“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”
Peter Lynch
Disregard Short-Term Forecasts
“Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply…and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”
Peter Lynch
Be Patient and Think Long-Term
“Invest for the long haul. Don’t get too greedy and don’t get too scared.”
Shelby M.C. Davis
Markets Fluctuate. Stay the Course.
“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.”
Shelby M.C. Davis
Arguably this could be the most famous quote by Benjamin Franklin still in use or quoted popularly. We’ve often heard our elders advising us on saving money by quoting this to us. Although this quote is self-explanatory and the thought behind it is to make one realize how saving a penny is actually an earning in disguise. Often we get tempted to buy things overlooking the price, irrespective of the requirement. Perceiving the quote from a finance and investment angle, when a penny is not spent and is saved, it could be invested. By investing the saved penny in Mutual Funds, you can earn more than its initial potential when left idle
To master any work or activity, knowledge is unquestionably the master key that helps us in achieving it. Partial or no knowledge can result in delayed achievement of our goals or deter the possibility of achieving it ever. Linking the quote with Mutual Fund investments, many investors are unaware of the scheme they’ve chosen to invest in. Many at times, they opt for schemes that are not in line with their financial requirements because they’re unaware of their risk appetite, investment horizon, investible surplus or their research is not aligned with their financial goals. These investment mistakes are often caused by lack of knowledge. To counter this and bring about a meaningful change, it is wise for the investor(s) to extensively read and research on the different mutual fund schemes, understand their risk appetite and list down their financial goals. Only then will it be possible for the investor to reap the full growth potential of their investments
Any perfect budget, financial plan is only effective if it is followed diligently. In the quote, Benjamin Franklin emphasized on the little expenses that are nothing but loopholes in disguise can cost you heavily. Binge spending, irresponsible use of credit card surmounting debts with heavy interest rates and irregular investing pattern result in financial instability. To be money prudent, it is essential to strictly follow the budget or investment agenda and identify loopholes and avoid all means that conflict with your financial goals or financial stability
Procrastination and lethargy are the biggest hurdles on your path towards creating wealth and attaining financial stability. It is widely advised to start investing in Mutual Funds at an early stage of life to reap its benefits later. It is evident that the clock will keep ticking despite you staying still and time shall not reverse. While there are several consequences of delayed investing, one such consequence is that despite making high investments, the returns in comparison would be weaker. Also, with the gradual passage of time, there comes a difference in the financial requirements, responsibilities and risk appetite. High financial responsibilities can be correlated with lower risk appetite, which eventually leads to an overshadowed investment agenda and returns. This can be explained with an example;* Consider Mr. X is 21 years old and Mr. Y is 41. Both of them invest an amount of Rs. 12,000 per annum (i.e.Rs.1,000 per month) for 20 years. Considering the 20% CAGR returns, their money grows upto about Rs. 26,88,307/- Now Mr. Y is 61 years old while Mr. X is at 41, the age where Mr. Y started to invest. If Mr. X continues to invest the same amount, considering the CAGR to be 20% by the age of 61 years his returns would be Rs. 10,57,51,552/-
Although change is the only constant, change may not always occur instantly. To experience the joy of getting the salary update on your phone, one has to work the entire month and wait for it. Likewise, achieving your financial goals via Mutual Fund investments is not an overnight process and requires a certain time frame to display the desired results. As an investor, you must invest regularly as that’s how the power of compounding works. Impatient behaviour like redeeming in the midst of your wealth creation journey will bring you nowhere close to your financial goals. Investing in equities require investors to stay invested for a longer period of time to watch their financial dreams come true.
*The illustrations are used to explain the concept and should not be used for development or implementation of an investment strategy.
In price action trading strategies, you can use several simple but effective tools to decipher the market bias.
The market never moves in a straight line. Instead, it moves in wave-like price swings, creating swing highs and lows.
Most price action trading strategies are sensitive to the market structure built by these swing pivot points.
