Investing in the stock market takes several steps to achieve your investment goals and financial needs. We’re going to give you a step-by-step beginners guide on how to invest in the stock market.

Below is our list of what steps you need to take to invest your money in the stock market the right way.

1 – Do you want to be an active investor or passive investor?

As we’ve mentioned in our how to invest guide, generally stock investing is divided into two categories or methodologies. They are

1. Active investing
2. Passive investing

As the name suggests, passive investing is where you either have someone else do the work for you (in terms of what to invest) like a financial advisor/planner, or you passively put your money into a few stock indexes, then let the money grow over time with the stock market indices, choosing fixed times to add money into your investment account.

It’s a very hands-off approach where you passively invest without much decision making.

For those of you with very little time or interest in learning about the stock market, we suggest this approach and that you should consult your financial advisor.

On the other hand, active investing is where you actively choose which stocks to invest in, when and for how long. 

It’s important to understand this does take more time, along with building your knowledge of the stock market and skills required to do so.

I would like to note the wealthiest investors are not passive investors, but active investors. If you like building new financial skills, don’t mind doing a little research on your time off, and would like to invest in specific companies, then we recommend active investing

2 – What are your investing goals?

What your specific investing goals are will greatly determine how you should invest in the stock market.

Are you a millennial that has at least 30-40 years before retirement? If so, you can probably take on more risk than someone in their 60’s or 70’s. 

Are you wanting a lower risk investment approach so you can steadily build your income with lesser risk to your investment funds? If so, you’ll want to invest in stocks that have lower price volatility, and ideally a strong market share + low competition so they can retain their stock value.

Hence, your investment goals will determine what stocks or stock indexes you invest in, thus it’s important to have a clear goal in terms of what your reason for investing in the stock market is, how much time you have till retirement, and how much risk you are willing to tolerate.

3 – What to invest in?

There are generally two major protocols for investing in the stock market. They are:

1. Index funds
2. Individual stocks

Index funds track major stock indices like the NASDAQ and S&P 500. An index funds are designed to match the long-term performance of the index they are trying to track. 

For the Nasdaq, it’s the QQQ, and for the S&P 500, is the SPY. Both index funds offer a dividend and have low costs in terms of fees.

It should be noted the S&P 500 historically has produced about a 10% annual return which is a fantastic way to build your investment portfolio over time, hence why it’s such a sought after index to be invested in.

Individual stocks are another protocol for investing in the stock market. 

Do you believe Apple (Nasdaq: AAPL) will remain a dominant player in the computing/phone/wearable device industry for years to come? You can buy a piece of that company by buying shares, thus profiting if they grow in value over time.

Do you think Amazon (Nasdaq: AMZN) will for years to come be the dominant player in the retail e-commerce space? Again, you can buy individual shares of Amazon and partake in the stocks increase in value over time.

Investing in individual stocks allows you more nuance in what you want to invest in, when you want to invest in, and how much to invest in them. Again, this takes a bit more time as you are ‘actively’ deciding which stocks to invest in. But if you feel you can learn the skills of investing in stocks, and think specific companies will do well over time, you will want to consider investing in individual stocks.

Regardless of whether you are in the active or passive investing camp, we recommend having investments in both individual stocks and index funds. 

4 – How much to invest into the stock market?

When it comes to how much money you may want to consider investing in the stock market, we only recommend investing money which meets the following requirements:

1. It’s not needed to pay off bad debt (i.e. any debt with a 10% interest rate or higher), and
2. You won’t need this money in the next three to five years.

If you have funds available that meet the above criteria, then we recommend at least investing some of those funds into the stock market.

It’s important to note the stock market has a directional bias of going up over time. If you look at the prices of the US stock markets over years, you’ll see they have a natural incentive to go up because the goal of a company is to increase its value over time.

It’s also important to note the stock market can and often does lose 20+% of its value (what we call a bear market) over time. This has occurred over five times in the last twenty years, so it’s something that’s not uncommon, and to be expected. Thus, it’s important you understand the risks of investing in the stock market.

Now as to how much should you invest with your investable funds, we recommend the rule of 110. This simple rule states that you take your age and subtract it from the number 110. Whatever that number is, that is the % of your investable funds you should put at risk into stocks and index funds. The remainder we suggest putting into fixed-income investments like higher grade bonds (AA or AAA rated). 

So now you know how much to invest in the stock market with your investable funds.

5 – Open an investment account

Once you’ve decided upon your investment goals, how you want to invest (active vs passive) and how much to invest, its time to open a brokerage account. This is simply an account that allows you to buy stocks and index funds.

There are many companies which offer brokerage accounts, and its possible your bank offers this as well.

For those who are more active investors, especially those with (or looking to build their investing skills), we recommend TD Ameritrade.

For those who are more passive investors, we recommend Public or Robinhood as they offer easy mobile apps which allow you to open the account via your phone and can be done so within a matter of minutes.

Generally opening a brokerage account is pretty easy, but it’s important to consider what type of investor you will be, and what account you may need to invest your funds.

For those just looking to invest funds from your normal bank account, you’ll want to choose a standard brokerage account. This will give you easy access to your funds and allow you more flexibility.

For those of you wanting to invest from your IRA account, note you’ll have limitations as to how much and will have less access to your funds. 

