August 18, 2016

The Performance Enhancing Drug (PED) of Trading

Disclaimer

  So many of the top athletes in the world are testing positive for Performance Enhancing Drugs (PED). Pittsburgh Steelers’ linebacker James Harrison, Green Bay's Clay Matthews and Julius Peppers are under investigation for alleged use of performance enhancing drugs. Several athletes at the Rio Olympics were banned due to testing positive for PEDs. The entire Russian track and field and weight lifting teams were banned from competing in the Rio Olympics because of a state sponsored system of cheating was uncovered (including the involvement of the Russian version of the US CIA).  But why do these people feel the need to use PEDs despite the chances of being caught and punished?

  These highly talented athletes cheat because the competition is fierce beyond any layman’s comprehension. Milliseconds mean the difference between getting a gold medal or getting a medal at all. Only the top performers succeed and are rewarded with medals, bonuses, and sponsorships. That means the vast majority of participants fail, about 90% or more. That sounds strikingly similar to the probability of failure in trading.

  Successful trading requires so much from aspiring traders. I cover the Laws of Trading, How to Trade, and Technical Analysis. Clearly, there are so many things an aspiring trader has to learn, practice, and perfect. But the foundation of everything starts with the Timeframe. That is why I wrote this post, to make sure all traders realize the fundamental importance of choosing the right timeframe.

  So before you learn anything else about day trading and try to become the next millionaire trader, make sure you FIRST learn this key principle of trading: Define your Timeframe.

  The timeframe is the price chart--such as the weekly, daily, 5min, etc.--you base your technical analysis on. Why is the timeframe that important? Because the timeframe is the foundation of your technical analysis; it's part of your trading edge--which is a function of your underlying assumptions about the market.

  Technical analysis reveals your conclusions about the probable direction of the underlying security. Therefore, it reveals your high probability entries, stops, and targets. Mess up your timeframe and you mess up everything else in your trading system, regardless of how much thought, effort, and hard work you put into it.

  TL;DR: Identify the timeframe that fits your trading style (i.e., long-term investor, medium-term swing trader, or short-term scalper, etc.), then everything else can fall into place (i.e. where you get into a trade, stop out, and eventually take profits).

Jory

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