During the Invest Fair a couple of weeks ago, I had the opportunity to attend two talks by Ray Barros, a professional trader and fund manager.
It wasn’t the first time I had attended his talk, and it certainly won’t be the last. I had always enjoyed his sincere sharing of knowledge with no hype and sales pitch.
There are three elements to being a successful trader.
1) Psychology
This contributes 60% to the equation and part of it means creating an environment where you will consistently execute your plan.
2) Trading Plan
Unlike what most people think, the trading plan contributes only about 10% to the success of the trader. Trading the market is a probability game and a written plan with an edge helps put the probability in your favour. The plan helps to define both your entry and exit points.
3) Money Management
This forms the last 30% of trading. Good money management helps to maximize profitability while at the same time minimizes the risk of blowing your trading account.
In his first session at the Invest Fair, Ray Barros focused more on the second element – the trading plan.
The function of an trading plan is to help you identify an entry point when the probability is in your favour. It will define your zones, entry and initial stops, and risk management.
Identifying the trend is also important as the strategy for trading each trend is different.
- Sell rallies in a downtrend.
- Buy correction in an uptrend.
- Exercise patience in a sideways market. Trade only the top and bottom band. The middle band should be avoided. One way of calculating the band is to put the daily range and divide it by 8.
Ray then taught us a system for identifying trends using the relative strength index (RSI) as an indicator.
In an uptrend, the RSI should reach at least 75 and go no lower than 35.
In a downtrend, the RSI should go no higher than 65 and and should go down to at least 25.
The criteria for identifying a change from downtrend to uptrend:
- Price break a significant high.
- RSI goes to 75.
- RSI doens’t go below 35 after that.
The criteria for identifying a change from uptrend to downtrend:
- Price breaks a significant low.
- RSI goes to 25.
- RSI doesn’t go above 65 after that.
In an uptrend, the buy zone should be when the RSI is between 35 and 40.
In a downtrend, the sell zone should be when the RSI is between 60 and 65.
The next session by Ray Barros which was more on money management will be covered in another post.
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