The Secret of the Perfect Trading Entry |
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| By: Jimmy Cox | ||||
Unfortunately, novice traders need to get something right in their minds up front: there is no perfect indicator. So why do people believe there is? Trading guru and author Van Tharp suggests it's due to the fact that many novice traders feel that by being intrinsically involved in the selection and entry into a particular trade they subconsciously believe they are some how in control of the market. He calls this the lotto bias and it can also be witnessed in people who pick numbers that are significant to them - for example, dates of birthdays or other anniversaries - when playing the national lottery. Picking these numbers gives the punter a sense of control and power. They feel that somehow these numbers are better than any other and are more likely to win. In reality, the numbers chosen are no more significant than any other combination available. It is the fact that they have linked an important emotional attachment to certain numbers that gives the player a sense of control - it has nothing to do with increasing the likelihood of winning. Traders do the same with their entry. When entering into a trading position you are in absolute control of the trade entry. You decide whether or not to pull the trigger. Unfortunately most traders hold onto this sense of control; however, once you are in a trade you have absolutely no control over the direction the market takes - it will do what it wants! The fundamental truth is: it's not when you buy the stock that determines how much money you make, it's when you exit and most importantly how much you put into the trade. The following example may clarify this point. Let's say you are interested in buying stock XYZ. Your trading system tells you to buy the stock at $10. Your exit signal is generated when the stock hits $12. Let us consider two scenarios where you invested (1) $1,000 and (2) $5,000. (1) For $1,000 you will be able to purchase 100 shares at $10. You will sell these shares for $1,200 when they hit $12. This results in a profit of $200 on the initial investment. (2) For $5,000 you will be able to purchase 500 shares at $10. You will sell these shares for $6,000 when they hit $12. This results in a profit of $1,000 on the initial investment. It sounds elementary but it is not the trading entry that determines how much you will win or lose, it is actually the amount of money that you put on the trade in the first place. This is a core principal in setting excellent money management. |
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| Article Source: http://yourfinance.co.za | ||||
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