It’s important to note the costs and fees associated with stock investing so make sure you understand the fees and commissions for buying and selling stocks and index funds with your chosen broker.

We always recommend your broker have the following qualities:

1. Be regulated (by your regulating agency in your country)
2. Have customer support you can contact via phone
3. Has a user-friendly app or software that allows you to easily make decisions about how to buy and sell stocks or stock indices.

6 – Choosing your stocks

Now that you’ve gotten your brokerage account all setup, it’s time to choose which stocks to invest in. Below are several points to consider which stocks to invest in:

• Invest only in stocks where you understand their business
• Avoid stocks that have high volatility (i.e. massive changes in their stock price) in the beginning
• Avoid penny stocks (most penny stock companies go broke and lose value over time)
• Learn the basics of how to evaluate stocks (through both fundamental and technical analysis)
• Diversify your holdings to mitigate risk

Based on the above key points, here are a few things to consider or avoid doing:

• Avoid meme stocks as they have high volatility and rarely will accumulate value over time
• Invest in companies you understand their product, market position and future developments
• Invest in a base of stocks that will have lesser price volatility, but stable growth over time
• Choose a few stocks that have strong dividends (4% and above) with lower price volatility
• Invest in a few index funds to provide lesser risk and greater stability over time
• Always pick a few stocks that focus on growth so you can capture more upside in your portfolio.

7 – Keep Investing

Virtually every successful investor in the last 50 years didn’t just put money in the stock market one time. They all kept investing and adding to their portfolios over time. We recommend the same approach, and often suggest simplifying this process by choosing a small amount you can put aside each month towards your investment portfolio. 

As we’ve said before, the stock markets have a directional bias of going up, thus by continually investing your money over long periods of time, you increase your probabilities of maximizing your returns and increasing your wealth.

In Closing

Investing in the stock market is a potential method for increasing your financial wealth over time. It’s important to understand there are risks and to never risk more than you can afford to lose.

But for those who are prudent with risk and invest their funds well, you can produce additional returns on your capital over time while building your financial means to buy a new home, pay for college, or fund your retirement.

Whatever your goals are, we recommend following the step by step guide above for investing in the stock market to improve your chances of success.

Day trading can be a highly lucrative form of trading because of the sheer volume of trades you are taking. Very much like the online poker player, who plays as many tables as possible to maximize their edge and profit, day trading works under the same vein.

Trade a lot more for smaller profits, and they all add up.

Now there may be people who claim “day trading doesn’t work” and “you won’t make money day trading”, but these statements are completely inaccurate.

Case in point, Stefano Serafini, who won the 2017 World Cup of Futures Trading with an impressive 217% return, is a day trader! Many people in this contest who placed very high, were also day traders.

Hence, it’s important to forget the falsely imported narratives about how day trading doesn’t work. There are a lot of people who make a lot of money day trading. The key is whether you can make it work.

How Do We Define Day Trading?

Before we dig deeper into the world of day-trading, let’s start by defining what day trading is and is not.

Day trading refers to the buying and selling of an instrument/security within a single trading day or session depending on the type of market you’re trading. Day traders close out all of their positions at the end of the day/session.

Day trading is common across many markets, such as forex, futures, commodities, stocks and global indices.

There are professional day traders, trading for large financial institutions and there are individual day traders trading their own money, or managed funds from investors and clients.

Now that we have a basic definition of day trading, let’s have a look at the pros and cons of day trading.

Day Trading Advantages vs. Challenges

Day trading offers advantages compared to trading on the higher time frames, but those advantages also come at the cost of added challenges which you have to be aware of.

One of the major advantages with trading on the lower time frames is the increased trade frequency because markets are moving faster and presenting more structures on lower time frames than higher ones.

If you’ve already established you have a trading edge, then like a casino, you want to execute that edge as many times as possible.

Another benefit to day trading is you eliminate your overnight risk – a risk that major events can happen (while you are sleeping) which may affect your trades.

By day trading, you are closing all your positions before the end of each day/session. This mitigates your ‘event risk’ by not having a position open long enough to be exposed to such risk.

On the other hand, day trading has its challenges. Trading intraday means faster price movements, which means you have to make your trading decisions much faster, while increasing your cognitive load (CL).

We will talk about trade frequency, cognitive load and transaction cost in more detail later. For now, just be aware day trading has its advantages and challenges, both of which you need to be fully aware of.

Is Day Trading Something For You?

First off, if you’re completely new to trading, I’d suggest not day trading in the beginning until you have learned the core skills of trading price action context, so much so that they are wired into your brain.

Why do I recommend this?

Day trading requires you to put all the focus and attention you can muster into reading price action context in real time. When the markets are moving fast, you can’t afford to spend more time than absolutely necessary on basic skills such as position sizing, order execution, etc. They have to be automatic and wired in so you can keep your mind free to find the best trades on the quick.

Hence, it’s important to ask yourself, are you someone who likes to take time to analyze charts, re-think scenarios multiple times before making a decision or easily get stressed?

Are you someone who has a full time job and only 1-2 hours available to trade each day?

If your answer to one of these questions (or both) is yes, you’d likely want to re-consider if day-trading is something for you.

However, are you someone who can make a decision very quickly and act on it?

