If you are a follower of our work and price action teaching strategies, then you have heard us say it often, and that is the fact that the only way to truly make money consistently as a day trader is to learn to read a price chart or learn to trade on the price action alone. Recent research proves that price action trading strategies work, and this research confirms our price action teaching strategies are sound.
One of the biggest mistakes made in the trading world is that traders like to buy when prices are rallying and they like to sell when prices are falling. However, what normally happens is that traders buy in at the highs, and then sell into the lows. No sooner than they enter a trade, prices are suddenly turning and their trade entries are quickly moving against them. The other problem is that traders are always looking for reversals in a trending market, so they are constantly selling into rally’s and buying into reversals, only to see the trend reassert itself and quickly put then into a losing trade.
Wrapping the above up in a nut sell, what the information is telling us is that the key to making money as a trader is to buy low and sell high, or sell high and buy low. There is no other way to make a profit, because any other strategy will cause you to lose money. This holds true for any trader, and it applies readily to both swing traders and day trading types as well. Hopefully you agree, and if you don’t, then spend some more time reading all of the free trading information that we have here on our website, because you will hear us say it over and over: The key to making money is to buy low and sell high! It’s really that easy, but learning how to do this is the hard part. The purpose of this article is to share some research that backs us up though, so we will share some of that research with you in the remainder of our post.
Below is an excerpt from a recent article we found at www.seekingalpha.com. This article by Nat Stewart provides some great information on his research into what is really nothing more than proof that buying high and selling low is most often a losing proposition for traders. Here is what Nat had to day.
Many traders approach the market with the belief that good trading ideas must be complicated. Traders dive right in with arcane theories, advanced mathematical approaches, or highly subjective approaches that only an eye with natural talent and 10,000 hours of screen time can identify (take your pick).
The NAS Trading perspective is that simplicity is often the best approach. Simplicity can work for a simple reason: The vast majority of investors have an inordinate tendency to do the wrong thing at the wrong time. These emotionally driven capital flows show up in the form of market patterns.
It is common to hear that most investors have bad timing. What is the evidence for this assertion? I believe it can be found in the difference between time-weighted and money-weighted returns.
Where does all the money from investors’ bad “bad timing” go? If you can consider this question, you can understand the opportunity more clearly. The goal of active trading or investing is to be on the other side of the great mass of market participants that consistently make bad decisions. How do we identify these opportunities?
Nat goes on to show some great examples of how investor sentiment encourages the exact wrong behaviors in the market. As the market is rallying, it feels good to buy, and as the market is falling, it feels good to sell, but what does that do for a trader? In reality, it causes them to buy high and sell low. However, in order to make money, we must do just the opposite, which is sell high and buy low. Hopefully we have reinforced this for you by mentioning it multiple times. Unfortunately though, reality tells us that no matter how often we reinforce this line of thinking, in reality, most traders continue to follow the crowd and do what feels good, which is usually the very wrong thing to do.
If you truly want to become a profitable trader, you must learn how break the cycle of buying and selling at the wrong times, and instead, learn to enter at what we call “key entry points.” These key entry points are buying opportunities at lows and selling opportunities at highs. There are different ways to do this based on whether or not the market is trending or range bound, so you must understand the difference in which we approach these two market conditions. In the end, understanding how to read a price chart, or understanding price action trading is the key to solving the problem of becoming a profitable trader. Research proves that price action trading strategies work, and if you want to learn to trade price action, then you can get the details on how to do so at: http://priceactiontradingsystem.com/pats-price-action-trading-manual/.