In part 18 we looked at alternative concepts in technical analysis. In part 19 we turn our attention to the world of Japanese charting. In fact, this and the next three parts (Renko, Kagi and Line Break) will all focus on the Eastern approach to technical analysis. We start with Heikin Ashi - an often forgotten and very effective way to use Japanese candlestick charts. Understanding this ancient method of candlestick charting can certainly reap dividends for your trading!

Trading Mistakes

I've noticed with both new and old traders alike, the propensity for them to cut out of trades far too early and regret their actions as they see the trade move in the direction they first sort to a much bigger degree. The reverse can also be said for setting stop limits and pulling them too tight and again being forced out of a potentially winning trade unnecessarily.

'Amateurs want to be right. Professionals want to make money!'

This trait is most prevalent (and understandably so) in new traders. I put this down to new traders falling into the trap that 'Amateurs want to be right. Professionals want to make money!' Due to their trading naivety they force trades to a conclusion rather than sticking to their original mental trading model strategy.

‘As we start to win we become more risk averse and as we start to lose we become bigger risk takers!’

Another major psychological problem is that as we start to win we become more risk averse and as we start to lose we become bigger risk takers! The old adage that you must let your profits run is very true!

Of course, that is what makes trading fun and also very difficult! Pareto's 80/20 rule is very relevant here. I believe trading is 80% psychological, using the other 20% to store your trading knowledge and skills.

‘Trading is 80% psychological’

Having a clearly defined trading plan and strategy would aid this process but I have noticed whilst teaching and monitoring many of my students that they simply like to tinker.

They struggle with the psychological movement of the price of any given asset and get too absorbed in the now and become clouded when trying to decipher the current trend: adjusting stop losses, pulling in limit orders and making irrational decisions.

So even with the best laid plans the actual trade can go horribly…

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