Do you have several uninterrupted hours to find trades at your computer?

If you answered yes to the above two questions, then you might want to take a serious look at day trading.

The key point here is to understand yourself and how you naturally think/act.

If you can do that, you can align your trading as much as possible with your personality and lifestyle, which is one of the most important factors to determining your success in trading.

Day Trading Time Frames

Generally, the time frames for day trading you want to use are the 1H, M30, M15, M5, M3 and M1 charts. Any time frame above 1H won’t likely be of any use for a day trader since any significant moves on those time frames take longer than a session or a day to play out.

If you hear someone say “One-minute or five-minute charts are just noise” don’t take advice from that person. Time frames just give you a different perspective into the markets and price action.

Shorter time frame charts reveal more detail, but less historical context, while longer-term charts show less detail, but greater historical context.

One of the most important ways to look at time frames is to see them as ‘lenses’ into the price action and information on the chart.

This is clearly demonstrated by the three images below.

After looking at the above 3 shots, what do you see?

Starting on the left, we have the wide lens (18mm) which shows this shore/side of the lake, trees on both sides, and a couple peaks near the top left. In the middle, we have a 55m wide lens which only shows the shore on the other side of the lake. It also shows a 3rd peak which is more easily seen to the upper right.

On the right side, we don’t see any lake, only one major peak, with a well-defined white strip of snow and lattice structure on the mountain.

3 lenses, same piece of land.

Now let me ask you this question: Which one is ‘right’? Which one is the ‘most accurate‘? The answer is neither, or better yet, ‘whichever is most important to what you’re trying to see.’

And that is how you need to think of price action on the lower time frames. Each time frame is its own ‘lens‘ (perspective) about the price action and order flow. Hence each time frame has its own trend.

The key is to pay attention to the time frames most relevant to how you’ll trade.

Expectancy vs. Frequency

As we’ve talked about before, day trading takes advantage of the premise that volume of trades (over smaller profits) is your trading edge (how you make your money).

This section will be dedicated to understanding what is a trading edge, trade frequency, expectancy, and how this ties into your performance and profitability.

It’s very easy with all the literature out there, to look at risk in a very two-dimensional perspective of accuracy and risk to reward, but there’s a lot more to your profits and performance than just risk to reward + accuracy. You have to look at your performance 3-dimensionally!

The bottom line is that our profits and performance are determined by 3 things:

1. Accuracy (% winners/losers)
2. Avg +R per trade
3. Trade Frequency

All of the above create your trading edge and ‘expectancy’, which is what we can expect to make over time through hundreds and hundreds of trades.

Hence, it’s critical to understand how these 3 relate to each other, particularly in relationship to day trading.

To get an idea of how these numbers all affect your performance and edge, let’s take System A with 60% accuracy, trading 5x a month, risking $100 and targeting $200, assuming a 1% risk per trade.

Below is how the math works out:

5 trades over 12 months = 60 trades per year
60 trades x 60% accuracy = 36 winners/24 losers
36 winners at +$2,000/trade = $7,200 profit
24 losers at -$1,000/trade = $2,400 loss

Total Profit = +48% profit/+$4,800

Now, let’s take System B, which is the same as System A, but lets reduce the accuracy by 10% (assuming you will be less accurate trading the same system on a lower time frame) while increasing trade frequency.

Trading 20 times a month (~5x per week), risking $100/trade and targeting $200/trade.

Below is how the math plays out:

20 trades a month = 240 trades per year
240 trades at 50% accuracy = 120 winners/120 losers
120 winners at +$200/trade = +$24,000 profit
120 losers at -$100/trade = -$12,000 loss

Total Profit = +120% Profit/+$12,000

Comparing the two systems, the day trader made an impressive +120% profit vs +48% for the swing trader. Same system, same risk to reward ratio, yet more profit for the day trader.

Even if I make System A 70% accurate (a very low probability), here is how the math plays out risking the same 1% per trade:

5 trades over 12 months = 60 trades per year
60 trades at 70% accuracy = 42 winners/18 losers
42 winners at +$200/trade = +$8,400 profit
18 losers at -$100/trade = -$1,800 loss

Total Profit = +66% Profit/+$6,600

As you can see, even being 20% more accurate (highly unlikely), the day trader still makes more profit than the swing trader.

The bottom line is, if you have an edge, the more times you can apply it with a relative level of accuracy, the more the edge will play out in your favor. And that leads to more profits!

The prior examples are of course overly simplistic, but in our Trading Masterclass, we teach you how to calculate trade expectancy based on your current performance, and how you can improve your performance by improving your expectancy and trade frequency.

Day Trading & Price Action Context

Regardless if you’re swing trading or day trading, you want to make sure that you’re trading in line with the most dominant order flow as this helps to put the probabilities in the favor of your chosen trading direction.

Therefore you’d want to work with at least one higher time frame (HTF) to establish the price action context + trading direction, together with one lower time frame (LTF) which will be your trading time frame on which you make your trading decisions and place your trades.

To give you an idea what this looks like, let’s have a look at some charts.

Below is a 1 hour chart which shows a very clear bearish trend.

Using this view as our HTF (Higher Time Frame) context we can clearly establish the most dominant order flow is distributed towards the sell side and we should only be looking for opportunities to sell this instrument on our trading time frame (Lower Time Frame).

