Market expert Alan Farley says investors should look to have a trading edge, which must hold up over time and through most or all market conditions. “Many traders who think they have a valuable edge have none at all or one that won’t stand up to the test of time,” he says.
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Who is Alan Farley?
Alan Farley is a best-selling author who has written the highly popular book, “The Master Swing Trader”. He has been a market expert since the 1990s, with expertise in balance sheets, technical analysis, price action, and broker performance. He has written many articles for Investopedia and TheStreet.com, highlighting profitable opportunities missed by the majority of traders and investors. He is also famous for his lectures on swing trading.
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Trading rules
Farley mentioned a few trading rules in his book, which can help investors avoid mistakes and achieve superior returns.
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Forget the news, remember the chart.
Farley says investors are not smart enough to know how news will affect prices as the chart mostly prices in the upcoming news.“Use the period before scheduled news to apply a convergence-divergence analysis that compares price action to current expectations. The best information comes when the chart diverges sharply from common wisdom,” he says.
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Buy the first pullback from a new high. Sell the first pullback from a new low.
Farley says investors should buy and sell from the first pullback from a new high and a new low, respectively.
“Act quickly when the market Gods offer a gift. Pullbacks let traders jump on board moving trains. They also provide fuel to carry a market higher or lower,” he says.
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Short rallies, not sell-offs.
Farley says when markets drop, shorts finally turn a profit and get ready to cover. “When markets drop, short sellers get ready to cover, making this a terrible time to execute new short sales. Wait until they ignite a squeeze and get shaken out at higher prices. Then jump in quietly while no one is watching,” he says.
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Trends depend on the time frame
Farley says trend relativity errors end trading careers. “Make sure your pattern works in the period that you want to trade. Opportunity aligns to specific time segments. Profitable trades find the right ones, while losing trades chase the wrong ones,” he says.
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Manage time as efficiently as price
Farley says time is money in the market. So, investors shouldn’t waste either. “Profit relates directly to the amount of time set aside for market analysis. Know your holding period for every trade. And watch the clock to become a market survivor,” he says.
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Expect the market to reverse as soon as you get filled.
Farley says investors should locate a safety net before jumping into a trade. “Stand aside when the exit door is out of reach. Wait for a pullback or drop down and trade the next-lower time frame. Never toss a coin into the fountain and hope your dreams will come true,” he says.
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Match tactics with market conditions.
Farley says investors should shift gears quickly when trades stop working. “Market inefficiency dries up as the crowd plays your game. But a new door will open as soon as the old one closes. Find it and profit until the herd heads your way,” he says.
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The perfect opportunity rarely exists.
Farley says the perfect trading opportunity is a rarity so investors should be alert and ready when a great trading opportunity comes their way. “Learn to trade in shades of grey. Profits depend on different levels of inefficiency. Get off the sidelines and act when enough ducks sit in a row,” he says.
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Know the price that violates the pattern.
Farley says investors should, all the time, keep risk and reward in sight. “Look for trades where the price must move only a short distance to show that it was a mistake. Then look the other way to find a profit target and apply this math to every opportunity. Limit execution to positions with low risk and high profit potential. Then update analysis with every new tick,” he says.
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Control risk before seeking reward
Farley says investors should strive to control risks rather than seeking rewards all the time.”Wear your market chastity belt at all times. Attention to profit is a sign of trading immaturity, while attention to loss is a sign of trading experience. The markets have no intention of giving money to those who do not earn it,” he says.
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Big losses rarely come without warning.
Farley says investors have no one to blame but themselves for any losses they incur.”You have no one to blame but yourself. The chart told you to leave and the news told you to leave. Learn to visualise trouble and head for safety with only a few bars of uncomfortable information,” he says.
