipline to follow the plan. You must learn the art of self management and master your emotions.

Even if you follow your plan to the letter, you will still lose money on trades. How much will you lose if you are wrong? This is where money management comes in. You have to know ahead of time how much you are going to lose on a trade if you are wrong. This amount should never exceed 2% of your trading capital.

By risking such a small amount, it shouldn't matter to you if you have a losing trade. It is only one trade. There will be many more. You have only lost a small amount of money temporarily. You will make the money back on your next trades. So relax!

How will you manage your trades? Use stops! If you are swing trading, use tighter stops. If you are trading a trend, use looser stops.

Determine ahead of time before you get into the trade how you will exit the stock. Remember, you want complete emotional detachment from the trade. Trailing stops is the best way to accomplish this.

The holy grail

There it is. That is the holy grail of trading stocks. Every profitable trading system or strategy, in one way or another, is designed to profit from the weak and misinformed - the novices. Behind that trading system is a person that executes a strict self management, money management, and trade management policy with precision and discipline.

Do you have what it takes to be a trader? Maybe. Most people don't have the psychological make-up to be traders. It has been said that 80% of traders fail and either quit or lose all their money the first year.

This makes perfect sense. The stock market was designed so that the majority will fail.

That is the only way that the minority can win.

Beginners: Learn the Basics

Intermediate: Trading Strategy

Advanced: Swing Trading Tactics