Now, let’s have a look at each of the highlighted areas (1-3) on the LTF (Lower Time Frame) or Trading Time Frame (TTF), showing us the price action in greater detail.

Highlighted Area #1:

Using the M15 chart enables us to view the bearish trend on our HTF in greater detail, enabling us to find high probability entry locations.

In this first example, we can see how price did build an area of ST support which later was broken and offered a good trading location on the pullback.

Highlighted Area #2:

The exact same structure/pattern repeated itself further down in the same trend.

Highlighted Area #3:

Once the trend started slowing down, price started ranging within a small corrective structure, providing multiple shorting opportunities from the top of the structure.

I hope this example clarifies why it is important to trade in line with the HTF price action context/order flow and how you can utilize the lower time frames to view the HTF price action in greater detail, enabling you to spot high probability entry locations.

Anyone trying to buy in this trend would have gotten crushed.
These are only a few examples of how to use the LTF to enter trades within a HTF trend.

Increased Cognitive Load (CL) When Day Trading

As already mentioned, intraday trading means faster moving prices/charts and requires you to make many important decisions in a fraction of the time that you’d have at your disposal when trading on a higher time frame like the 4 hour or daily chart. This significantly increases the cognitive load on a trader.

What is cognitive load you ask? Cognitive load refers to the total amount of mental effort being used in the working memory, similar to the working memory of a computer and refers to how much information an individual can consume/process in a given period.

A greater cognitive load means that you’ll exhaust your energy at a much faster rate which in turn can have an effect on your decision making.

Aspiring traders often are attracted to trading the lower time frames because they offer more ‘action’. But since they are not experienced enough, they are often unable to cope with the increased cognitive load, which renders them paralyzed at times or leads to very bad trading decisions.

The additional stress caused by suboptimal trading decisions further increases the cognitive load and a trader can end up in a very vicious negative spiral.

Now, there are a few key things we can do to:

1. Reduce cognitive load and
2. Handle the increased cognitive load correctly

First of all, one of the most important factors to reduce cognitive load is skill. The better you are at something and the deeper a skill has been wired and made subconscious, the less effort is required to perform a task.

A good example is driving a car. When you just have gotten your driver’s license, driving a car in heavy traffic can be exhausting, simply because all the skills necessary for driving a car have not yet become a sub-conscious skill and therefore requires a lot of focus/concentration, whereas a few years later, we are able to drive a car effortlessly, almost on auto-pilot.

It’s the same with trading. Before you take on one of the most challenging trading environments (intra-day trading), you’d want to make sure that many of your core trading skills have been repeated enough for them to be subconscious skills.

Another key factor to help reduce cognitive load is having the right mindset and being able to handle emotions. Having an incorrect mindset while letting emotions take control of you will multiply the already high cognitive load experienced during day trading.

In our Advanced Traders Mindset Course, we provide the tools, strategies and training to build a successful trading mindset, including day trading.

Increased Trading Costs

It is important to note, if you are trading the lower time frames intraday, trading costs will become a greater factor compared to someone trading the higher time frames. Even though trading costs may seem small in isolation, those differences in trading costs can add up pretty fast.

As a simplified example, let’s say a swing trader and intraday trader go long the stock of Apple at the same time. The swing trader naturally will have a bigger profit target and stop loss compared to the intraday trader since he/she only trades larger moves/swings.

Thus, for the sake of this example, let’s say that the swing trader has a target of $10 whilst the intraday trader a target of only $2 and both have an average spread of $0.20.

Now, for the intraday trader, this means that the spread (cost) for this trade is 10% of their potential profit whilst for the swing trader, the spread will only be 2%, meaning the swing trader can keep 98% of their potential profit whilst the day trader only can keep 90%.

Whilst this might not sound like a lot, over time (and hundreds of trades), this difference can add up fast and ‘eat up’ a big portion of your profits.

Now this example is overly simplified as there can also be commissions and swap rates involved, but the bottom line is that intraday trading is more ‘expensive’ than swing or position trading when it comes to transaction costs.

The higher trade frequency of an intraday trader will likely cover some of the costs, but in the end, as an intraday trader you need to be more precise in your trading to reduce the impact of the spread in relation to your overall profit.

Risk & Money Management

Taking risks is an essential part of trading. In order to make money trading, a trader has to take on risk. But this risk has to be calculated and controlled at all times as poor risk management can lead to disaster, and in the worst case blow up your account (losing your entire trading capital).

Thus, proper risk, money management and capital preservation should be the #1 priority of any trader.

For the members of my Trading Masterclass, I recommend having three to four risk thresholds as part of their trading plan.

These thresholds are:

1. A max risk per trade
2. A max risk per day
3. A max risk per week
4. A max risk per month

A max risk per trade should be based upon your risk of ruin. If you have a risk of ruin that is zero, mathematically you cannot blow up your account and you will make money. A max risk per day should be a daily risk limit to avoid losing too much on any given day. The max risk per week and month are also based upon the same concepts.

If any one of the above is ‘optional‘ in my book, it is the max risk per week. Keep in mind, none of the above defines how many trades you should (or should not) take in a day to avoid over-trading, a topic we’ll talk about later.

