When first starting out trading any instrument, many beginners already have a thought framework in place whether they are aware or not. Most of the time, this thought frame work is conventional in nature. This means that their reasoning process relies on things like conventional market wisdom, other peoples opinions and gut feelings. From the start, new traders are set up to fail and it is simply because they focus on the wrong information. In order to compete professionally in the trading world, a specific thought process needs to be developed in order to value and weigh market information effectively.
An effective thought framework for a professional trader involves knowing what information to focus on and how to analyze it properly. Keep in mind there is no single way to analyze market data, it all depends on what you are observing and how to apply that information to your risk management. When it comes to a thought framework for trading, it is first important to understand the natural processes that are present in a financial market. For example, one concept that we observe regularly is long or short covering. The conditions for this trader behavior to occur can be isolated to specific price levels and formations.
Instead of being distracted by news, random price action, or other peoples opinions, the traders in our program learn to focus on and compare variables related to price action. Price action analysis involves identifying trends or range bound conditions through price structures. It also involves observing historical price information from larger time frames and comparing that to more current price structures. For example it is possible to have a broader bullish trend while observing a bearish correction within that trend on a smaller time frame. Inexperienced traders are more likely to define this bearish condition as the “trend” because they are easily blinded by their short term indicators. They take short positions with unreasonable or irrelevant expectations, meanwhile they are shorting into a broader structure that is strong. Having a flawed thought framework or not knowing how to process this information into expectations that are relevant to market conditions is the sign of a conventional trader.
Following steps to collect market variables and compare them to come up with actionable trading ideas is easier said than done. Without a strong understanding of the market processes that generate this information, it is hard to interpret markets intentions as price action unfolds. This is why it is so important to have an experienced trader regularly evaluate and offer feedback on your trading performance.
I use these steps in my weekly analysis videos, but if you want to learn them first hand, then consider my one-on-one training. Either way, in order to grow as a trader, you must have a process that you follow every time. I hope this helps. Please let me know what you think.
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Marc Principato, CMT,
*No Relevant Positions