Essential Trading Concepts
There are very a few pieces of vital
information necessary to effectively use the strategies given here. No
matter what trading system or time frame you operate in, you must be
able to determine five things at any given time: entry price, loss
price, profit price, trend, and counter-trend. If you are lacking anyone
of these of bits of information you are better off sitting on the
sidelines.
The simple creature that the market is, dictates that it can only move in one of three directions at any given time; up, down, or sideways. Traders have to figure out a way, to the best of their ability, to take advantage of the up, down, or sideways movement. The straightforward approach of the average retail trader requires that they buy when the market goes up, sell when the market goes down, and stay out of the market when it moves sideways.
The problem with the straightforward approach arises when the market doesn't follow the game plan. You go long or short, the market moves in the opposite direction for a little while, then sideways, then back in your direction, and finally collapses into the opposite direction. Until now, the only response for the retail trader was to use a stop to protect them from loss. Yet still traders lose money.
By dissecting a trade into its five core components you give yourself the ability to exploit the market the same way that professional traders do. You go one step beyond stop orders and the need to predict the markets. You are capable of exploiting the entire daisy chain trading effect with grace and ease.
Daisy Chain Trading Effect
If there is any secret to trading, it lies with how effectively you manage margin and leverage. The typical approach to margin and leverage is to view it as a dangerous enemy. Whether it is futures, spot forex, or options, the fear of the leverage they provide can be paralyzing. This does not need to be the case.
Futures, spot forex, and options were not created in a vacuum. While they may be traded separately, it was never the intended purpose. Futures and options, along with many more sophisticated instruments, were designed to operate as insurance for the cash market. Whether the cash market is stocks or actual gold and oil, futures and options were created to help protect the owners from losing money.
Time and time again, throughout my books and in my seminars I talk about the daisy chain trading effect. The cash market is protected by futures, which is protected by options, and options protect both cash and futures markets. When the market is looked at in this way a host of opportunities open up. No longer is the leverage or margin your enemy, but a part of your risk management plan.
This feeds directly into trading flexibility. It quickly becomes apparent that opportunities are created by combining the advantages of the various derivatives products with each other and the cash market to maximize returns and minimize losses. In a world in which you use the various forms of leverage and margin together you are able to buy stock shares, but guarantee that your loss won't exceed the strike price of the option, or CFD (for my international readers), that you have put in place to protect yourself. You can combine spot forex trading with futures forex contracts without batting an eye.
This is the approach that professional traders take to trading. Nothing is sacred. You neither attempt to fixate on a time frame, nor do you artificially constrict yourself to one type of financial product. The reality is that technical analysis can be applied in the exact same way, no matter the financial product. So there are few, if any, benefits to being just a commodity trader, or just a forex trader, or just a stock trader.
By being aware of the daisy chain effect and then utilizing it, retail traders develop a proactive approach to the markets. The emphasis shifts from profits to loss management. This is a necessary shift in order to achieve longevity in trading. Developing ways to minimize loss first allows profits to handle themselves. This is the core of the professional trader's approach.
Risk Management Is Not the Same as Money Management
Loss, loss, loss! This is what risk management deals with. Managing your loss. Whether you use stops, limits, or any of the other strategies given, all risk management does is explain how you manage loss. Money management, however, deals with how you handle your money "win, lose, or flat." There is an essential confusion between the two topics. Money management deals with how you treat the money in your account. Risk management deals with what you do when faced with the risk of losing your principal and profits.
Stipulating that the most you will risk on a trade is 5 percent or that you will only commit one-third of your principal to the markets at any given time are both money management rules. They have no bearing on what you do to achieve these goals. But if you say that every time you put on a trade you will use a stop to protect from losing 5 percent of your account value, then you have risk management.
In this way you separate the actions you take to protect yourself from loss, from the amount you are willing to lose. You can adjust the amount from 5 percent to 50 percent, yet still maintain the same set of risk management strategies to get the job done. Knowing the difference is essential to understanding how to react to the markets when your principal is affected by sudden gains and losses.
The simple creature that the market is, dictates that it can only move in one of three directions at any given time; up, down, or sideways. Traders have to figure out a way, to the best of their ability, to take advantage of the up, down, or sideways movement. The straightforward approach of the average retail trader requires that they buy when the market goes up, sell when the market goes down, and stay out of the market when it moves sideways.