Also I’d suggest no more than a 1% risk per trade, although for day traders, I’d suggest less in the beginning (<1%).

Preparation

Preparation, in my opinion, begins with the mental game, and that has to start before you actually put your butt in your chair.

You’ll see this in professional athletes who are getting themselves mentally ready before they even get to the stadium.

Aaron Rogers (quarterback for the Green Bay Packers, 1x Super Bowl Champion & holder of several Quarterback records) spends a lot of time the night before thinking about the game and what he is going to do.

Trading has to be approached in a similar way, and the successful traders I communicate with regularly, employ the same tactic.

Hence, you have to include mental preparation in this part of the trading process.

Many times I talk to my private course students and ask them what they do to prepare for the day’s trading.

These are the general responses I get:

• Drink a cup of coffee, maybe two.
• Check out what announcements are coming out.
• Look at the markets and then get ready to trade.

And it ends there…

To me, this is somewhat shocking. Perhaps because I trained in martial arts, played semi-professional futbol or competed in archery, I have a habit of preparing for anything I am doing seriously. This is the same for trading – preparation is key.

Case in point, think about what you are doing when you are going to trade for the day.

You are going to do many of the following tasks each day:

• Make critical decisions and calculations on risk
• Access long-term memory and use your pattern recognition skills to find trades
• Come up against your psychological issues around money and Equity Threshold
• Sit down for hours meaning your bodies energy will be less active and more stagnant
• Use the reptilian part of your brain (limbic brain) which thinks more of near term rewards instead of long term benefits

Do you notice a pattern here?

Other than the fourth one on the list, all the others have to do specifically with your mind. The most important tool you are going to be using while trading is your mind, so preparing this is the most critical thing you could do before trading.

Ask yourself the following questions:

• Would a professional football player not warm up their muscles before a game?
• Would a football coach not watch video of their team or the opposing team before a game?
• Would a professional archer not take a few shots with the bow before starting a competition?

No – and there is a reason for this. All professionals know one thing for sure – they all prepare for whatever their task, skill or thing they have to execute. And why shouldn’t you?

Why shouldn’t you be preparing your mind before you start your day of trading?

While the questions are rhetorical, there are several things you can do to get yourself mentally prepared to make money trading. My first recommendation is to get up early and take a shower before you start your day.

Your central nervous system actually needs certain things to get in sync with your body biologically. Getting up around the time the sun does activates a protein sequence in your brain which helps it get chemically prepared for an intense day of critical thinking.

Showering helps to stimulate your nervous system and wake up your body and mind so you are more fresh for the day.

Another recommendation is to get some exercise, whether it be physically, mentally, or ideally both.

Each day, before I do anything, before I make any critical decisions or start work, I practice yoga and meditation every day.

Yoga helps calm my breathing which allows me to control my emotions and thoughts while having a body physically healthy to sit for long hours in the day.

Meditation sharpens my mind to help develop awareness of my thoughts and emotions which could influence my trading. It also helps me think clearly while making critical decisions.

I then spend the last 10-20mins visualizing what I am going to accomplish for the day, how I am going to trade, and what I will do successfully.

At a minimum, if you start trading in the morning, I’d suggest doing a few stretches since you are sitting all day and at least do some visualizations to program your mind for success. Remember, sitting is the new smoking, so make sure to augment this by getting some exercise.

If you are trading after work, make sure to take a break from your work mode, unwind a bit, clear the mind, and then sit down at your computer.

Day trading & Overtrading

Regardless of whether you are day trading or swing trading, over-trading is something many traders struggle with. The reason why you over-trade has two major underlying reasons.

Before we dive into those, I’d like to point out some key things most struggling traders mention when it comes to over-trading.

They are:

• “Feeling the need to be in the market” or “Fear of missing out (FOMO)”
• “I get impatient sometimes”

Note those two statements down for now as they are critical.

But before we get into the reasons why you over-trade, we need a working definition of ‘over-trading’. My definition of over-trading is as follows.

Assuming you are working with a trading plan, I define over-trading as the following:

Over-trading is taking any trades outside of your trading plan.

If you take any trade outside your trading plan (either going over your risk limits, or something not in your trading plan), then you are ‘over-trading’. Everything inside your trading plan (whether it be 10 trades or 100 trades for the month) is not over-trading, just trading and taking advantage of opportunities.

You can over-trade on any time frame. The time frame is not the root cause of over-trading. A lack of discipline is.

If you have not wired your brain to mentally execute your trading plan, the time frame will make no difference.

Just like if you have the habit of overeating, you will do so whether you are at a restaurant or your own kitchen. The habit is within you and doesn’t just disappear when you change environments.

If you want to dissolve the underlying root of over-trading (discipline & mental execution), you have to rewire your brain. Before we get into how you can do that, I’d like to address a few points about my definition of over-trading.

If a basketball player is on a hot streak, you keep feeding him the ball as those streaks are critical to winning. Professional poker players know this as well – when hot, keep putting your chips down.

The same goes for trading. Not pulling the trigger when you have a setup (with all conditions in place) simply limits your upside. Why would you ever do that? If the price action context is prime for you to make a ton of money that day, you should be attacking the markets.

On the other side of the coin, I’ve had days where I started out with 6, 7, maybe even 9 losses in a row. But I’m not fazed by this. As long as I haven’t hit my risk limit per day, I’ll keep attacking the markets, sometimes buying and selling in the same day.

