Trading is not about Searching for Trades «

Trading is not about Searching for Trades

Trading is about using analysis (specifically technical analysis in this context) to determine when and where to make profitable trades. Trading is not about using analysis to search for trades to make. If these two sentences appear to say the same thing, then stop trading until you have read the rest of this article, because the difference between them can mean the difference between making a profit or not.

Fitting Analysis to Trades
Many traders believe that analysis is about looking at a price chart searching for the next trade to make. As a result, they will try many different time frames, they will use many different indicators, and they will draw lots and lots of lines, hoping that one of the combinations indicates that a trade is available. They will then make that trade believing in all honesty that they have performed good analysis, and have uncovered a potentially profitable trade.

They are wrong, and in all likelyhood the trade will not be profitable, and even if it is, their trading will probably not be profitable over the long term.

Fitting Trades to Analysis
In contrast to most traders, professional traders believe that analysis is about determining when and where to make trades. They will perform their analysis, and then wait for their trades to occur (or not), but they will not change their analysis to find a trade to make. They will not try any different time frames, they will not use any additional indicators, and they will not draw any additional lines. If and when their trades occur, they will make the trades according to their analysis, but they will not change their analysis in any way.

This is the correct way of using analysis, and assuming that the analysis is correct, their trading has the potential to be profitable over the long term.

Discretionary and System Trading
The same concept applies to both discretionary and system trading.

Discretionary traders should perform their analysis (either in advance or in real time), and then make a trade if (and only if) a trade is available. Once the analysis has been performed, it can be modified according to the market’s dynamics, but it should not be modified to create a trade.

System traders should create their trading system, and then follow their system exactly, making the trades that are indicated. Once the trading system has been created, it should not be modified during trading (e.g. no changes to time frame, or indicator length, etc.). For example, if a trading system is created using a ten bar moving average, only those trades that are indicated by the ten bar moving average should be made, and not those that would have been indicated with an eleven bar moving average.

Analysis and Psychology
One of the reasons that traders fit their analysis to trades, is that it is very difficult to not make any trades, especially when a market is moving in a manner that would have provided some profitable trades. One of the primary differences between amateur and professional traders is that amateur traders are usually desperate to make a trade, and are incapable of patiently waiting for their next trade, whereas professional traders will wait as long as necessary for their next trade (e.g. even a professional scalper will happily wait days for a trade if they have to).

One way to determine if you are fitting your analysis to trades is to consider your activity level. If you spend most of your trading making adjustments to your charts (e.g. time frames, indicator settings, etc.), then you are most likely performing your analysis incorrectly, and you will probably have a very short trading career.


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