Understanding the Four Parts of a Trade as a Self-Directed Investor

March 10, 2010
Donald R. Berger outlines four steps to becoming a self-directed investor.

by Donald R. Berger, DDS, FAAP

There are four parts to becoming a self-directed investor.
The first part is to define the trade. Is it a continuation trade or a contra-trend trade? A continuation trade is a trend-following trade. This is a momentum trade and not price-sensitive. There is no price too high to buy or a price too low to sell. The activity and momentum of the market will take care of any imperfection in our entry price or execution of the trade. Contra-trend trades are price-sensitive, because we are predicting a change in a trend due to a change in price. If the market remains in a trading range, we are looking for price levels to remain stable and within the trading range. The risk of a contra-trend trade is that you are wrong more often than not, but when the contra-trend trade is right the reward is large.The second part is to use a technical indicator to recognize the trade opportunity. What technical indicator are we going to use to enter the continuation trade or contra-trend trade? Chart patterns, ATR, moving averages, RSI, Bollinger Bands, etc., can be used to recognize what we are looking for in the market, and it is happening now! In other words, the market is behaving the way we expected it to behave.The third part is to trigger the trade. Modifiers or filters are applied to enter the trade. A trend line or trend channels — X percentage above a high or below a low of a bar; above a valley high or a pivot low, etc. — can be used as a trigger.The fourth part of the trade is to manage the money once you have entered the trade and not the analysis. As a speculator, you have to balance the initial capital, commitment size for the capital, reserve amount for the account, actual percent accuracy of trading results, commission cost, slippage, risk reward, stop loss, and stop profit, Bet size (test, normal and maximum), duration of the trade, time frame of the trade, expectation of the trade, and personal commitments. Closed drawdown is critical in the management of the money.Drawdown Gain to Recover 5 percent loss 5.3% gain10 percent loss 11.1% gain15 percent loss 17.6% gain20 percent loss 25.0% gain25 percent loss 33.0% gain30 percent loss 42.9% gain40 percent loss 66.7% gain50 percent loss 100.0% gain60 percent loss 150.0% gain75 percent loss 300.0% gain90 percent loss 900.0% gainAfter seeing this table, it is the job of the trader to preserve capital as the first objective and have small losses in relation to capital as the second objective. Remember:
  • Trading is more than analytics:
  • It is the mastery of analytics.
  • It is execution skills and tactics.
  • It is risk management and bet size strategies.
  • It is overcoming psychological impediments.

With time and devotion to learning and understanding the markets, anyone can become a self-directed investor.
If you are interested in become a self-directed investor , please feel free to contact me.

For more information, Dr. Donald R. Berger can be reached by e-mail at [email protected] or by phone at (215) 896-7448. Visit his Web site at www.dberger.org.