Ironically, on many of those days, one or two big winners either brought me back to break-even, or helped me end up in profit for the day. Had I succumbed to some notion about ‘over-trading = x trades‘, every one of those days would have ended in a loss. On top of that, each one would have ended with a much greater negative impression in my mind.

Yet how much confidence do you think I get from losing 9+ trades in a row, yet still ended the day in profit? Just like a quarterback doesn’t stop throwing the ball because he’s had a couple interceptions and bad passes, the same goes for trading.

Your goal should be to win each and every day while maintaining your trading plan, risk limits and mental execution.

The time frames you are trading doesn’t determine whether you over-trade or not.

And the proof is in the pudding! Many traders are already trading the higher time frames, and still have issues with over-trading. The underlying root cause is discipline and mental execution in trading, and that comes down to how your brain is currently wired.

If you haven’t wired it into your brain yet, you won’t be able to execute discipline while trading. It’s as simple as that, regardless of the time frame. If you fear something will happen, you create psychological tension around this fear. This only increases your negativity bias, which further perpetuates this behavior.

In conclusion, we have to adopt a different working definition of ‘over-trading’. We have to get beyond the time frames that cause overtrading notion.

Your goal should be to execute your trading plan as is (and nothing more). And that needs to include your risk limits while pulling the trigger when you need to.

Review Your Work for the Day

Did you know professional football coaches after each game will spend anywhere from 20-40hrs a week reviewing tape of their last game, how things went, and then look at tape of their upcoming opponents?

Sometimes they are spending as many hours as people work in a week, just preparing for the next game. They will make notes, look at several different angles of the games, then prepare some tapes for their players to review to see what mistakes they made and learn from their mistakes.

There are actual poker players who have rooms full of journals with notes they took on players, how they played, what decisions they made, and how the hand played out.

• What do you do to review your trading and correct your mistakes?
• Do you have a trading journal which you actually fill out religiously?
• Do you screen record your trading and make comments of what you were seeing so you can see your mistakes and what you did correctly?

Do you review your systems performance monthly, quarterly or yearly? Trading is not just sitting in front of the computer when the markets are open, pushing a few buttons on the mouse, buying, selling and putting in stops or limits.

Trading, like all professional endeavors, is about preparing yourself for the challenge ahead. Trading is having a framework and a clear trading plan so there is no confusion about what you need to do each day.

Trading is about preparation + reviewing your performance. Simply put, you cannot change that which you do not review and measure.

Ask yourself what you are currently doing to review your trading process and how you are fixing your trading mistakes and plugging your leaks.

In this article, we are going to talk about the traditional definition of price action, how we approach it differently than others, and how you can use price action to trade pretty much any asset class and any time frame

What is Price Action Trading?

In the most traditional and technical sense, price action is simply price’s movement over time. This could be on any time, ranging from the 1-minute chart, all the way up to the monthly chart. Any price change or fluctuation for any instrument is a form of price action. Price action trading is the science and art of trading these price fluctuations over time with few or no indicators. By learning to read price action and price’s movement over time, you can learn to:

• See where the institutional players are getting involved
• Where key support and resistance areas are located
• Where to find precise entry and exit locations
• When to get out of a trade, add on to a trade or exit for profit
• How to trade transitions and reversals
• How to spot breakouts and identify if they have a high probability of working out or not
• Get into trends early on
• Identify the overall market conditions and how to position yourself based on that

This is why learning to read price action can (and in our opinion should) be a critical component of one’s trading. However, based on one’s approach to it, there are key differences in how one can trade it.

Various Ways to Approach Price Action

A lot of price action trading techniques you find on the internet these days are based upon candlestick patterns. Some of these patterns can be flags, triangles, double tops and bottoms, pinbars, inside bars, etc.

But if you are trading these patterns just because they are a pattern, then you are really failing to understand what price action is. As already mentioned, the proximate driver of price action is order flow which is the total sum of all buy and sell orders that are executed in the market.

It does not matter whether the market is moving because of a fundamental or technical reason. Order flow is the underlying force and reason why price moves on the chart. Price action has the fingerprints of order flow all over it.

Some markets do offer tools that allow you to read the order flow directly, for example via the DOM (depth of market) or time & sales (T&S) in the stock market. Markets such as the FX market, a market that isn’t centralized, does not offer the same advantage.

Regardless, since the most common driver of market movements comes from order flow, you can learn to read the order flow distribution using price action.

Don’t get me wrong, we also do trade patterns in the markets, such as breakouts for example, but we do so with the key understanding that all price action is the result of order flow. And since order flow is what moves the markets, we have to learn how to read order flow through price action. This is how you can take your trading to the next level.

Good Trading Decisions Are Based Upon Context

If you want to find high probability trades and skip those with a low probability of working out, you’ll need to develop a core skill.

What is this skill you ask?

The core skill we’re referring to is the ability to read the ‘Price Action Context’.

Yes, Price Action Context.

First, in order to make things easier, let’s define the word ‘context’. Context refers to the ability of understanding and approaching a situation based upon the ‘context’ (or environmental variables) around it.

In price action, the ‘context’ is a way of describing the overall environment, and using that to help you trade with the underlying order flow.

