Top 5 trading tips

Lesson # 1: Don’t Ignore the Warning Signs
When you hear warning signals, listen. One of our
analysts felt the initial subprime earthquake, and went
short US interest rates in anticipation of rate cuts.
However, he failed to run for cover when the first waves
of destruction started hitting the US economy (e.g. Merrill
Lynch, Bear Stearns, and UBS all started revealing
colossal losses tied to subprime problems). He assumed
that stocks would rally in the months ahead because of
the rate cuts and subsequently went long USD/JPY.
Obviously, USD/JPY has fallen over 1,000 pips since
then, but now he knows that when the sea is receding
from the coast, he should assume that a tsunami is
coming, run for cover, and come back to the market when
the volatility drops to levels that are more normal.

Lesson # 2: Don’t Be Right in Your Analysis, but Miss
the Trade
If you’ve been thorough in your analysis and feel
confident that a trade could be profitable, take the
position! What are you waiting for? You may be missing
out on profits. For example, one of our analysts saw
potential in 2007 for EUR/USD to rise from 1.34 to 1.48
and for USD/CAD to fall below parity. However, she didn’t
take the trade, and by the time her strategy flashed buy
and sell signals on these currency pairs, the stops were
much larger than she was normally comfortable with (100
pips or less). However, the eventual rewards were fargreater than the 150 to 200 point risk that was needed,
and by adjusting her position size to risk the same dollar
amount but taking a wider stop, she could have been on
board for a trade that would have reaped major profits.*

Lesson # 3: Trust Your Methodology
You must have a methodology by which you go about
your trading business and you must trust it; otherwise,
you are not operating in a business-like manner, but
rather a chaotic manner. And where there is chaos, there
is nothing. For example, one of our analysts identifies
market extremes in his trading, relying primarily on
sentiment indicators and Elliott Wave counts. At one
point, COT positioning indicated that the JPY was very
oversold and GBP was very overbought. His wave count
(with Fibonacci extensions) indicated that the top for
GBPJPY should be near 250.00. Following his strategy,
he put in orders to sell GBPJPY at 250.50 and every 50
pips up until 252 with a stop above 253. As GBP/JPY
approached 250, he got nervous, cancelled everything,
and followed the crowd to go long. As it happened, the
GBP/JPY top was at 251.10 and within one month, the
pair fell to 219.30. Had he stuck to his initial strategy, he
would have made a handsome profit; but instead, he
received a margin call because he was long.*

Lesson # 4: Take the Time to Find the Best Trade,
Don’t Rush into It
Keep a diary: It forces you to think through your idea
because you have to write it down. By thinking about the
trade instead of rushing it, you will be more critical and
more selective in choosing the best trades to take.
Additionally, a written record provides you with an
opportunity to review your thought process so that you can replicate the successful ideas and modify the
unsuccessful ones. For example, one analyst liked CAD
to the short side but chose AUD/CAD instead of
USD/CAD because he was rushing the trading idea and
forgot to check the calendar for event risk, which was
negative for the Aussie. Now, he always makes sure to
check the calendar as part of his process of keeping a
diary of trades.

Lesson # 5: Know When to Cut Your Losses
Don't be stubborn: Conditions change all the time,
whether they are fundamental or technical in nature. It’s
easy to stay too focused on one particular thing, such as
a support/resistance level, to the point that you become
"confident" it will play out your way. When it doesn't, quit.
Establish stop-loss levels beforehand, know when to cut
out of your position, and don't sit and try to wait for your
trade to work out the way you want it to.