The Tao of Trading

Have you ever bought a stock because an analyst recommended it or it looked promising, only to have it sink along with the prospects of you gaining a profit in the near future?

Cautionary Tale One

I did that with Tesla (TSLA) stocks recently.  On most days, Tesla drops fairly dramatically at the open, then fluctuates fairly dramatically up and down during the day with a high range often as much as $4 to $8. Most days you can count on at least $3 a share for as many shares as you can buy. A day trader will take the money and get out by close.

Tesla trading chart
A good trading day for Tesla

Not that day.

I started low and mostly fell in a downward trend all day. Instead of selling, I bought more as it fell expecting it to reverse.  It never did that day. Exactly the wrong thing to do.

A Better Way

I have been taking a course on a trading style that looks at the market fresh each morning, and buys and sells the fluctuations.  I looked at the daily chart at the end of the day and realized that their approach would have generated a lot of profit.

Here are the simple rules.

  1. If the stocks are going up, buy.
  2. If they continue to go up, buy some more.
  3. If they go down, sell.  If you can sell short, sell short.
  4. If they continue to go down, sell some more.
  5. Buy on the way up using rules 1 and 2.

The only risk is holding overnight for short term trades.

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Cautionary Tale Two

I used this strategy nearly perfectly with Twitter (TWTR) for two days, then made the mistake of not selling the last batch at close. I was in profit and had my bid one cent higher than the last sale. I was thinking I had bought fairly low and the next day would continue in a similar range.

I was wrong.

Prices started 13% lower next morning and stayed there. The second day almost returned to break even.

twitter_fall_1000

If I had not had money tied up in TWTR, I would have said, “well that is weird”, and applied the strategy to Tesla, which would have been a winner that day. Live and Learn!

Why Tao?

There are two aspects of Taoism that apply to trading: Energy Flow and Seeing What Is.

Trading Chi Energy Flow

Taosts refer to energy as Chi. Trading is really a massive energy flow of investments. Money flows between currencies, and from currencies to equities, commodities, futures, options, bonds, and other holdings. It is one huge energy dance!

Seeing What Is

While there as some mystical branches of Taoism, it is grounded in seeing and accepting the world as it is without overlaying a lot of abstract notions and wishful thinking.

A farmer pays close attention to the seasons and the weather, and takes action appropriate for the season and actual weather conditions. Plant in the right season.  If on the day you want to plant it happens to be snowing, do something else.

No amount of wishful thinking will change the seasons or the daily weather.

It is the same with trading. I got myself into trouble on the two days by having expectations about the way I thought the market would behave, then not reacting appropriately to what was happening.  I knew what to do, but my attachment and expectations got in the way.

Chart Reading Skills

Today there are an incredible set of tools available to casual investors that even professional traders dreamed of a decade ago. The main tool and skill set for a trader is to be able to set up a chart with real-time data to see what is happening with a stock or other investment.

The screen shot of the twitter fall above has indicators for range, direction, momentum, index trends, and last trade.  In other words, the chart shows what is happening minute by minute.

With understanding, skill, and practice, a trader can learn to call direction changes correctly eighty or ninety percent of the time.

You can learn the skill too.  There are many only resources to learn about how to interpret candle patterns, studies such as Slow Stochastic momentum graphs, parabolic SAR indicators, moving averages, and much more. It can be simple or as complex as you like.

The Simple Strategy

The simplest guidelines are these:

  1. If the chart bar (1 or 2 minutes) is showing green and the asks are going up, buy.
  2. if the chart bar is showing red and the asks are going down, sell.
  3. It is better to get out right away at a small loss or gain if the direction changes against your interpretation. I am still getting stung by not doing this!

You will make better decisions with practice considering other indicators, though these simple guidelines will provide opportunity for growth with almost no risk if you are disciplined. Low commission rates help a lot.

Use the Discipline of a Martial Artist

There are many parallels to learning to trade and learning a martial arts. In both cases success comes from mastering the skills, being disciplined, and interpreting and reacting correctly to what is in presently in front of you without being distracted by wishful thinking.

Recommendation for Starting

You can sign up for a paper trading account with one of many brokers to observe live markets and practice trading skills. Interactive Brokers has a great set of tools and low fees when you are ready to do some real trading.

Be patient and study and practice for a month or so before jumping in with real money.

Warning! It can be somewhat addictive!

And if you follow the guidelines described as A Better Way, you can make money with little risk. Then trading becomes a Fun and Profitable game to play.

 

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