Now, before we dive further into how you can analyze the price action context of an instrument, let’s go over the basics of technical analysis as this is a crucial precursor to understanding and being able to read charts properly.

Introduction to Technical Analysis

Okay, so what is technical analysis?

Technical analysis can simply be defined as using technical methods to analyze a stock and use information in a chart to predict what is the more probable direction for the stock in the future. Typically, this is done with a price chart.
While there are many types of charts, the most common and our preferred method is the candlestick chart, which you can see below.

Those blue and white bars that you see in the chart are called candlesticks or candles. They move up or down based on changes in the price, they have different shapes, with little wicks or lines on the top or bottom.

Each one of these bars/candles represents the stock’s movement for a particular amount of time. For now, we’re going to focus on the very basics of technical analysis, starting with candlesticks.

Before you can really understand a candlestick chart, you must understand what candlesticks represent. To break down candlesticks a little bit further, we’re going to show you a bullish and bearish candle individually and explain what they mean about the stock’s price so you can understand how they work.

NOTE: You can color your candles any colors you want, but typically in most charts, by default, they are going to be green and red.

This green candle above represents a bullish move for the instrument, and we’ll be showing you a red one shortly that represents a bearish move.

Let’s say this candle is from a daily chart. That means each candle, like the one above, that you see on the price chart equals the stock price’s movement over that entire day. Thus, this green candle represents a bullish day, meaning the stock traded higher for that day.

There are a couple main parts of the candle that you need to understand, which is the body (the ‘boxy’ part of the candle), and then there’s the wicks or little lines at the top and bottom.

The body of the candle will represent the open and the close of the stock price for that day. Since it went up, the bottom part of the candle’s body is called the opening price while the top part is the close. The wicks on top and the bottom represent the highs and lows of that candle or the highest and lowest price of the stock for that particular day.

If you look at this candle and you want to understand what it really means in terms of that stock price, it basically means the stock opened at the bottom of the candle’s body, traded a little bit lower, and at some point in the day, bounced higher, hit the highest price at the top of the wick, and then closed just a little bit off the highs.

Moving over to this red candle, it’s basically the opposite of a bullish candle. Since it is a red candle, we know that it’s a bearish candle, that means the stock price went down for the day.

Essentially this means this instrument opened at the top of the candlestick’s body, went a little bit higher which is represented by the wick at the top, and then some point in the day, it sold off, went all the way down to the bottom of that wick, and then bounced a little bit and closed a little bit off the lows.

These are the four components, the ‘boxy’ part is the body (price movement between the open & close), and the lines on the top are those of the wicks (price movement between the highs & lows of that time compression).

The top wick will always represent the highest price of the day, and the bottom of the wick pointing downward will always represent the lowest price for that day. That means the bottom of the body is the opening price and the top is the closing price.

For a bearish candle it is just vice versa. The opening price is the top of the body, and the closing price is the low of the body. This is how to read candlesticks.

While it may seem confusing right now, with some practice it will become second nature very soon. Eventually, after looking at enough candles, and soon it’ll just be automatic in your head, you’ll understand it without any sort of thinking.

On the price action charts that we looked at earlier, you can see that candlesticks take many shapes and forms. Don’t be intimidated by this. As soon as you start looking at a bunch of charts, this will become second nature. It won’t be that complicated to read at all.

Okay, now going a little bit deeper into technical analysis and chart reading, there are three main environments in terms of price action:

• Downtrends
• Sideways movement (also called ‘ranges)
• Uptrends

These are the only three things that you can really see on any particular chart.

Downtrend is very straightforward. That’s when the price of that stock is trending downward over time. A sideways, or what we call ranging market, is when the price is going sideways or stuck, not really going up too high or not really going down too low. It’s stuck between a few prices. An uptrend, simply the opposite of a downtrend. It’s the price of a stock appreciating consistently over time. These are the only three technical environments you can be in at any given time.

Trends, as we mentioned before, downtrends and uptrends, these are just directional moves where the instrument is either being bought up or sold consistently.

NOTE: For those of you wondering about the bull and the bear symbolism, it has to do with how those animals attack. A bull, with its horns, will attack from down to up. It’s attacking upward, hence a bull trend. A bear will attack with its claws swiping down, hence a bear trend. That’s where that terminology comes from.

Now let’s dive a little bit deeper into trends. Even though trends can have an overall upward or downward direction, they can also have what we call swings in the market, where the market swings up or down inside the overall trend.

When you look at the chart below, you see that the overall price is climbing over time, but there are individual pullbacks within that bullish trend. You can see that price is making new higher highs on each move up and new higher lows on pullbacks. These little upward swings are called trend swings.

To clarify, bullish trends consist of a series of higher swing lows and higher swing highs and bearish trends are made up of a series of lower swing lows and lower swing highs.

Looking at the chart above, you can see that the first pullback in this bull trend finds a bottom and then rallies higher, that’s a swing low. Then it makes a new swing high, pulls back a little bit, and then it makes another swing low. Very straightforward. Just a little bit more nuance to understanding trends.

Ok, so now that we’ve talked about uptrends, downtrends, and swing points, let’s go back to ranges now. A range, as I mentioned, when price moves in a sideways direction, we call that a range because the price is between a high and a low, i.e. between two prices.

