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Humans are very good at recognizing patterns in every day life, and mostly patterns that we are familiar with. For instance, it doesn't take us a whole lot of effort to recognize a face, even if that face is showing a different expression than the first time we saw it. Recognizing a road crossing, but from a different angle than the first time is equally easy.
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Every now and then when I'm reading an article from the world of behavioral economics discussing a particular phenomenon, it makes you realize once again how much trading and investing is about human behavior.
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Sometimes, the most simple and basic ideas can lead to better performance in trading. As we know, trading is a lot about having rules and obeying them. Maybe, when those rules are complex or can be bent, it's more likely that they will be broken. A simple rule has, therefore a good chance of being applied in a very rigid and disciplined way. In this article, I will share a very basic and easy rule that I use and have used for quite some time now. I call it the One-Trade-Per-Day rule. As you can guess from the name, that doesn't sound like a very ingenious idea. And it isn't, but it works.
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"Never complain, never explain" - it's a well-known quote. Famous people have used it, management gurus have used it, and too many to accurately determine who initially came up with it. Let's apply this to trading because trading is probably the ultimate activity where this quote fits extremely well.
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It has been mentioned in many posts here and elsewhere: to be successful in trading, you need a completely different mindset than the average person.
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Every now and then, you run into a situation in real life that triggers the trading mind and makes you look at the situation from a trader's viewpoint.
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The trading world is known for its beautiful one-liners that are all so true, but at the same time so extremely difficult to practice. Some of the most well known around are: "Cut your losses and let your profits run." or "The trend is your friend." (until it isn't), just to mention a few. Collecting more of those one-liners would be a great subject for another article. This post deals with getting with the trend.
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There's a lot of talk about so-called gaps. General wisdom says they will be closed. But is that true? Is there a statistical edge about gaps that we can use in our trading? Let's find out.
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In our previous post about gaps, we looked at market behavior around opening-gaps and would generally happen during that same trading session. But nothing spectacular came out, an opening-gap basically meant nothing for further price action that day. Also, the average size of an opening-gap turned out to be a few factors smaller than average daily volatility, so those margins were easily absorbed regardless of whether there was an opening gap or not.
Now suppose the opening-gap does not get closed during the same trading day. How does affect the market in the next couple of days? Does price gravitate back towards such a gap, as if it wants to pull in price or doesn't it have any significant meaning as we saw in the opening-gaps analysis? Let's dive in.
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Interactive Brokers (IB) is a popular broker, operating in several counties around the world, usually under local national names. Their trading platform is the same everywhere, it's the Trader Workstation or TWS. For novice users, it may be somewhat intimidating at first glance, but once you get a good understanding, you'll see it has a lot of powerful features to offer.
We have learned that disciplined trading is the only way to survive in this business. The best way to adhere to your own strict trading rules is to automate things. Let your orders take care of your trading, not your brain because the human brain usually fails in (short-term) trading. In order to achieve this, we need an extensive set of order types. TWS has just that, so let's get into it.
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If you use any search engine and type in the phrase "How to become a successful short-term trader" or anything similar, you will find roughly 70 million(!) websites that will help you in achieving that goal, or so it seems. While in reality, there's only one right and honest answer which is more like this: "There is an extremely low probability you will ever be successful in short-term trading, and you will most likely lose all funds in your account".
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After part 3, we move on to part 4 of this series of 'Market gurus and their predictions'. If you're new to this, you may want to start with the first part for some additional explanation.
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Investing in gold has been on every front page in the last two, three years. The financial crisis has scared a lot of investors who lost faith in everything but gold. Many investors buy gold in some form, in paper or physical gold. Investing in gold is not something from the last couple of years, but has been around for many years. It's just that the last couple of years, gold has every characteristic of being a bubble. Gold investors sometimes seem to lose all good sense of judgment and logic. Buying gold has almost become a sort of religion.