Common price action trading mistakes that cost me lakhs of rupees:
A thread ๐งต
1. Front running the market based on my analysis:
Any analysis we do should be proved by market as correct before we jump into a trade.
How?
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Example:
Mr. X marked 1500 as a strong support in HDFC Bank. Next day, stock opened at 1510, came down and hit 1500.
ABC went long in the stock. A few minutes later, stop got triggered. What went wrong here?
(2/n)
1500 is support for HDFC bank as per Mr. X but he did not wait to check if market validated his opinion.
At supports and resistances marked by a trader (you), wait for market to show the stock is actually taking support/resistance at those levels.
(3/n)
For your analysis to be correct, market buying>selling at support, market selling>buying at resistance.
Essentially, on a lower TF, check for bullish price action at support, bearish price action at resistance before you enter the trade.
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Remember that no support is too low to be broken and no resistance is too high to be broken.
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2. Having the same timeframes for analysis and trading:
If you are a price action based trader, the most important guiding principle for you is:
1. Higher the timeframe, more accurate and reliable the technical analysis 2. But big moves start on small timeframes first.
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Both sound contrarian? Yes, they do.
The key is to balance these two principles and have a structure where you analyze markets on a TF and trade on a TF which complement each other.
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Example:
If you are a day trader, do not pick stocks on 15 mins TF and trade on 15 mins. Switch your analysis to hourly TF/daily TF.
It will help avoid choppiness in the markets to a large extent.
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3. Taking reversal trades based on divergences:
A divergence is a signal for a potential reversal which MAY occur, but not a confirmation.
Just taking reversal bets on divergence will sooner or later burn big holes in your pocket.
(9/n)
To trade any divergence, have a structured rule based action, (Ex: I use fibs to validate divergences) and then take reversal trades after PRICE CONFIRMTION.
Every divergence does not mean reversal and every reversal does not come with divergence.
(10/n)
4. Using multiple oscillators:
Some people use RSI, MACD, Stoch RSI all on one chart.
On a minute basis, even though these oscillators have their own differences, fundamentally on a broader perspective, they have the same purpose.
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Doesn't matter whether you use a analog watch or a digital watch, primary purpose is to check time.
So, pick one oscillator and do not clutter your chart and minds in live markets.
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Relying too much on candle patterns:
This could get a bit unpopular but I like to put the truth out:
Bullish candle patterns work well in bull markets and bearish patterns work well in bear markets.
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But on the whole, deciding the direction of a stock and taking a trade just based on "one single candle pattern" is injurious to account in the longer run.
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Focus on understanding the market mechanism.
Deciding the direction based on just 1 candle without considering the positions of market participants of different timeframes is not a good practice.
Focus on developing an analysis method based on multiple factors.
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One of the most important yet underrated and unknown aspects of improving your trading performance is "Inward reflection"
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90% of the trading happens inside your head, only 10% on the terminal.
As a trader looking to improve or maintain performance, it is essential to constantly introspect on how you feel before, during and after market hours on days of various performances.
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Asking a generic question like "How to improve my trading psychology" is like walking into a garment store and asking " I want a shirt."
Sideways price action or consolidation is a phase where institutional players are silently building their positions transacting in smaller quantities.
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What we need to understand is that big players have huge amounts of money and one major disadvantage of having such large cap is that they cannot transact in big quantities without being spotted (aka volumes)
In order to minimize this disadvantage to an extent, they will begin building their positions with many smaller blocks of orders to look like multiple small players and to not alert other market participants much.
Yesterday, I met with a trader who wanted to make it in the markets. Advised on the following psychological pointers from my own exp:
Time:
1. You cannot become a successful trader overnight. 2. How long it takes depends on a person, the time they can dedicate everyday, their level of emotional control and balance etc.
Expectations:
1. There is no magic setup to turn 1L into 10L in a week or month. 2. Compared to other professions, trading can make you rich faster but not UNREALISTICALLY faster. If you have a golden goose, take one golden egg per day, don't cut its stomach in greed.
Thread on risk and trading psychology in day trading:
Some traders stress too much on RM and TP to cover their many incurably inept trading methods. Some simple rules which is all you need are:
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Pre-Trade:
1. Have a proven system in place. 2. Do not risk more than 1% of cap per trade. 3. Fix a number of trades per day. I don't go beyond 4-5 trades at any cost. Many days, I am done in 3 trades only. 4. Focus on R:R but also make sure you focus on POP.
(2/n)
During the trade:
1. Be a trend follower. Higher rate of success. 2. Do not always book in full at target in the direction of trend. Book partial, move SL to cost and let it trail. More often than not, trends continue than reversing and will give extra gains.