Trading Master 104 - The Moving Average Strategy

Understanding the mind of the successful trader we're going to assume that we're starting out with an initial investment of $10000. Our trade does not always please his entire investment on one single trade. This is not a very clever thing to do is not wise and entreaties do not do this. Successful traders specify the maximum amount that they are willing to invest on each and every trade. So you could break this up into Dan Creed's you could have a maximum level of let's say a thousand dollars per trade. It could be $500 per trade but breaking it down basically reduces the amount of risk that we have per trade. So let's assume that we've decided to break up our trades in you know 10 percent. So that means that each trade is going to be a thousand dollars. So this is a rule that we can end up making and traders have different levels based on their initial investment and the amount of risk that they are willing to take. How much money that they are willing to make or lose. Basically that is what determines how much you're willing to invest on one single tree. But you always have to remember that you have to break it up no matter how experienced you may be or However time that you may have or whatever kind of strategy you may have. All traders break up the trade. They will never trade in one go with the entire amount that they have. So successful traders also know that there will be some times some Creed's already will end up making money and there will be others where they will lose money. Traders understand that trading is basically a game of probability. So therefore they are going to try and find high probability set ups before they enter into any kind of trade or a high probability trade basically means that there is a high probability that we will end up with a winning trade for the moment. We're going to assume that no matter what creed we get into we are going to take a profit of 25 percent on our investment. Now I'm only doing this at the moment to explain a particular concept to try to understand what the trader is thinking. So this means that if a stock is trading at $10 and we've decided to invest a thousand dollars on our trade then we will be buying up 100 shares. Now a 25 percent profit on our investment would mean $250 and in profit to get $250. The stock price would have to move up by two and a half dollars per share. Now we're also going to assume that we don't want to make a loss on more than 10 percent on any given day. So the flip side here is that if we only want a 10 percent tree loss then that would amount to a hundred dollars. And to get out of the trade with loss of hundred dollars the stock price would have to go down by one dollar per share. Here is where we're going to apply our rules of probability. So if our decisions are completely random then in any given circumstance no matter what it is and if there's only two possibilities like in this case where we're only going to make you know either a profit or a loss you know you can't have something else then the chances of both the events or either of these events are basically equal. We're going to now assume the classic coin flip case of probability. This simply means that if we have a coin and we flip it 100 times the rules of probability state that we would end up with 50 heads and 50 tails. Now I understand that you may have forty nine heads and fifty one deals with you forty eight heads and fifty two deals. However if we increase the number of times we're actually flipping the coin let's say we make this a thousand. So we would have the chances that we will have 500 heads and 50 500 tails is far more probable. We may have you know just a bit more of the heads are a bit more of the deal that really doesn't make much of a difference. So if we have 50 percent chance of winning and 50 percent chance of losing then the math would look something like this. Fifty winning trades where we make a profit of $250 per trade would mean that we are making twelve thousand five hundred dollars on the 50 trades that we won. Now the remaining 50 trades we're actually losing money. We make a loss of a hundred dollars so 50 times a hundred is $5000 so we made a profit of twelve thousand five hundred million loss of $5000. So a net profit would be seven thousand five hundred dollars. This is the mindset of the trader a trader looks and except some profits and some losses he knows she knows that there will be profit and there will be losses. However at the end of the day since we have a 50 percent chance of winning a 50 percent chance of losing it would still be in a net profit. So where do strategies come in and why we want to move forward to the next section. And we're going to try and understand strategies.

Disclaimer For Stock Trading Advice

Mindset of the Successful trader. Successful traders understand that they never trade a 100% of their money on 1 single trade. Instead they use the laws of probability to increase their chances of a win by breaking up and placing their trades at different levels. This is called a trade size management strategy.

The moving average strategy with the 50 period simple moving average (SMA) crossing over or under the 200 period simple moving average (SMA). This presents a good and reliable opportunity to place successful trades that deliver high profits. However the number of entry and exit signals might be low compared to some other moving average combinations. Lets explore...