​Translating analysis into concrete trading decisions

November 27, 2016 18:00

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Dear Traders,

Did you ever wonder why setting up analysis seems simple but trading turns out to be more complex?

Or perhaps you have noticed the opposite…

…that trading comes natural and effortless but setting up analysis is a major headache.

Why are most traders better at analysis and others at trading?

Simply said, both activities are really two totally separate activities – they require a completely different skillset and mindset.

This article dives into the core principles of each activity and shows how traders can combine.

Also, I will explain how traders and analysts are able to find that right balance.

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Trader or analyst?

The starting point is to recognise whether you are more of an analyst or a trader.

Most traders have a natural preference for one of the two camps.

So, the first question you should ask yourself is whether analysis or trading gives you more joy.

Eventually, I found a balance between trading and analysis but it did take time to build experience.

The process can be accompanied with some changes along the way.

For instance:

  1. at first, I was heavily focused on trading
  2. then I became more analytical over the years
  3. and now I feel that there is a balance between the two.

The triangle of technical analysis

When analysing the market structure of a financial instrument, like a currency pair or CFD, I always keep in mind these three pillars of analysis:

  1. trend and impulse
  2. support and resistance
  3. patterns.

This helps me understand the larger picture and the market structure with much more comprehension.

It also allows traders to understand the path of least resistance and evaluate the trading charts on an entirely different level.

Above all, it determines whether the instrument is interesting to trade.

I have no issues with skipping an instrument or a particular timeframe in favour of finding something more suitable.

After a thorough analysis, I choose the best instruments and make a shortlist of Forex and CFD pairs which qualify.

For me, strong impulse and chart patterns are often key elements.

You can get more information on that in the video below.

The triangle of trading

After completing the analytical part, it is time to move on to the next task.

At this point, I need to replace my analytical cap with my trading cap.

In the previous part, the main focus was on "planning the trade"...

...but now it's time to "trade the plan".

Here, the focus is on not overthinking your approach or even rethinking it from scratch.

As a trader, my core concern is to understand these three points:

  1. zones: the placement of key decision zones, or POC (point of confluence or control), on the trading chart
  2. triggers: visibility of confirmation signs (triggers) in the decision zone
  3. entry details: entry method, entry level, stop-loss and target zone.

In this phase, I am monitoring the charts and ready to execute a trade if the charts confirm my analysis.

Of course, it is a fine practice to build in moments where you revisit your analysis to make sure the setup is still valid…

...but the majority of the focus rests on trading itself.

Time for thinking versus reacting

At trading firms or funds, the roles of trader, analyst and risk management are purposely split.

There are good reasons for that, like enhanced focus and efficiency.

Retail traders do not have the same luxury but they can copy the same style by first completing their analysis before focusing on trading.

During my many years of trading, I noticed that splitting the duties between a trader and an analyst is the best way to avoid confusion.

It helps remove distraction and improve focus.

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There has to be a clear moment when traders do the "thinking" part versus the "reacting" part.

Mixing the two is a recipe for disaster, since it leads to impulsive reactions (chasing the market) and passive inaction (like paralysis of analysis).

In other words, it is better to stick to the battle plan and risk management plan rather than change course half-way.

You need to realise that no plan can avoid losses…

...and losing days and second-guessing your plan will certainly not help in the long run.

The upside benefit of sticking to the plan is that you are better able to evaluate your performance.

It can also help you understand whether any changes are needed in either your trading plan or the execution of your plan.

Remember that the trading plan should steer traders to long-term profitability.

Evaluations are key to keeping you on the right track and helping you improve.

Want to learn more?

Join our Zero to Hero course, where we discuss how traders can find a trading style that suits them and much more.

Cheers and safe trading,

Chris

Zero to Hero Trading Course


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