Struggling to identify the direction of the market

Pitfalls of trading can be easily avoided if one is aware of them. In trading, there are two types of possible mistakes.

  1. Small mistakes
  2. Mistakes due to bad judgement.

Small mistakes are inevitable and they do not have much effect. For instance, entering the wrong stock symbol or incorrectly setting a buy level. They don’t affect much. Mistakes due to bad judgement on the other hand, should be avoided by all means. In addition to losing one or two trades, this second group of mistakes can ruin the whole trading career. These pitfalls have to be therefore avoided by watching oneself closely and maintaining high level intelligence in trade.

identifying the market direction

A perfect allusion of trading mistakes is driving a car on an icy road. If you know that driving on ice is dangerous, you can comfortably avoid traveling in a sleet storm. On the other hand, however, if you don’t know about the dangers of ice, you might drive freely as if there were no threat, only realizing your deadly mistake once you are already off the road.

Putting a lot of wasted time and effort into a prediction of legitimate trends is one of the first mistakes new traders make often. Traders can use very complicated indicators, formulas and systems to identify possible trends in trade. The result is that they end up plotting so many indicators on a single screen that they can’t even see the prices anymore. They lose sight of simple decisions about when to buy and when to sell, in effect.

Don’t try to understand too much at once. It has been a common error by some traders, who think that the best system in the prediction of trends is the most complicated one. This definitely is totally untrue. Overdependence on complicated systems often makes you completely lose sight of the basic principle of trading; buy when the market is rising and sell when it is going down. The most important thing to discover is when a trend begins, keeping in mind the fact that you should buy and sell early in a trend. Complicated indicators only make this information difficult to understand.

Simplicity is the other key important issue in trading. You should be in a position of identifying the business trends. For instance, using trend lines. Trend lines are direct ways to let you know when you are seeing an uptrend (when prices make a series of higher highs and higher lows) and downtrends (when prices show lower highs and lower lows). They show you the lower limits of an uptrend or the upper limits of a downtrend and most importantly, can help you see the beginning of a change in a trend.

Comfortable plotting trend lines can be used to make decisions on when to start taking action. These early indicators should always come first and it is after this that you should now come up with plans to use more specific strategies to determine your exact sell or buy point. Examples of more specific strategies are like;

  • Turtle trading
  • Relative strength index (RSI)
  • Moving averages.

These, however, come up after determination of whether there is market trending or the market is not trending.