Because of it’s size, I have divided it into three parts to make easier reading.

I guarantee that you will learn from this article, and if you put into practice what you learn,you’ll definately become a more successful trader.

The Path To Successful Trading.

By Charlie Wright

In the broad category of “trading the markets,” there are basically three types of trading: discretionary, technical, and strategy-based.

When I sat down to write this book, my intent was to write only about strategy trading. But then I realized that to fully describe strategy trading, it was also necessary to discuss discretionary and technical trading.

It’s important that you understand the difference between them, which is not always clear. I’ve met many people who believe they are strategy traders when they’re actually technical traders, and vice versa.

I have known and taught many traders, and have observed that there are four distinct stages of trader education: discretionary trader, technical trader, strategy trader, and complete strategy trader.

All successful traders have gone through them. It is almost impossible to be a successful strategy trader without going through all of these stages.

My goal with this book is to help you understand and move through the stages at much less cost in both time and money.

Every trader usually starts out as a discretionary trader. The amount of money lost generally determines how long it takes the individual to start using technical indicators to make trading decisions.

Eventually, as even employing technical indicators fails to move the trader into profitability, the trader moves into the third stage and starts to write strategies based on quantifiable data.

It is at this stage that the trader ordinarily starts to make money. Finally, the strategies and money management approaches are refined and the individual becomes successful as a strategy trader.

The Discretionary Trader

A discretionary trader uses a combination of intuition, advice and non-quantifiable data to determine when to enter and exit the market.

Discretionary traders are not restricted by a concrete set of rules. If you are a discretionary trader, you can make buy and sell decisions using whatever criteria you deem to be important at the moment.

For example, you can use both a combination of hot tips and relevant news stories from The Wall Street Journal, and enter or exit the market based upon this information.

If you begin to lose money, you can immediately exit the market and change your trading method.

You don’t have to use the same techniques day in and day out. It’s a very flexible way to trade that you can customize based on what you think the market is going to do at any given moment.

For the discretionary trader, trades are made using gut instinct and intuition.
Unless a computer is generating a buy or sell signal and you actually follow the signal, your emotions will affect your trading.

I explained in the introduction what problems instinct and intuition could be in trading. Remember fear and greed? In discretionary trading, technical tools such as indicators are sometimes used; however, when they are put to use, they are utilized sporadically as opposed to systematically.

Fascinated by the markets, the discretionary trader is ready to put on a trade at a moment’s notice.
The most uncomfortable part of trading for the discretionary trader is when there is no action. So he will jump on any piece of information, anything that will permit him to take a stab at the market.

Above all, he craves the action.

INTUITION & HOT TIPS.

The discretionary trader uses several sources for his trading decisions. One is intuition, for example, “I see a lot of people in stores, so I think the economy is good, and earning will increase, so the stock market should go up, and I should buy Sears.”

He usually spends a lot of time talking to his broker. “What do you think Joe, isn’t Woolworth’s going to turn around?”

Another is reading and watching the news, “Retail sales are looking strong and Woolworth’s is closing stores to lower their overhead.”

Hot tips are a common way that a discretionary trader gets ideas.

A call from his broker or good friend, or a tip from a discussion at a cocktail party are all places the discretionary trader gets his trading ideas. “Hey George, HTECH Corp. has a hot new product in the works, here’s a stock you can pick up cheap.” If it gets dry in the summer, our discretionary trader may decide to buy Corn, Beans or Wheat.

However, when he looks out the window and notices that it’s raining, he sells the position immediately.

A news story on the nightly news may cause a discretionary trader to short the airline that has just had a crash.

CRAVES EXCITEMENT.

What a discretionary trader loves is the excitement.

He loves being “in the markets,” playing with the big guys. He craves the risk, the excitement of trading, and the gambling rush that he gets from calling his broker and putting in the order to buy.

He loves being able to sell Gyro Corp. based on the news story of the health hazards of their top selling Gyrometer.

