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Introduction

Forex. Developing an Investment Style

The question professional traders are asked most often is, how do I develop an investment style? People usually not ask like that. Most of beginner traders take a more direct approach: How do I make money intraday trading? How do I make a fortune trading stocks? How to trade sucessfully every day? The asnwer can not be given to the above questions. It is like showing four people the red color and asking them to describe it. One person may be color blind so you automatically throw out whatever he says. One says it is solid red. Another says it is not red at all but orange, while the third says it looks like a combination: red-yellow. To each individual, red looks like red — just do not try to compare answers.

Developing a trading style is a lot like that. It is an individual endeavor that has a lot in common with experience. One cannot give you experience but can only suggest ways to acquire your own.

If you buy the first stock showing some familar pattern, like ross hook, and you will probably be successful. The first trade nearly always works for the beginners, maybe even the second or third one, too. Eventually, though, the rug is going to be pulled out from under you (who knows, maybe it occurs on your first trade). You will make an investment in a chart pattern and the trade will go bad. Maybe you will stumble across a herd of bad trades and get flattened. You might question your sanity, you might question God, but one thing is for certain: It is not working!

Most people buy stocks like they buy food. They look at it, perhaps sniff it, and plunk down their money. We are not talking about couple of dollars here. We are talking about thousands of dollars for part ownership in a company.

If you have ever been a board member, you know what this is all about. You have a fiduciary responsibility to the people who elected or appointed you to that high position in a company. Not only should you study the material handed to you by some financial adviser, but you have to get out in the field and kick the tires. It's wrong to assume that what the staff says is always correct or represents the best solution. Question everything but learn in the process and try to be helpful without being a pest. As a shareholder — an owner of the company — should it be any different?

I recently was considering buying a position in a company which was showing an upside breakout from a symmetrical triangle. The computer program told me the company is a member of the machinery industry and further research revealed that it makes refractory products. I continued doing research on the company until the message gnawing at me finally sank in. I did not have the foggiest idea of what a refractory product was. Despite my search for an answer, I was not getting the sort of warm fuzzies I usually get when researching a possible investment. So, I passed it over. I am trading it on paper, sure, but not in real life. Peter Lynch has given a ghood advice on this: Do not invest in anything you cannot understand or explain in a paragraph. This is certainly a good advice.

Of course, if you blindly invest in chart squiggles and it works for you, who has the right to tell you you are doing it wrong? The fact is, you are not. If you can consistently make money with your approach and it lasts for months and years, then you have developed an investment style that fits your personality. Good for you!

Professional investment style, as you might have guessed, usually combines fundamental analysis, technical analysis, emotional analysis, and money management. Just because trader relies on technical analysis, it does not mean he or she can not look at the price-to-earnings, price-to-sales, and other more esoteric ratios. Then there is the emotional element. After going for months without making a single trade, suddenly a profitable opportunity appears and there is a strong desire to take advantage of it. You do it and three days later, you will want to trade again. Why? The reasons may be of many kinds. Some trade just because it feels good to be finally back in the thick of things. Some traders do so just because the single woman living nearby does not know about their existance and trader is trying to impress her with the size of his wallet? That is where "paper trading" comes in handy. You can experiment on new techniques without getting burned. If the simulation is done accurately enough, your subconscious will not know the difference and you will learn a lot in the process.

Once you come to terms with all of the emotional issues, look at money management. How much can you realistically expect to make and how much can you lose? What is the proper lot size to take? When should you add to your position? How long will it take for the stock to reach your target and should you invest in a less promising but quicker candidate?

Investing using chart formations, which is very popular in day trading, is an exercise in probability. If you play the numbers long enough, you will finally win out. Sure, some of the investments will be failing, and you must learn to cut your losses before they get out of hand. But the winners should serve at their best, providing you let them grow and increse your profits. Just do not make the largest mistake popular among beginner traders - watching a stock double or triple only to reverse course and drop back to where it started.