Trading Logic – the Key to Making Huge Profits Fast

October 11, 2008

If you trade any financial market, you will be aware that the majority of investors simply don’t make money. It’s not because they lack trading ability – investors don’t make money because they don’t understand trading logic.

A focus on trading logic is essential for any trader who seeks to make money. Forget, opinions and emotions, and focus on the reality of the trading environment - you can then apply trading logic, to make huge profits consistently.

Here are some observations of trading logic, and how you can use them to your advantage.

The Market Price

Firstly, before we look at anything else, we need to look at what moves financial markets:

Supply and demand (fundamentals) + Investor perception = Market price

Therefore, prices are determined not just by supply and demand - but also by people. So, what does this trading logic tell us? - Predictive theories don’t work, but odds theories do work.

There are lots of theories that claim markets move to a scientific theory - this isn’t true - if they did, then everyone would know the price in advance - and there would be no market!

Correct trading logic tells us that while we don’t know exactly where prices are going to go, we can calculate the odds of a move - by studying price history.

While human nature is unpredictable – driven by the emotions of greed and fear, there are patterns that constantly repeat – and this leads us to technical analysis.

Human Psychology Repeats Itself

Trading logic tells us that human psychology repeats itself - because we can see it in charts.

Although there’s never a perfect scenario, we can calculate the odds of success of a trade - based upon what happened in the past. Therefore, by using a soundly based trading method, we can make money - over time.

Day Trading V Long Term Trend Following

From the above, trading logic tells us that day trading is futile. Why? - Because human nature is very unpredictable over short-term time spans. Human nature only becomes predictable over long-term time spans. Look at any currency, (or any financial instrument over time) and you’ll see long-term trends - and they’re the ones you need to focus on.

Emotions are a Trader’s Worst Enemy

Traders hate to trade alone - they constantly seek opinions, and success, from someone else. As the bulk of traders get it wrong, they step into the trading majority and find themselves caught up in a losing mentality.

The only way to trade successfully is in isolation - using trading logic to look at the facts, not what others think.

Trade Entry and Exits

Trading logic tells us that market timing is futile. Why? Because you cannot predict - and that’s what market timing tells us to do. Therefore, you should follow market action - rather than try and predict it. This means leaving top and bottom picking, to the losing majority.

Money Management

As we’re playing an odds game, money management is essential – we must be constantly trying to preserve our capital.

If you lose 50% of your capital, you have to make 100% on your next trade, just to get back to even - so try not to lose money in the first place! This is of course difficult - and involves doing two things:

1. Only trading when the odds are heavily in your favour - and in many markets, this means trading only a few times a year.

2. Taking enough risk - so you aren’t stopped out of your trade, by normal market volatility.

Risk and Reward

Trading logic tells us that risk is a combination of the following factors:

Market volatility + Trading methodology + Money management = Risk of trade.

This complex interaction is much more than setting a stop, or allocating 2% of capital to a trade - which is the way most traders view it. It involves seeing risk in a different light.

Some trades you make may look risky - but if you have balanced the equation correctly, the odds will be on your side.

Trading Logic

There are many other examples of trading logic, that we can look at - but the above covers the most important areas.

To make money, you need to see the markets, and their behaviour, as they are - not how you want to see them.

Don’t make the same mistake as the majority of traders. Instead, think logically, and without emotion - and it will lead you to huge long-term gains.

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