In ranges, nobody really is in control of the market between the bulls and the bears. In ranges, price just moves sideways for a period of time, and eventually it’ll break out of that range either to the upside or to the downside.

Another key aspect of technical analysis and reading candlestick charts is to understand the concept called support and resistance zones. Support zones if you think about it, like when you stand on something, it’s offering support.

A support zone in a stock is when the instrument you’re trading is supported at a particular price or zone, where buyers feel like, “Hey, it’s really cheap at this level. We’re going to keep buying anytime it gets down, and we’re going to buy it and then we’re going to send it back up”. That is a support zone.

It’s when bulls feel the stock is cheap, they feel it’s a good value, they’re going to continue to buy it because they feel it’s valuable at that particular price. Hence, the instrument is supported by this.
A resistance zone is just the opposite. It’s a ceiling that is hard for the stock to break through in price. This could be because the buyers simply don’t want to buy it at this price as they feel it’s too expensive and sellers feel that “Hey, we feel this stock is expensive at this price, we are going to sell this stock, and therefore provide a temporary ceiling for this stock in terms of price.” These are support and resistance zones. Very straightforward.

You need to think of them like the floor and ceiling in your house. They provide support or resistance for things to be supported on the downside or capped in terms of how much they can grow to the upside & they only last for a period of time.

There is a lot more to learn about technical analysis and this is just to give you the basics. But for now, if you’re a beginner, you should have a basic foundation in candlestick charts and technical analysis.

Price Action Pyramid

If I had to look at price action as a structure, it would be a pyramid, with the base being how price action is a reflection of order flow (particularly executed transactions).

In our Trading Masterclass, we have 3 major filters to understand price action context and in this article, we’ll talk about 1 of these 3 filters which are impulsive and corrective moves.

Impulsive Moves

During impulsive moves, the order flow is relatively ‘imbalanced’, meaning it’s dominant towards one side (buying/selling) which causes strong directional moves.

3 characteristics of impulsive moves are:

• Larger candles
• Majority of candles are of the same color
• Candles often close towards the direction of the move

Below is an example of impulsive moves:

Impulsive moves are critical to understanding price action context because they communicate a strong ‘imbalance’ in the order flow of the market. The more ‘imbalanced’ the order flow is to one side, the stronger the directional move will likely be.
Impulsive moves communicate critical things to you about your current/potential trades, such as:

1. Who’s in control of the market (bulls/bears)
2. If a move/trend is more likely to continue
3. If there is a potential breakout

By learning about impulsive moves, you can make critical trading decisions to increase your potential profit.

Corrective Moves

Corrective moves are also critical to understanding price action context because they communicate a relative ‘balance’ in the order flow.
3 characteristics of impulsive moves are:

• Smaller candles
• Candles close towards the middle
• Greater mix of bullish/bearish candles (mixed color)

If there is a relatively even number of buyers and sellers (buying/selling in relative equal amounts), the price action and market won’t move much up or down.
For a directional move to happen in the markets, an ‘imbalance’ between the buyers and sellers is required.

Below is an example of impulsive moves:

You should be able to notice that the chart above is the same chart in which we marked the impulsive moves earlier. This is a great example of how bullish impulsive moves, followed by corrective moves create a directional movement, i.e. bullish trend.
Corrective moves give you important information about your trades and price action, such as:

1. When the market is taking a pause (likely to range)
2. When it is more conducive to play both sides of the market
3. When you need to be more patient with your trades
4. Potential trade locations

Learning how to spot and read corrective moves, enables you to optimize your trading decisions and increase your potential profit.

Using Impulsive and Corrective Moves to Discover the Price Action Context

Now that we understand the basics of impulsive and corrective moves, we can use them to discover the price action context of the market.

As a general rule, an impulsive move (the majority of the time), is followed by a corrective move. For example, a with-trend impulsive move, followed by a corrective move, is more likely to be followed by another with-trend impulsive move than the opposite (counter-trend).

Now, what do impulsive and corrective moves teach us about price action context?

They give us an underlying sense of what the dominant order flow is.

If you see a potential trend in place, along with a good series of impulsive and corrective moves, then you can feel confident the order flow is imbalanced towards the bullish side (bullish PA context), and thus you should be looking to buy more often than sell.

Want To Learn More About Price Action Context?

While impulsive and corrective moves are a crucial part to determining price action context, they are only one tool in the took-kit our students use to achieve this.

We have two other key factors to determine price action context and in which direction the dominant order flow in the market is imbalanced towards.

To learn more about these two, plus much more, like reversal patterns and ways to increase the accuracy of your entry locations, check out our Trading Masterclass where we teach you how to analyze higher-, lower- and multiple time frame contexts with clear rules to understand them.

In fact, our entire 1st section of lessons is dedicated specifically towards understanding price action context. Inside the course, you’ll also learn how to read other critical (and more advanced) price action structures to help you find high probability trade setups.

If you’re currently learning/trading a price action strategy or approach that only works on specific time frames or instruments, then it’s a limited strategy that doesn’t really understand how price action or price action context works

If you want to learn how to read the markets in real time instead, find more and better trade opportunities, increase your profit potential and at the same time boost the quality of your learning process, make sure to check out our Trading Masterclass.