The Foundations of Profitability for Traders (Part 1)
03/10/2008 12:00 am EST
In the search for a profitable edge, traders often forget the true foundations of profitability. This is especially true in the more active intraday and swing trading time frames. In order for a setup to produce consistent profitability, it must harness some psychological trigger event that will provoke strong order flow from the other market participants.
There are two basic types of order flow, orders triggered by greed as traders take risk in anticipation of a profitable outcome, or orders triggered by fear as traders remove risk to avoid losing open profits or trading capital. When a market prints a continuation pattern such as a bull flag, or base near highs, traders take long and hope that many other traders will also be reacting to the charts buy signal. In essence, when we trade a bull flag, we are asking the other market participants to agree with our directional bias. This chart shows a bull flag that formed on the daily chart of the Silver ETF (Amex:SLV). Traders who reacted to this continuation pattern by going long were hoping that other market participants would agree with their bullish bias. If enough bulls were present, this buy signal would bring in a surge of order flow that would overwhelm demand and the stock would rise.
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By Bo Yoder, of BoYoder.com