Test the Water Before You Go All In

To get good at anything in life, you have to go through a period of learning, study and practice.

If you want to play the piano well for example, you’re not going to play a Beethoven Sonata from day one. It takes time, and long hours of study and practice.

Getting good at trading markets is no different. You have to do the work and study to get results.

The market must be studied and learned, and not just in some casual way.

Work on yourself, not just the charts

So many enter the stock market, thinking it’s an easy way to make money. But the lazy, ‘get rich quick’ punter will die poor in markets.

And even when you do all the study, trading the stock market can still be challenging for many reasons.

It’s not all about the technical aspects. It’s really comes down to what you bring to the market. Your frame of mind, or your own psychology.

This reminds me to mention paper trading.

Paper trading is recommended by many as a good way to learn. Yes, it is a way to test your theory, or practice your trading strategy.

And paper trading is OK, up to a point.

But it’s not really trading.

It’s only when you purchase a stock that the emotions start to kick in. It’s only when there’s money blowing in the breeze, that you can really test your judgement and emotions.

Emotional control is the most important factor for trading success. It’s what makes successful share market trading possible.

Your mindset, your emotional control, are aspects to trading that often get overlooked in all the trading books.

When you start off trading, you try to learn everything you can about markets. What you may come to find though, is you learn a whole lot more about yourself along the way.

Get your psychology right. What you bring to the market is ultimately the most important thing. Far more important than the technical aspects.

That’s why I suggest you’ve got to be doing the work on yourself, not just the charts.

The market is always giving you feedback

Keep in mind, the market is always giving you useful feedback.

Let me give you an example.

If your trading is stressful, you’re getting useful feedback that you need to tweak things. To fine tune your trading approach. Trading the stock market shouldn’t be stressful.

We all have enough stress in our lives, why make the market another source of stress?

What’s more, if you’re stressed out all the time about your positions in the market, you won’t be able to keep that up over the long haul.

To take the stress out of entering a trade, there are a couple of things you can do.

One, get your position size right.

It’s so important to get that right. It’s a subject that I believe doesn’t get enough coverage.

If you worry about your stop loss being taken, buy less stock.

Get your position sizing right and you’ll mitigate a lot of the stress of the market.

The other thing you can do, is scale into a position in stages.

This is something that the great traders like Jesse Livermore and WD Gann were known to do. So there could be something to it.

You don’t need to load up and buy all the stock from the beginning.

Test the water before establishing your full position. After an initial entry, do not make a second entry until your first entry shows you a profit. When those positions show a profit, then you can start to go ahead and take out your full position. Take it in stages.

The beauty of this approach is that you’re not heavily positioned if the trade runs against you from the beginning.

It allows you to test the water, so to speak. If the stock acts right from the get go, you can then start to add to your position when the share price breaks key levels of support or resistance.

If the market moves against you from the start, you only lose a small amount of capital.

It’s perhaps a less stressful approach. You shouldn’t be losing sleep over your positions in the market.


Terence Duffy,
Chartist, Phil Anderson’s Time Trader

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money