Hello traders! This week I am writing to you from sunny Dallas, Texas, where we are experiencing a warmer than usual fall week. Last week I was in San Diego, teaching a futures class and enjoying the beautiful beaches. In this futures class we had the usual mix of students: a couple retaking the class, a few that had been trading for a while on their own who aren’t as successful as they would like, and several brand new traders.
As with any new endeavor, anyone new to trading can be overwhelmed with all of the new information that is washing over them, and this class was no different. In every class that I teach, I prefer to “remove the complexity.” This is merely an ironic way to say keep it simple. Whenever you are looking at the charts waiting to get into a position, there are basically three things that you can do: buy, sell, or wait. (Obviously if you are in a trade you can manage that trade, which has been covered before.)
When a student is staring at the screen with a bit of an overwhelmed look on their face, I have a simple reminder of what we can and can’t do when looking at the charts. We must first eliminate what we CAN’T do, so we can more easily focus on what we CAN do. So how do we eliminate one or more of these three options?
This always comes back to our supply and demand, retail and wholesale prices. When our core strategy is done properly, we are looking to buy in demand and sell in supply. Stated another way, we buy when things are cheap and sell when they are expensive. Have you ever been to a grocery store and heard the seafood counter manager come over the intercom and say, “Crab legs are only $20 a pound for the next fifteen minutes!” What was your response? If you don’t like crab, your response was to do nothing. If you liked crab and knew that their price was normally $40 a pound you probably ran through the store pushing people out of the way to get yourself some tasty crab legs! Why? Because the price was very cheap and you are ready to be part of the demand. What happens if you knew the price was normally $10 a pound? Would you still run back to the seafood counter? Of course not because you knew that the price was expensive, so you couldn’t buy. (I’m still trying to figure out how to short crab legs in the grocery store.)
Many inexperienced traders treat the charts the opposite of how they treat their normal shopping. Many try to buy things AFTER they have already gone up in price, where things are expensive, and look to sell things AFTER they have gone down in price where things are cheap. Every other buying or selling transaction in their lives is done properly, but trading is where things go haywire.
As the new trader is sitting at his or her screen in class, we are examining charts and trying to figure out what to do: buy, sell, or wait. When a currency pair has ALREADY moved up, meaning a series of green candles has already formed, we can eliminate at least one of our options. You are too late to buy! You could wait at this time, or you could choose to sell in a quality supply zone. When a currency pair has already moved down, meaning a series of red candles has formed, the pair is cheap. Logically, I can’t sell cheap things, so one choice is eliminated. I could look to buy in a quality demand zone, or I could choose to wait. So what does that look like on a chart?
In this chart I’ve marked in a supply zone with the blue box, and a demand zone with a yellow box. As price action was approaching the yellow box it gave us several red candles indicating it was getting cheaper. Where is it cheap enough to buy? In the quality demand zone. Even if there are a couple of red candles indicating cheapness, I still won’t buy until the price is at a demand zone because we believe that there are still a stack of orders waiting to be filled that caused that original demand zone. The green arrow indicates where price is cheap enough for me to buy.
As price approached the blue supply zone, even after several green candles, was it expensive enough to sell? After price has moved up already I know I can’t buy, but is it expensive enough to sell? Only in a quality supply zone can I sell. The red arrow indicates where price had become expensive enough to sell.
One of the problems many new traders have is the tendency to overtrade, that is, trading too often. They very often think that if they aren’t constantly in trades, or actively buying and selling, then they aren’t trading enough to make money. This is the wrong thought process. With a few weeks of seat time in front of the charts, you will start to realize that the vast majority of your time is spent waiting for price to get to one of your zones to enter a trade, and once that has happened, you are waiting for price to move to your profit targets. If you get stopped out, you are waiting for the next trade to set up. If you are in a trade, you are probably also waiting for price to move to manage your stop to lock in profits along the way. I would guess that about 98% of a trader’s time is spent waiting! The actual “hitting the buttons” part of trading is such a small part of our actions we often must have hobbies or chores to do to take up the rest of our day. The more you sit at the charts staring and waiting for something to happen, the more likely you are to force a trade when you should be waiting.
So, how can this truly help you? When you are staring at the charts, look to eliminate at least one of your possible choices. If price has several red candles in a row, I know I can’t sell. I might buy in demand, or I must wait. If price has several green candles in a row, I can’t buy. I might sell in supply, or I must wait.
Until next time,