Mastering the Trade

1. Markets move due to supply and demand, not personal opinions

Markets don't move because they want to, they move because they have to.

Supply and demand drive markets. Prices rise when demand exceeds supply and fall when supply exceeds demand. This fundamental principle operates regardless of economic indicators, news events, or personal opinions. Traders must focus on actual market behavior rather than their own beliefs about where prices "should" go.

Emotional reactions fuel major moves. Markets often make sharp moves when enough traders get trapped on the wrong side of a trade. This creates a burst of fear, frustration, and panic buying or selling. Professional traders capitalize on these emotional reactions by positioning themselves on the opposite side.

Key drivers of supply/demand imbalances:

• Margin calls forcing liquidation
• Stop orders being triggered
• Psychological capitulation

2. Successful trading requires discipline and a professional mindset

Emotions are fine at weddings and funerals.

Control your emotions. Successful traders develop the ability to follow their trading plans without being swayed by fear, greed, or other emotions. This requires cultivating discipline and a professional mindset focused on consistent execution rather than individual trade outcomes.

Avoid common psychological pitfalls. Many traders sabotage themselves through destructive habits like overtrading, chasing the market, or holding losing positions too long. Recognizing and overcoming these tendencies is crucial for long-term success.

Key psychological challenges:

• Fear of missing out (FOMO)
• Inability to accept small losses
• Overconfidence after winning streaks
• Analysis paralysis

3. Set up your trading technology for optimal performance

If traders can get this part right, they are at least going to have a fighting chance to compete on a level playing field with everybody else.

Invest in reliable hardware and software. A trader's computer and execution platform are mission-critical tools. Invest in a high-performance system with ample RAM, multiple monitors, and robust backup solutions to avoid costly downtime or errors.

Maintain and secure your technology. Regularly update software, remove spyware, defragment hard drives, and implement cybersecurity best practices. This preventive maintenance helps ensure smooth operation during crucial trading hours.

Essential technology components:

• High-RAM computer (minimum 1GB)
• Multiple monitors
• Uninterruptible power supply (UPS)
• Reliable internet connection with backup
• Professional-grade charting and execution software

4. Understand market internals to gauge intraday direction

Musicians know how to read music; traders must know how to read the markets.

Monitor key market indicators. Successful intraday traders develop proficiency in interpreting various market internals like the TICK, TRIN, and Put/Call ratio. These indicators provide insight into the underlying buying and selling pressure driving price movements.

Use internals to confirm trade setups. Rather than relying solely on price action or technical indicators, incorporate market internals to validate potential trades and gauge overall market sentiment. This multi-faceted approach improves the odds of successful trades.

Important market internals to watch:

• NYSE TICK
• TRIN (Arms Index)
• Put/Call ratio
• Advance/Decline line
• Sector performance

5. Use specific setups to identify high-probability trades

Trading without a specific setup in mind is like hiking in the Amazon without a compass.

Develop a repertoire of proven setups. Successful traders focus on a handful of high-probability trade setups that align with their personality and risk tolerance. These setups provide a systematic approach to identifying potential trades across various market conditions.

Continuously refine and adapt setups. Regularly review the performance of your trade setups and make adjustments as market conditions evolve. Be willing to discard setups that stop working and explore new opportunities as they arise.

Example trade setups described in the book:

• Opening gap plays
• Pivot point trades
• Squeeze setups
• Brick plays
• HOLP and LOHP reversals

6. Implement risk management and position sizing strategies

Professional traders focus on limiting risk and protecting capital. Amateur traders focus on how much money they can make on each trade.

Define risk parameters for every trade. Before entering a position, determine your maximum acceptable loss and place a stop-loss order accordingly. This predefined risk helps prevent emotional decision-making during volatile market conditions.

Size positions appropriately. Avoid overleveraging by limiting position sizes relative to your total account equity. A common guideline is risking no more than 1-2% of your account on any single trade.

Key risk management principles:

• Use stop-loss orders consistently
• Avoid adding to losing positions
• Scale out of winning trades to lock in profits
• Implement proper position sizing

7. Develop a comprehensive trading plan and stick to it

Traders who want to maintain a competitive edge in this business must first be aware of the technological dangers facing them in today's world.

Create a detailed business plan. Outline your trading goals, strategies, risk management rules, and performance metrics. A well-crafted plan provides a framework for consistent decision-making and helps maintain discipline during challenging market conditions.

Regularly review and update your plan. Assess your trading performance on a weekly, monthly, and quarterly basis. Identify areas for improvement and adjust your plan accordingly. Be willing to adapt to changing market conditions while maintaining your core principles.

Essential elements of a trading plan:

• Trading goals and objectives
• Specific strategies and setups
• Risk management rules
• Position sizing guidelines
• Performance tracking and review process
• Continuous education and improvement plan

Last updated: November 18, 2024