He has a real obsession for buying Cotton based on the hot tip from his broker that the upcoming crop report was going to be bullish, and he covets the tip from his friend who called to say that he just bought Techno Corp. because the latest quarterly earnings were going to be a surprise on the upside.

Discretionary traders retain the flexibility of changing their buy and sell criteria from moment to moment, and change they way they trade from minute to minute and day by day. “Well, that last trade was a disaster, so tomorrow I will buy McDonald’s only if it opens up from yesterday’s close.”

They don’t have any discipline, nor do they think they need any.

They use their intuition and their gut instinct, and feel justified in doing so. They think, “Making money is easy, you just have to be smarter and quicker than the next guy.”

I personally don’t know anyone who has made money by discretionary trading. They may have been lucky and won on a few trades, but overall, over time, discretionary traders always lose money.

It is after enough money has been lost that the discretionary trader in some way stumbles across technical indicators.

It may be from the chart book he just looked at where there was a Stochastic Indicator underneath the chart.

Or he may have gone to the latest Make a Million Dollars Trading the Stock Market seminar and found out that using the Relative Strength Indicator is the sure way to stock market profits.

He thinks, “So this is how they do it!” These indicators look like magic. They add some rationality to an otherwise irrational trading style. He thinks, “This must be how the big money players make the big money—they use technical indicators!”

DISCOVERS TECHNICAL INDICATORS.

Once the discretionary trader discovers technical indicators, he or she incorporates some rudimentary ones into trading, usually as additional justification for making the trade. “Not only did Ralph (my broker) tell me to buy Gizmo Corp. but Gizmo has great relative strength. Gizmo’s moving averages are bullish, and the Stochastics are oversold and giving a buy signal as well.”

These newfound technical indicators give the discretionary trader a new lease on trading.

Now our trader has a whole new world in front of him—the world of technical trading. For a while, this newfound world combines with intuition and the discretionary trader views himself as a strategy trader.

He says, “I trade a strategy using moving averages and Stochastics with a dash of daily news and tips from my broker. I am now a real objective strategy trader.”

While the trader may view himself as a strategy trader, this could not be farther from the truth. The discretionary trader’s style is still undisciplined, based on newly educated guesses, and he is probably still losing money.

For a moment, these technical tools were thought to be the answer, and while they add a little more rationale to his trades, the losses continue to pile up. Despite his continuing angst, our discretionary trader is now on the way to becoming a technical trader.

The Technical Trader.

A technical trader uses technical indicators, hotlines, newsletters and perhaps some personally defined objective rules to enter and exit the market.

As a technical trader, you are beginning to realize that rules are important and that it is appropriate to use some objective criteria such as confirmation before making a trade.

You have developed rules, but sometimes you follow them and sometimes you don’t. It depends how confident you feel today and how much money you are making or losing.

If an indicator gives you a buy signal, you may override it because your broker told you the earnings report was going to be negative.

Or maybe the bonds are up, which means interest rates are rising, and you better see how high rates go before you commit more money to this already overpriced market.

You may think, “I have a profit, hmm, I just may take it now.
Even though the Stochastic is not overbought, the markets are tough. It’s not easy to make money. Like my father said, ‘you can’t go broke taking profits.’ At least now I have a winning trade. I’ll sleep well tonight.”

Our trader now begins to realize that using the intuitive and hot tip approach will not lead to profitability.

He now begins to focus on the technical indicators themselves.

There are so many! Moving Averages, Exponential and Weighted. The MACD, Momentum, P/E Ratio, Rate of Change, DMI, Advance/Decline Line, EPS, True Range, ADX, CCI, Candlesticks, MFI, Parabolic, Trendlines, RSI, Volatility Expansion and Volume and Open Interest, just to name a few.

So much to learn and so little time

This whole new world of technical books, seminars, newsletters, and hot lines now begins to preoccupy our trader. He learns all he can about indicators. He wants to find the one indicator that will ensure profitability. He surrenders to what I call Indicator Fascination.


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