By Sam Evans, Online Trading Academy UK Forex, E-mini, and Power Trading Workshop Instructor
This week, I will focus on a simple, yet fundamental aspect of each and every trade: Expectation. In both the Online Trading Academy classroom and the XLT - Forex Trading, I like to constantly remind students of the market, that they need to be disciplined risk managers at all times, with a robust application of a sound trading plan. Consistency in trading comes from a solid combination of understanding Price Action, identifying the highest probability, low risk turning points and most importantly, limiting loss. In the search for perfection, most market speculators are always looking for the perfect strategy that works each and every time. This attitude often leads to the road of financial ruin, as traders focus on predicting where the next big money trade is setting up, or jumping in and out of the market for a quick buck. So how can this be prevented? Rather than focusing on making money, the consistently profitable trader needs to focus on protecting their money and this adjustment can be made by not attempting to predict the market's next move, but rather anticipating all possibilities.
The successful trader looks to manage entry and exit while objectively analyzing opportunities which offer clear profit targets and intelligent stop loss orders. If you enter a trade, it is vital to know beforehand where to put the stop, and know your targets, or in short, have a plan. Think about this: What's the point of pulling the trigger if you don't even have a clue where you are going to exit? With this concept in mind, we return to the title of this article. If you understand your expectations of each and every trade, you have a far greater chance than most out there. We need to respect that not all trades are going to work and understand that we also need to be clinical about taking profits when the market offers them. Anticipate both the winners and losers and you'll soon find things a lot less emotional! Let's take a look at a few trades we took in a recent Forex Trader class held in London a few weeks back and how we put this idea into practice.
Below is a snapshot of USDCAD during the London FX trading session (see Fig 1):
Figure 1
This currency pair had been trading in a tight range overnight, unconvincingly testing resistance at 1.1000, a big round number. Objectively, we could see this was a potential area of order flow with both Supply and Demand in balance, yet suggesting weakness in the market. In anticipation of further weakness, we took the opportunity to be some of the first to sell and shorted at a price of 1.0985 and placed a protective Buy Stop a few pips above the Pivot High at a price of 1.1005. The target was the lower area of demand at a price of 1.0905, offering a good Risk to Reward ratio of 20:80 pips. Why did we make this area our target? Simply because the trade involved unemotional analysis which determined that if prices fell to 1.0905, there would be a strong potential for a reversal and a high probability buying opportunity.
Figure 2
After a few hours the market fell to the predefined demand area and we closed the trade for a profit of 80 pips. The exit order was placed well in advance, allowing the class to take profits cleanly and unemotionally. However, as soon as the trade was closed, we then bought USDCAD in this area of strong demand at the same price of 1.0905 with a stop order at 1.0885, anticipating a retest of the previous supply area at 1.0990 (see Fig 2). With another logical risk to reward ratio, this time of 20:85 pips, the trade offered an equally good low risk, high probability speculation like its predecessor. It was a good move, as prices rallied strongly from the identified area of Demand and reached our final target of 1.0990, where our exit order was once again waiting in advance. However, it didn't end there...you guessed it, as we exited the long trade, knowing that we had retraced into a predefined area of supply, we then initiated another short position on USDCAD (see Fig 3).
Figure 3
With another short sell at 1.0990 and a stop at 1.1005, we anticipated yet another drop for the currency pair, setting our exit once again at the same price of 1.0905, risking 15 pips to make a possible 85 pips. As you can see, this third trade didn't work out and the stop loss was hit before the market did fall as we expected. However, this is the reality of the market and let's face facts, it had been a good day with a total of 165 pips made and just 15 pips lost giving a net profit of 150 pips overall. Did we chase the market after it hit our stop loss and then went south as we originally expected? Of course not, because the class expected and anticipated that events like this can happen at anytime in the Forex markets. The key lesson learned was that it is vital to know where to enter the market and where to exit instead of holding out for ridiculous profit targets that are rarely achieved. Many novice traders set unrealistic predictions for their trades which often results in them painfully watching a profitable trade turn into a breakeven or losing one as the market retraces back on them. Remember, it's not profit until the trade is closed! Understand your market, plan your trades and be honest with your expectations. As a leader in the Extended Learning Track (XLT) - Forex program, I always tell students, "If you don’t have a target to aim at, then don't be surprised if you find yourself shooting in the dark."
Until next time, keep those losses small,
Sam Evans sevans@tradingacademy.com
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