The Professional Trading Edge

Professional Trading-2

The Game Within The Game

''The price pattern reminds you that every movement of importance is but a repetition of similar price movements, that just as soon as you can familiarize yourself with the past, you will be able to anticipate and act correctly and profitable upon forthcoming movements.'' - Jesse Livermore 1923

Many individual investors are surprised to discover that at the professional trading level, it requires the mastery of only two or three reliable tactics, techniques, or strategies to significantly increase your probabilities for success in the stock market. In fact, attempting to use more will, more often than not, diminish performance. Price has a memory. Certain price patterns and formations tend to repeat themselves. The ability to recognize them as high-probability trading opportunities is an acquired skill known as pattern recognition. This critical chart reading skill demands that you only trade what you see, versus following popular opinion or what those with a vested interest would want you to believe about a particular stock. However, despite it's indispensable use as a trading tool, chart reading alone is never enough to make an informed decision about whether or not to put on a trade. The ocean floor is littered with ships that were loaded with charts. Only when pattern recognition is cross verified by other key indicators is it confirmation that a high-probability trade set-up may be forming. This may include re-tracements, sector strength or weakness, open interest, institutional money flow, volume, heavy S&P futures pit activity, measures of momentum, overbought/oversold readings, all depending upon the time-frame and financial instrument being traded. As complicated as they may seem on the surface, every standard and advanced technical indicator used (Point & Figure, Stochastics, MACD, RSI, Bollinger Bands, Elliot Waves, Fibonacci, Japanese Candlesticks, VWAP, etc.) is based solely on combining or dividing stock prices in some way. They are all moving averages in varying degrees of complexity that are designed to aid (or confuse) a trader in their interpretation of a stock's potential holding period and price objective. Through trial-and-error, a trader eventually determines which ones, if any, that they can interpret and apply best. Some highly successful short-term traders prefer to rely solely on ''tape reading'', tracking only volume and the time & sales action in a stock to guide their trading decisions. Once opportunity has been identified, the trader's task then shifts to identifying an acceptable risk-to-reward ratio entry price level and exit price level. Most professional stock market traders are minimalists when it comes to their market activity. Many trade only a handful of the same stocks, or as few as one single stock, ETF, index, etc., over and over and over again. They specialize in exploiting two or three repetitive events that they recognize and that fit their personal style and time horizon, relying on skill rather than chance to determine the outcome. In other words, they are playing a completely different game than most other market participants. And as in every game, whether chess, poker, golf, or the equity markets, there are good players and bad players, impulsive players and methodical players, smart players and dumb players, good strategies and bad strategies, and a means of keeping score that clearly separates the skilled from the unskilled, the winners from the losers. The successful professional trader keeps score not just by the dollar amount he is able to extract from the market, but by the percentage of winning trades he makes, the quality and timing of his entrances and exits, and how well he manages each position for maximum benefit and risk control. Each closed position is closely examined with critical assessment, and is a vital learning tool for future performance. This attention to detail is why, statistically, the biggest percentage's of trading profits in the equity markets are obtained by the smallest percentage of the market's participants,- the professional traders.