| 1. Thou shalt always trade with a plan. Use stops and limits |
Markets never go up or down in a straight line, instead they tend to ratchet out a trend. The battle is all about price and psychology. Price action can be measured hourly, daily, weekly. Psychology meanwhile is explained most effectively anecdotally:
What is the next move in the market?
You generally find three camps, the confused, the economists and the technical analysts.
The confused horde personifies uncertainty, throwing their hands up and saying..."It is difficult to call, the market is delicately poised. It could go up or down".
In the economists' camp they are often equally non-committal, because they are focused on what has happened rather than what will happen.
The third camp (the technical analysts) interpret the actions of market participants and their impact on the formation of trends. This type of analysis is particularly suitable to short-term CFD trading and will play a significant part in the selection of trade recommendations for the Fat Prophets CFD Trading Report. |
| 2. Thou shalt always trend Trade not Range Trade |
At any one point in time markets will either be trading in a well defined range or embarking on a trend. Trending markets can produce spectacular moves. However markets tend to spend more time in range building (or building mode) as a precursor to a breakout. There exist many trading styles that have been developed for markets "stuck in a range" as well as those "trending."
Fat Prophets believe that trends offer the best opportunities.
Once a trend has been identified, there are a number of stages in a trend. At the start of a trend, no one believes it. Often the crowd is positioned the other way. As the market continues to trend, the bulls and bears fight hard. Usually the market moves impulsively in one direction and corrects in the other. After a period of time, either the bulls or the bears will capitulate and spur a significant impulsive move. |
| 3. Thou shalt set objectives and accept responsibility for trades. Listen to the Market |
Financial markets behave in a fluid, yet volatile manner. Even the greatest guru can fall. The market is dynamic in nature, always changing and constantly adapting to new pressures both from within and beyond.
Many traders lament over being stopped on the low or high, unable to get their broker, not enough volume, their PC crashed, phones went down or some other mishap/excuse... They look to blame their tools. Unfortunately the market is always right and Harry Hindsight is never wrong.
Looking back at the past, you will see that any number of trading strategies or methods have picked some very profitable moves.
You may see a pattern / design as clear as day; the trouble with this is that entry may have been the day before a major announcement or require you to be a contrarian and ignore some market commentary.
YOU MUST TAKE A RISK! The rules for profitable trading never change, and people tend to embrace them or discard them. All trading methods require discipline and patience.
The rules are; apply correct disciplined money management, take profits and set stop losses at an appropriate level for the prevailing market conditions.
Fat Prophets constantly assesses the landscape and in the words of Bloomberg, "Sometimes Markets Roar Sometimes They Whisper." We will always endeavour to make every trade with a systematic method of execution.
Traders should always accept responsibility for their trades. They should document and learn from mistakes and never dwell on bad or missed trades. It is also crucial to never sit on a losing position in the hope that prices will move back in your favour. |
| 4. Thou shalt Take Profits |
Profit taking is the hardest of all trading disciplines to master. A profit comes with a psychological response that always clouds the picture. The feelings of victory and satisfaction affect the way you behave. Just like a kid in a candy store our emotions almost always get the better of us.
No trader likes to exit a trade just before the "big move." However, we believe that setting a target for taking profits is an important element in disciplined trading. Unless there has been a significant change in market conditions, Fat Prophets will generally take profits on a trade once the nominated target has been reached. |
| 5. Thou shalt use Sound Money Management |
Every trader should have sound money management guidelines in our view. What to risk, how much you can afford, stop losses and disaster recovery procedures are essential to staying in the game. .
Money management varies according to strategy and remains discretionary, but guarding against loss is generally the key theme. As such stop losses are essential on every trade. However, determining how to place stops and what type of money management to use is never easy. You must understand and manage the percentage of capital you risk per trade.
Bad money management will lead to even the best trading methods demise. Fat Prophets believes money management styles should be tailored to each individual, and applied consistently thereafter.
For explanation of a relatively simple method of managing risk, see the section on fixed fractional Position Sizing. |
| 6. Thou shalt not overtrade |
"Too many trades spoil the bank account"
By and large the only ones that benefits from overtrading are brokers.
Markets are full of opportunities every day, every hour, every minute. However, this should not translate into a high number of trades every day. Instead, we believe it is wise to be patient and execute only the best trade opportunities. |
| 7. Thou shalt trade volume relative to market conditions |
CFD's are a highly leveraged product. This, of course, is a double-edged sword. When trades are going well, profits will be rolling in. However, when trades falter or conditions become volatile, many traders easily forget basic trading rules only to find that leverage can amplify the effect of poor decisions.
Fat Prophets recommends that you trade volume that is suitable for the prevailing market conditions. |
| 8. Thou shalt respect the Market |
The market is ruthless and thrives on people's opinions. As a general rule, for every hundred losers there are usually just a few winners. This transference of wealth is usually from the speculators and little people into the hands of professional market players.
The trade that makes sound technical sense but generates a feeling of fear is the one to make. Compare that with the trade that is easy, which many are in on, and where one spends each moment calculating the potential profit and loss. That is the wrong trade. You must respect the market. |
| 9. Thou shalt take overnight risk and test methods |
As the old saying goes, "experience counts." It remains critical that trading methods are tested, reviewed, and variations constantly appraised. Nothing stays the same in the financial world. One minute Microsoft is on top of the pile, next it has fallen from grace. Same deal for trading methods.
Managing time and expectations of a trade is a crucial concept. Inherent impatience will often dominate thoughts. In time the market will be the judge.
Fat Prophets traders use a wide variety of technical analysis tools overlaid with fundamentals and cross checked against a checklist. To follow the rules requires discipline and courage - traits which are measured in both money and time.
This means that you must take overnight risk. |
| 10. Thou shalt accept that no-one will ever master the psychology of the market |
Collectively, people create uncertainty or certainty; it just depends on one's time frame. Understanding this concept will lead to insight. Adopting a contrarian stance is often the best course of action. The psychology of the crowd in the financial markets is very perverse. Why?
Greed.
When people are forced to do anything there can be volatility. Acknowledgement of such volatility has existed for years and spawned the cliche "up the stairs and down the elevator." Understanding the psychology of bulls (buyers) and bears (sellers) and the inherent volatility they produce means that you are one step away from looking at fundamentals for answers.
Fear and greed are the drivers of markets. The psychology they produce can never be truly mastered. |