There is so much trading information, it can be overwhelming. In this article and video, I reveal the ONLY thing new traders should focus on, learn, and practice to become successful.
In this video I show new traders the only thing they should focus on: establishing a trade setup, and then trading it over it and over again. Nothing else. No matter what market you trade, if an asset isn’t showing you the trade setup you trade, don’t trade. You look for your setup, and trade it over and over again. A trade includes a precisely defined entry point, a stop loss to control risk, and a price target that compensates you for your risk. In the video I discuss one trade setup you can use. You don’t have to use that one. The point is, have one or two, focus on those, and that is all you need.
As a new trader don’t adjust your entry point, stop loss or target once you have placed them. Let math and statistics do the work for you. If you trade trends in the manner discussed in the video you will likely be right more than 50% of the time, and your winners (based on your target) should always bring in more than you lose on your losing trades (based on your stop loss). As you improve, expect to win about 60% to 65% of your trades.
While you can focus on any one particular trade setup you like (it may be triangle breakouts or some other trade setup for example) this trend-channel-pullback strategy is a great one for new traders. Once you know it, your only job is to find that setup, and trade it over and over again, and avoid trading when the pattern isn’t present.
In the video I discuss another video on screening for stocks…you can check that out here: How to Screen For Strongest Stocks in Strongest Sectors – Swing Trading
This video was originally recorded in 2014 by a younger version of myself that was not very well versed in making videos or giving talks, but the information is still relevant.
What to Focus On As a New Trader (Video)
The video discusses a simple trading following strategy, where trendlines provide an approximate entry area. The trendline itself does not tell us when to trade. The overall trend direction tells us in which direction to trade–buy if in an uptrend, or short if in a downtrend–and the trendline just tells us where and when we should start looking for a trade setup.
A trade setup is a set of conditions that tell us when to get into a trade. For this strategy, the trade trigger is something that tells us the price is starting to move back up (if in an uptrend) off the trendline area. Or, if the trend is down, the trade trigger tells the price is starting to fall from the trendline. In the video, I use another small trendline as the trade trigger. Other trade triggers I use include consolidation breakouts and engulfing patterns.
Channels are useful because they show where the price has rallied and fallen in the past. If the trend is up, the bottom of the channel provides a potential entry area, while the top of the channel provides a potential area to exit the trade with a profit. When searching for long trades, scroll through the screener results looking for stocks that are currently near the bottom of the channel. If they are close to triggering, write it down and then watch for the entry signal to occur over the next several days. Do the same for short trades, in downtrends (near the top of the channel).
Once a trade is taken, we are assuming that the price will move toward our target. If it doesn’t, and instead it moves against us, a stop loss is placed to limit our risk on the trade.
For reward:risk, I now usually only take trades with a 3:1 ratio or higher. That is my personal choice, but anything above 1.5:1 or 2:1 is also fine. When I day trade I often use a 1.5:1 ratio, or slightly higher. But for swing trades, I like a higher ratio. I like to be compensated more since I am holding the trades for longer when swing trading. How much we risk is important. It is recommended new traders put only 1% of their account at risk per trade. So if the account if $50,000, the trader can risk/lose $500, and potentially make $1,500 with a 3:1 reward:risk trade. To see how this works, read Proper Position Sizing For Any Market.
The goal of the trader is to simply find trade setups. Nothing else. Everything else is just a distraction, and not necessary. New traders should focus on learning one or two strategies, and then focus on only implementing those methods. You don’t necessarily need to use the trade setup discussed in this video, it is just one option. Knowledge of all the technical indicators or all the different ways to trade or analyze isn’t required. It is fun to learn, so you may choose to expand your mind for personal growth, but it is not required for trading. If you want more trades, then add another trade setup to your arsenal. Trying to get more complicated than that usually results in worse performance, not better.
It is still important to find the best conditions to implement your trade setup. For example, after 10 or 20 trades, you may notice that your results are much better when the trend is very strong. This relates to concepts called velocity and magnitude. You may also notice that if the price is falling very aggressively to the bottom of the rising channel you will lose more often, compared to when the price drifts slowly to the bottom of the channel or slows down a bit before reaching the channel bottom (also related to velocity). We are still focused on our trade setup, but we can often find small ways to improve our trade selection.
If you interested in learning a complete method of swing trading stocks, including how to find trades, how to manage risk, where to enter and where to exit, then check out my Stock Market Swing Trading Video Course. More than 12 hours of video shows you how to swing trade efficiently, in less than 20 minutes a day.
By Cory Mitchell, CMT