Upwards sloping trend lines track bullish markets, and downwards sloping trend lines follow bearish markets.
While false breaks offer pullback setups, a decisive trend line break signals the beginning of a new opposing trend.
For another example that uses a trend line to define market bias, refer to the last section of Template for a Simple Day Trading Strategy.
In a bullish market, support levels are likely to hold up.
In a bearish market, resistance areas tend to keep the market down.
By paying attention to how the market reacts to significant support and resistance areas, we can get a glimpse at the actual bias of the market.
Many price action trading strategies include volume analysis.
One of the best uses of volume is paying attention to volume spikes. You can learn more about this concept in this article.
The chart below shows how volume spikes help to define an effective support area.
Another powerful method to work out the market bias involves applying the techniques above on higher time frames.
For instance, you can analyze the trend line on the daily chart to figure out the market bias. Then, adhere to that bias as you find setups within the intraday session.
The same approach applies to other tools like the market structure and support and resistance.
When implementing price action trading strategies, integrate these tools to determine which direction the market is more likely to head in. This is the first step in any price action trading approach.
An integrative approach makes sense as these tools are not mutually exclusive.
For instance, a trend line is a form of support and resistance; and analyzing the market structure often leads to drawing reliable trend lines.
The importance of market bias also explains the rise of global macro trading and trend following strategies. The former uses fundamental data, and the latter employs technical methods. But both approaches focus on aligning themselves with the market bias while putting less emphasis on the exact timing of their entries.
A trading setup is a specific set of market circumstances we want to see before considering a trade.
The starting point is usually a price pattern within price action trading strategies.
Examples of short-term price patterns include an inside bar, reversal bar, or candlestick pattern like Engulfing or Morning Star. Some price action trading setups focus on longer-term chart patterns like Head and Shoulders and Double Top.
But didn’t we just state that the market bias provides us with the trading edge? So then, why can’t we just figure out the market bias and jump right into the market?
Why do we need a trading setup?
In theory, we can simply enter a trading position once we are confident of the market bias. Once we change our bias, we exit and maybe reverse our position.
However, this way of trading requires deep pockets.
This is because the adverse price change between the time we enter, and the time we realize that our market bias has changed, can be huge.
Since retail traders do not have deep pockets, we need to control our risk by risking little pockets of money each time.
This leads us to the purpose of a trading setup – risk control.
We can pinpoint a stop-loss point by timing our entries with a setup.
This is especially true for price action setups with a natural and logical pattern stop point. This point is usually the lowest point of a bullish pattern or the highest point of a bearish pattern.
The chart below shows the natural stop-loss level of a bearish Pin Bar pattern.
(Too many price patterns to learn? Start with our Guide to Reading Price Action.)
There are several ways to exit a trade. But there are always two scenarios to plan for: exiting when you’re wrong and exiting when you are right.
As discussed above, when the market goes against us, our stop-loss depends on our entry pattern.
When the market flows in our anticipated direction, we need to have sensible targets.
Here are two standard price-based methods:
Support and resistance levels provide logical points for exiting.
If we aim for levels that are further away from the market, we need to accept a lower chance of the market hitting our target. On top of that, expect some pullbacks along the way.
As traders, this is the type of trade-off we need to manage to eke out positive expectancy.
Support and resistance are projected from historical price features.
If the market is breaking new ground, moving into price ranges that it has not been to recently, then we might not find practical support and resistance levels.
In such cases, the measured move presents a valuable concept for projecting targets.
The measured move takes the length of a previous impulse swing and projects it by the same amount.
It is a specific instance of Fibonacci extension using 100% for the projection. Using a smaller percentage gives more conservative targets.
Base your projection on a solid and clear impulse wave for best results.
For more targeting approaches, refer to this comprehensive guide on taking profits.
Ultimately, trading boils down to finding a method that suits your skills and temperament.
Hence, instead of blindly following price action trading strategies of other traders, be discriminating. Learn from them what makes sense to you.
Remember that price action trading strategies go way beyond just price patterns.