Misconceptions about trading – Is it a good time to buy?

Life of a Trader 25 Apr 2024

Many often ask about where is the perfect level or opportunity to enter or exit a trade. But do these entries and exits really exist? In this podcast, Vee discusses about what a trader should focus on instead.

Transcript:

Let’s talk about another misconception about trading. Today’s question is whether trading is an exact science. It’s a very good question, as many people who are new to trading are very intent on finding the exact levels or making the correct decision every time. They want to know with full confidence whether a trade is 100% going to be correct. Of course, there’s no way to know whether the trade will be correct or if you’re going to make money until you actually see the results afterward.

What happens is that many people get frozen by the requirement to know exactly what’s going to happen next. They want to find a high degree of confidence whether they should trade or not, so they often look for others to reinforce their decision-making. Of course, it’s good to look for sources of information that add to the probability of success of your trade, but I get a lot of questions from people asking if they should buy here or there, if it’s going to go up or not. They ask these questions because, hopefully, they trust my decision-making process, but even then, whatever I say is based on my view and it’s not an inevitable outcome.

There is no way of knowing whether our outcomes will be correct. But what we can know ahead of time is whether this is the trade that fulfils our trade requirements. We must have a list of trade requirements, and of course, this varies from person to person as different traders have different requirements. But I believe the basic rule is that before you do a trade, you need to know where the exit is, where you get out, where you’re wrong, where you stop out, and where you take profit.

So many people ask me if they should buy here, but I think the question is, if you buy here, where is the stop? Where is the target? Then you must look at the risk-reward. I often say that markets are based on the trend, either buy on dips or sell on rallies. But where is it safe to buy the dip? You will never know until you actually do it, and then you will only have a balance of probabilities. If you buy here, what happens if it goes down and what happens if it goes down further, right? So if you’re unsure but you think this is a great level to buy at, scale in, buy 25%. If it goes lower, buy some more, but there must be a level where you say, “Okay, I am completely wrong now. I must reduce my risk.”

It’s all a balance of probabilities. It’s not an exact science where there is a correct buy level and sell level. And I was reading just the other day about a very good technical analyst who said that based on his technical analysis, he gives these levels and these levels are based on the information currently available to him. Right, so currently available to him, these are the levels, but of course, support and technical resistances will change as news comes in and things happen. For example, if you look at a stock and think, “Okay, 100 is the support level now. It’s around 105. If it approaches, I will buy because I have a support level at 100,” but if certain earnings news comes out or maybe government regulations that are detrimental to the company, of course, that will change the whole situation and such the levels must also change as well. And if it breaks, then yes, it’s a whole new chart altogether. Now, you must look at it.

So, it is always an evolving thing. It’s not static, so many people like to ask ahead of time where they should be buying, so I tend to say, okay, given the current situation, I think these are where the correct levels are. But again, I do not always buy, you know that because it depends on how it gets there. So I think the answer to this trading question is that it is not an exact science. No, not really, it is a bit of an art and it is a mix of art and science, right? The science is that you can control the factors within your control, for example, how you make your decisions, the risk-reward profiles that you’re looking for, and the risk allocation of your capital. But the market conditions are not an exact science, and I get many questions regarding what happens if this happens, what should I do? On balance, most of the time, if something happens, policymakers just do this, then the function will be this, but it is not hard and fast rules because it’s always changing. It depends on how the market’s positioned and what were the expectations of the market.

So, of course, this is a little bit wishy-washy here and there, and I go back to the same thing that I always say to people who join the TrackRecord trading program, there are no hard and fast rules about trading except the risk framework, right? Any advice I give, the correct reaction function is always a reaction function of markets. They are wrong, right? The rules, if I give any to you, would have exceptions. So if you look back in time, there was a hard and fast rule that there were no negative interest rates, no textbooks wrote about negative interest rates in the 90s and the early 2000s. Then negative interest rates came, now it has become the norm. Everybody knows about negative interest rates. So my point is that the rules change over time, so the current market environment is likely going to change over time as well. Any rule that you have will always have to be adjusted to new market conditions.

So to summarise, is it an exact science? No, but there are guidelines that you can follow, but most of the things about the market is that it changes and the market environment constantly changes, people have to adapt. So this is a game of adapting to new conditions all the time. As always, stay true to the process, and eventually, you will be profitable. Thank you.