The more complex a trading system is, generally speaking, the more confusing it is to understand, the harder it is to follow, and the more difficult it is to implement. For starters, let’s talk about simplifying. This can apply to many areas of life; however, it is a critical element to having a successful trading plan.

Let’s start with trading strategies. Don’t make your trading strategy too complicated. This may sound obvious, but many beginning, and even very experienced, traders tend to make their job as a trader more difficult than it needs to be. One common error in trading is the idea that we need to have some fancy, complicated strategy with some wild combination of indicators and crazy settings to have a successful strategy to trade. This could not be further from the truth; in fact, as you speak to successful traders, they will often times tell you that they started with many indicators on their charts and now only use very few, if any. Some of the more successful traders will look more at price action than indicators to trade. This does not mean you should not use indicators, just that you need to use them only if they are going to help simplify your trading process. Simpler is almost always better, especially when trading. So many of the indicators give similar information that using too many will make charts complicated and just confuse the trading opportunities. Using a few simple indicators to confirm the price action is generally much better and simpler. For example, a couple of moving averages can be used to help confirm the trend and momentum, along with support and resistance level derived from the price action (highs and lows). Looking for too many signals may only lead to lower probability trades and worse overall results. So make sure that your trading strategy is simple enough to implement in most market conditions.

In addition to using more complicated indicators than are necessary, also avoid the temptation to trade too many positions (or too many pairs in forex) and too many time frames. Trying to trade the 5-minute charts, the 1-hour charts and the daily charts may have you chasing to many trades in too many securities to successfully manage. This often leads to poor decisions and bad trading discipline. Again, the most successful strategies are simple to understand and implement. In addition to a simple trading strategy and simple rules, simple, clear risk management rules are essential to a good trading plan. Never trade larger sizes than appropriate for your trading account. For example, keep a simple rule such as never risk more than 2% per trade, based on a hard stop loss order, no more than 10% of your total account at any one time, and limiting you’re trading to no more than 5 trades at a time.

The best way to get good at trading is to focus on practicing your system and avoid the temptation to always be looking for a better system. Start by picking what you want to trade, use just a couple of indicators, and pick just a couple of time frames to use.

In summary, keeping it simple is actually the smartest way to trade – keep your trading system simple, your charts simple, your entry and exits simple, and, most important, keep you risk management rules simple!

I believe that, for some traders, there is a natural tendency that makes them want to trade against the prevailing market trend. Most traders have heard the old adage “the trend is your friend”, but saying it and applying it are two completely different things. When traders see an ongoing trend develop and age, I believe that it becomes easier and easier for them to believe that it’s going to end, which makes it very difficult for them to enter the trend to participate in it. We know that all trends will end at some point, but if we are watching a current trend, waiting for a reversal or some other kind of move in the opposite direction, we’re very likely missing out on making some relatively easy money. The market does all the heavy lifting for us; all we need to do is to figure how to enter the market as early in the development of the trend as possible.

Getting into the flow of a current trend isn’t always the easiest thing to do from a psychological standpoint, but, most of the time, it seems as though it is the easiest way of trading with the least amount of risk and resistance. When a trend develops, many traders will find that getting into it at a given point is tough because the longer it goes, the more likely it seems that it may be over, so it seems as though there is a good possibility that they are entering at the end of the trend just before it turns around to stop them out. The problem with waiting for the prevailing trend to end is that, depending upon market conditions and the time frame that is being traded, it could take a significant amount of time for you to get a confirming move in the opposite direction, which means that you could be standing on the sidelines instead of capturing the money that is right in front of you.

The current direction of the market isn’t always obvious and there are as many ways to determine its direction as traders can think of. Some traders may simply look at the direction of a longer-term average as a gauge for the market’s direction, while some will look for a shorter-term average crossing over a longer-term average. Some traders may use a specific indicator, such as the color change of the Heikin-Ashis to determine this. Regardless of how you do it, once you do determine the direction of the overall market, you may consider just trading in that direction, only taking long positions when the overall market is long and only taking short positions when the overall market is moving down. Of course some issues will move counter to the current direction of the market and many will move independently of it, but, generally speaking, for the overall market to be moving in a given direction, the majority of stocks in the index must be moving in that direction or the index wouldn’t be trending that way.

I believe that many people have a contrary mindset by nature, which oftentimes will make them want to trade against the prevailing trend or, at least, it will make them look for the end of the current trend, hoping to get into the market in the other direction. This may not be an overall contrary mindset as much as it is looking to get into the next trend as close to its beginning as possible. Practicing recognizing what is a reversal in the market versus what is just a pullback could be the difference between long-term and short-term trading success. Watching a longer-term trend and entering in the direction of the trend, based on a pullback to that trend, while still looking for a reversal trade to set up, is actually a pretty easy thing to do. The market goes up and it goes down, but it never goes straight up or straight down. So picking a spot to join an existing trend that has been progressing for an extended period of time is an excellent way to participate without the aggravation of always looking and waiting for the end of something or the beginning of something new.

Trading is actually not that complicated when you break it down to its simplest form. When we are trading, we are merely trying to recognize repetitive patterns that occur in the market as early in their development as possible. We really only need to know a few things, which include our entry point and our exit point. Getting into the market is pretty easy for most traders because most of them will have a set of qualifications or setup conditions that must be met, which may require specific indicators or the price action or some combination of all of these to be aligned properly before a potential setup is deemed to be valid. There shouldn’t be a lot of thinking that goes into entering the market, all of the thinking around this is typically done well in advance when the trading methods is created or learned from a third party. The exit strategy can be a little more difficult to manage, but as long as there is a preset set of criterion to determine when and how to exit an open position, it should not be that tough.