The problem with the straightforward approach arises when the market doesn't follow the game plan. You go long or short, the market moves in the opposite direction for a little while, then sideways, then back in your direction, and finally collapses into the opposite direction. Until now, the only response for the retail trader was to use a stop to protect them from loss. Yet still traders lose money.
By dissecting a trade into its five core components you give yourself the ability to exploit the market the same way that professional traders do. You go one step beyond stop orders and the need to predict the markets. You are capable of exploiting the entire daisy chain trading effect with grace and ease.
Daisy Chain Trading Effect
If there is any secret to trading, it lies with how effectively you manage margin and leverage. The typical approach to margin and leverage is to view it as a dangerous enemy. Whether it is futures, spot forex, or options, the fear of the leverage they provide can be paralyzing. This does not need to be the case.
Futures, spot forex, and options were not created in a vacuum. While they may be traded separately, it was never the intended purpose. Futures and options, along with many more sophisticated instruments, were designed to operate as insurance for the cash market. Whether the cash market is stocks or actual gold and oil, futures and options were created to help protect the owners from losing money.
Time and time again, throughout my books and in my seminars I talk about the daisy chain trading effect. The cash market is protected by futures, which is protected by options, and options protect both cash and futures markets. When the market is looked at in this way a host of opportunities open up. No longer is the leverage or margin your enemy, but a part of your risk management plan.
This feeds directly into trading flexibility. It quickly becomes apparent that opportunities are created by combining the advantages of the various derivatives products with each other and the cash market to maximize returns and minimize losses. In a world in which you use the various forms of leverage and margin together you are able to buy stock shares, but guarantee that your loss won't exceed the strike price of the option, or CFD (for my international readers), that you have put in place to protect yourself. You can combine spot forex trading with futures forex contracts without batting an eye.
This is the approach that professional traders take to trading. Nothing is sacred. You neither attempt to fixate on a time frame, nor do you artificially constrict yourself to one type of financial product. The reality is that technical analysis can be applied in the exact same way, no matter the financial product. So there are few, if any, benefits to being just a commodity trader, or just a forex trader, or just a stock trader.
By being aware of the daisy chain effect and then utilizing it, retail traders develop a proactive approach to the markets. The emphasis shifts from profits to loss management. This is a necessary shift in order to achieve longevity in trading. Developing ways to minimize loss first allows profits to handle themselves. This is the core of the professional trader's approach.
Risk Management Is Not the Same as Money Management
Loss, loss, loss! This is what risk management deals with. Managing your loss. Whether you use stops, limits, or any of the other strategies given, all risk management does is explain how you manage loss. Money management, however, deals with how you handle your money "win, lose, or flat." There is an essential confusion between the two topics. Money management deals with how you treat the money in your account. Risk management deals with what you do when faced with the risk of losing your principal and profits.
Stipulating that the most you will risk on a trade is 5 percent or that you will only commit one-third of your principal to the markets at any given time are both money management rules. They have no bearing on what you do to achieve these goals. But if you say that every time you put on a trade you will use a stop to protect from losing 5 percent of your account value, then you have risk management.
In this way you separate the actions you take to protect yourself from loss, from the amount you are willing to lose. You can adjust the amount from 5 percent to 50 percent, yet still maintain the same set of risk management strategies to get the job done. Knowing the difference is essential to understanding how to react to the markets when your principal is affected by sudden gains and losses.
Noble DraKoln founded Speculator Academy Traders Club, http://www.speculatoracademy.com, where the motto is "Great Trading Ideas Deserve To Be Shared", which is the home of the famous "$1 Trading Course", http://www.speculatoracademy.com/1-trading-course-offer/
Noble DraKoln, has been involved with the trading industry for over 20 years and is a featured speaker on trading and investing around the world.He is a former editor of Futures Magazine, contributor to Forbes, has been a featured guest on numerous financial channels, including Fox Business News, and is a sought after consultant and speaker in the futures, forex, and options world.
Noble DraKoln, has been involved with the trading industry for over 20 years and is a featured speaker on trading and investing around the world.He is a former editor of Futures Magazine, contributor to Forbes, has been a featured guest on numerous financial channels, including Fox Business News, and is a sought after consultant and speaker in the futures, forex, and options world.
