Wave trading...what is it and how do we do it? Most of us know the basics but its often the basics we forget and fail to implement! I've invited Troy Flowers from InvestorsUnderground.com to bring us back to basics and give us some advanced tips and tricks to really wave trade with success.
Comments are open so if you have anything to add please feel free to do so. Also please check out InvestorsUnderground.com, it's a great place to connect with other like minded traders and to get a few ideas from people that have already tried a trade or a method.
Sometimes too much information is just that. There are always reasons why the market is moving one way or another, or at least lots of theories. But too many indicators makes traders overlook the obvious of wave trading, which is the most simple form of day trading.
The theory goes...XYZ stock is bullish or bearish, a day trader sees trend momentum building and enters the trade. The day trader follows the trend for a time and then exits when either one of two things happen. 1. The trend momentum weakens and the skilled day trader calmly and quickly executes an exit as the risk/reward ratio changes (Remember the trend is premise for the trade, so if it weakens so does the traders reason for being in the trade). 2. The stock turns against the trend altogether and the skilled day trader calmly and quickly executes a pre-determined protective stop.
Easy, right? While this form of day trading is not difficult to learn, it still requires the same kind of discipline as the more refined types of day trading, if not more! Here are a few tips to help successfully trade momentum waves.
1. Executing your entry and exit requires planning and disciplined execution. When entering a trade, first determine what your stop will be. A trailing stop is a good way to take full advantage of trading waves. Continue moving up your protective stop loss as the trade dictates. However, hesitating to pull the trigger can be disastrous. Having a set stop will be easier to execute. Lastly, trade only with small portions of your capital when trading waves.
2. This type of trading is often compared to surfing. In surfing, one does not wonder from whence the wave came, only that it is here for riding. A surfer does not know how long the wave will last or how strong it will be but is determined to ride it as long as possible and then SAFELY exit to catch the next wave. Keeping this calm and emotionally detached attitude will help in executing both exits and stops instead of metaphorically riding the wave too long and getting pummeled.
3. Always use the same indicators to determine when a trade is developing and when to exit. Inconsistency will ruin a good trading pattern every time. This is still its own form of science after all!