Regardless of what the method or system is that we are applying to our trading, our setup conditions have either been met or they have not; there shouldn’t be any guessing or anything that is left up to chance or interpretation. If our setup conditions are satisfied, then we enter the market applying our preset parameters to the trade and, if they are not, we discard it altogether and look for the next valid opportunity. This is very simple, it’s black and white, and shouldn’t have any gray area at all.

Now that we have firmly established how we handle the outer ends of a trade, the entry and the exit, what do we do about the middle of the trade, the part between the entry and the exit? The only way I see that this part of a trade can be managed effectively is by doing absolutely nothing with it. Between the entry and exit of a trade, there is nothing for you to do, the market does all of the work for you, it goes where it’s going to go and the most likely result of over-managing your position is failure.

If you have thought far enough in advance to have created specific entry and exit rules, they are likely to be based on a specific time, which means that the results and expectations of the trades will also be based on that time. When I say time, I mean an actual time, not the general time frame of the charts that you are using. If you have created your method based on 1-hour charts, then all of your research, your data, and everything around your expected results, will be based on a 1-hour time frame, a complete 1-hour candle. If you are looking at your open positions at any time, other than at the top of the hour, with the intent of manipulating something around them, there is almost nothing good that can happen for you.

When you create a set of expectations that are based on one thing, in this case, the close of hourly candles, but you manage them based on another thing, which is likely any time other than the close of a one hour candle, there is virtually no way that you can be successful. All you’re doing is undermining your own method or trading strategy. If you know by looking at the closing candles of an hourly chart that your trades should be successful at least 80% of the time, this number is based on the information that comes from the top of the hour, not 10 minutes after the hour, not 30 or 45 minutes after the top of the hour; it comes from the top of the hour. This means that the only way to achieve your expected 80% positive results is to discipline yourself into entering and setting up a trade and then letting it go until it comes to fruition without your involvement. There is rarely anything to gain by managing an open position before the current candle closes. If your method was created using closing information, it has to be managed based on the same information and, if it isn’t, you are entering a trade by using one method, but managing and exiting it with an entirely different method. Over time, this inconsistency alone should result in failure.

How do you know the difference between trading and gambling? Can you tell when you have crossed the line and become one versus the other? I believe that one very good way to know which one you are is if you have a trading plan that your trading business actually follows. Of course this would also require that you actually declare your trading business as a trading business and admit what it actually is that you’re doing. If you do have a detailed trading plan and if you follow it and stay disciplined, regardless of what is going around you, it is entirely likely that you are trader. If you are the type of trader that quickly jumps in and out of the market regularly, with no real plan, applying very little thought to what or why you are trading, then you may be a gambler. An obvious question may be is one preferable over the other or do you end up in about the same place over time regardless of what you are actually doing?

I personally don’t believe that you do end up in the same place. I believe that a lot of wannabe traders call themselves trades, but they are really just gambling and, if that is the case, they should admit that they’re gamblers and gamble in areas where gambling was meant to take place. If you are gambling, you are playing a game of chance, but, with games of chance, such as card or dice games, there are a tremendous number of variables; however, regardless of the number of variables there can be, they are, for the most part, known or, at least, expected. There may be a lot of variables when playing a hand of poker, but you know that all of the variables are centered on the cards. When gambling in the markets, not only do you have all of the variables that surround the market that you’re are gambling in, but you have the added variables of all of the people that effect your position. You don’t know when a world leader will die or be assassinated, you don’t know who will attack whom, and you don’t know when an officer of a major corporation will do or say something stupid that will adversely affect your position. You don’t even know when a cataclysmic natural event may affect you.

If you want to be a professional trader, then treat trading as a business, and a business is a business, regardless of the industry it is in. Make sure that your trading business is properly capitalized for the type of trading that you want to do and make sure that you have a very detailed and organized trading/business plan. Reduce and eliminate as many variables as possible and, just like any business, the more you plan ahead, the more variables you will be able to eliminate. When you are operating your trading business, you will see that every trade is just a business deal; some work out well and some do not, but there should never be one business deal that is so important to a company that the company cannot survive without its success. Applying the same concept to a trading business means that there should never be one trade that is so important that it is the deciding factor of whether the trading business can survive or not.

If you own a company that sells something to earn profit, or if you repair something for profit, or if you provide some kind of a service to earn a profit, these things are no different than if you trade for profit. It seems that a lot of traders want to deny that they are actually running a business, which could in fact be because they are running the trading business so poorly. It isn’t that they are bad traders, they are just in denial regarding what they are actually doing. Not acknowledging or admitting that a trading business is actually a business is one way to hide from its results and it is a good way to avoid responsibility. It is very easy to say that you have a trading account that you play in from time to time, but when you state that you are running a trading business, there’s nowhere to hide; you’re either succeeding or failing, just like any other business. At some point, just playing around in an account doesn’t mean anything, but when you actually declare that you are running a trading business and you expect to trade profitably and be successful, that is when you will begin to see consistent and positive results. Remember that even professional speculators have a plan.