Those are the two most important decisions a trader has to take. They sort out the winners from the losers, in this tough activity.
So how would you make these two calls?
First, let’s focus on the decision to enter a trade. Once you choose whether it’s going to be a “Buy” or “Sell” call (as explained in the previous article), you now need to pick the right entry point. For Buy trades, you need the lowest possible price. On the other hand, for Sell trades, you look for the highest possible price of the asset you intend to trade.
Let’s use an example. Suppose you wanted to trade gold on the upside (a Buy Call). You look at the price chart, and you notice that gold has been trading between $1595.00 and $1610.00 an ounce over the last 24 hours. Then you go through the latest financial news. The stock markets, say in North America, have been going down for the last five sessions. You also look at world news: There’s a conflict in Syria, an earthquake in Japan, and the Russian army has just entered Georgia to aid the local government in its struggle against the rebels.
How does all of that affect your trading decisions? Let’s take them one by one. The slump in the stock markets makes most investors flee to safe havens, namely gold and silver, which means the prices of these two precious metals are destined to rise, at least on the short-term. The instability in Syria and Georgia points to threats to oil supply, and higher demand of weapons. Liquid cash is at play here. Again, gold and silver are easier to convert into cash than stocks. This supports the speculation that prices of these two instruments are expected to go up.
Now you are more confident that a Buy Call is the way to go. Your next step is to choose your entry point. This is tricky. If you jumped in immediately, you might lose the chance of entering at a lower price. If you waited too long, you might miss out on the window of opportunity, as prices already started to ascend rapidly.
Your target, as a wise trader, should not be to enter at exactly the lowest point, and leave at the highest possible price. If you insisted on that scenario, you would lose many trades. So what is your target? You want to have a piece of the pie, not the whole thing, in order to avoid the risk of making your pie and eating it!
Going back to the price range, you put an “order” to buy 10 ounces at $1600, and sell them at $1605. Why would you do that? To be as certain as possible that your net would catch some fish in the middle. The price may not go as low as $1595, or as high as $1610 again. But the probability, given all the analysis, of the price moving through the range between $1600 and $1605 is quite high, and that’s what you want.
This kind of trade may look modest, but it would give you $50.00 within a day. Keep in mind that this should not be the only trade you do. You should get involved in two to four trades concurrently. This serves the objective of diversification, which we’d talked about before.
In today’s online trading, all platforms give you the facility to set an entry price, a stop-loss price, and a take-profit price. Your role is to pick the right prices.
Once the trade is executed, you should keep an eye on it. If it behaved in a way that would indicate a bad result, you would need to interfere, by either closing the trade, or adjusting the stop-loss and/or take-profit prices. Your first and most important objective is to preserve your capital, then to make profits.
A wise trader would not discount a small profit if he/she felt that waiting for a higher profit might risk a good portion of his capital. A profit of $2.00 is definitely better than a loss of $10!
Another aspect of trading is repetition. If you couldn’t make the profit you had anticipated, you would go out at a lower profit, preserve your capital, then enter again, using the same asset, or a different one. The bottom line is to create momentum and good income. The kind of asset is irrelevant. It’s only a vehicle. What matters is how you handle the asset in a way that brings the best possible results, under the current circumstances.
To be continued…
The Wealth Maker