Don’t be an Icarus Trader

In Greek Mythology, Icarus is the son of the master craftsman Daedalus.

Icarus attempts to escape from Crete using wings that his father constructed from feathers and wax.

Icarus’ father warns him first of complacency and then of hubris (extreme pride, overconfidence or being out of touch with reality) asking him that he fly neither too low nor too high because the sea’s dampness would clog his wings or the sun’s heat would melt his wings.

Icarus ignored these instructions not to fly too close to the sun, and the melting wax caused him to fall into the sea where he drowned.

So how is the Icarus story relevant to trading? Complacency, overconfidence and being out of touch with reality is common in the retail trading world. This can manifest itself in the form of overtrading (among other things), which will hurt your trading account or put it on life support.

1. Chasing losses (hurt pride & ego)

Many traders can’t take their medicine when a trade goes wrong. They are overwhelmed with hurt pride and a damaged ego. It’s called going on TILT in the poker world. Discipline is lost; revenge against the market kicks in and reckless behaviour follows. Chasing losses never turns out well. 

Remember, the top traders in the world have some bad trades. The difference is they don’t flip their lids and force their trading after taking a hit. They understand that this is part of the game. They don’t get emotional about these losing trades (or about the winners either) but take it on the chin and use their patience and discipline to wait for the next high probability trade set up before taking further action. 

2. Boredom trading (complacency)

Many full-time traders stare at the screens for over 10 hours a day and get it into their heads that if they are not clicking buttons and opening and closing positions they are not working. They start over trading: opening positions that are more on a par with coin flipping rather than holding fire and waiting for the high probability trade set-ups to develop.

Pro’s trade far less than most retail traders and don’t do a huge amount of screen time. If you’re bored, walk the dog, do some trading research or get a new hobby but don’t trade in random market conditions. Coin flipping is not a strategy.

The Top Pros I know do 8-10 trades max per week. That’s it. They are not fixated on the screens. If you are a part-timer you want to be looking at about 2-3 per week.

3. Setting unrealistic targets (being out of touch with reality)

Setting unrealistic targets will encourage you to over trade and make poor trading decisions.

A day trader making 8%-10% per month consistently is one to be applauded as their risk is controlled in achieving these types of returns.

Pros don’t set unrealistic targets. They make good trading decisions win or lose, have a solid risk management strategy and let the profits look after themselves.

If you want to succeed in this game be the steady, safe, disciplined trader. If you get complacent, let your ego run riot or set the bar too high or you will fly too close to the sun and stop yourself from achieving your goals.

CMTrading is here to help you on your trading journey and provide you with the help, guidance and support you need to succeed. Click the link below to get started.

Don’t trade blind  

Like every other financial instrument, the markets can be evaluated using the fundamentals i.e revenue reports and cashflow statements – or via the technical approach which is an attempt at interpreting past and live price action to provide entry signals for a potential trade. Usually, fundamentals give us a birds-eye view of a company’s performance. This is why day traders who are aggressively opening short-term leveraged positions, favor technical analysis applied directly on the price chart, since the chart shows exactly how the price is performing right now and at the end of the day, that’s what matters most. 

Fundamental analysis 

If you are trading stocks however, you probably already know that fundamentals do have a great impact on price direction and especially when it comes to news. That’s why trading stock online is such a risky endeavor. The inherent volatility, however, provides investors with more opportunities as they take advantage of these big price moves to make equally large profits. Fundamental analysis should have a place in every trading strategy, but it could be argued that the insights it provides are not so helpful in predicting the actual behavior of the price. For example, a positive earnings report can drive the price of the stock down because the market already projected good financials, but their expectations were much higher than the results. Likewise, even a negative statement can have a positive effect on the price because the market had anticipated as such and this was already reflected in the pricing.  

It becomes evident that it all depends on how the investors react to these economic indicators and events. Fundamentals are therefore somewhat unpredictable but if you disregard them completely, you could be in danger of blowing your account no matter how strict your money or risk management strategy is. In fact, it is usually advised that you keep track of the fundamentals just so you know when to avoid trading stocks altogether. The unpredictable volatility doesn’t really fit into a sound trading plan that aims to preserve capital and promote consistent growth.  

Technical analysis 

Technical analysis isn’t the holy grail either as more often that not, the chart can be misinterpreted, and technical indicators can be implemented incorrectly which in turn can provide false entry signals. It’s incredibly useful though because technical analysis can impart key data for investors looking to trade stock online.  

Simple indicators on the chart can help traders better visualize support and resistance levels from which the price of an online stock struggles to fall below or exceed respectively. Having a good idea where the price ranges within these levels is very important and offers an easy way even for novice traders to spot trend reversals. If the price reaches the resistance ceiling, then it will likely start dropping again and this provides us with an opportunity to sell the stock on the downtrend. Instead if the price of the stock drops to the support level – it is a signal to buy before it swings up. 

Another benefit of technical analysis in trading stocks is that we can clearly see the trading volume. Which is how many stocks are being traded for any given period. High trading volumes provide greater liquidity and could even signal a breakout from the resistance level or a breakdown from the support level. These deviations from the support and resistance zone usually mean a sustained trend in the respective direction. This raises the demand for the stock which in turn diminishes supply and pushes the price further up or down accordingly. 

Your journey starts here 

CMTrading is here to help you on your trading journey and provide you with the help, guidance and support you need to succeed. Click the link below to get started. 

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