Last week while I was teaching a class, a student asked me how they should know whether or not to take a particular trade. After thinking about it for a minute, I replied, “Think of your trading decision as if you were presenting a case to a jury.”
While this was a thought that suddenly came to me, it really makes sense. We are the judge and jury as well as the advocates for or against taking any trade. While we cannot dictate the outcome of the trade itself, we can decide punishment (losses) and even whether to enter the trade, (guilty) or pass on the trade (acquit). A plea bargain could even be entered to trade with smaller share size for minimal risk.
When we are deciding whether to take a trade or not, we must look at the evidence for and against. As a trader, collecting the evidence is critical. Without compiling the reasons why a trade is likely to be profitable you’re reducing your chances of success. However, when one takes the time to substantiate a trade, trading is more like speculation and offers a greater chance for success.
So, what is the evidence we are looking for? That is what we teach in our classes at Online Trading Academy. It should include things such as:
- The trade is compliant with the dominant trend in the trading and larger time frame
- Entry for a long is at a fresh demand zone, or entry, for a short at a fresh supply zone
- The broad market confirming the trade
- The sector confirming the trend and trade
- There is a minimum of 3:1 Reward to Risk ratio
- Technical indicators suggesting divergence or confirmation
We must also remember to find and evaluate any negative factors that could affect our trade’s chances for success. We should always do this before we trade since we will often ignore any negatives once we are in the trade. No one likes to be wrong and when money is in a position, we are likely to downplay or rationalize reasons to exit for a loss. Evidence against a trade could include:
- There is a supply or demand zone that is in the way of price reaching our target
- The markets, or sector, is not moving in the same direction as the trade
- The demand, or supply zone, has been tested one or more times before
- The trend has already run for a while and you may be chasing price
- You have had losses on this particular stock before and may be revenge trading
This is just a small sample of the pros and cons for taking a trade. In our Extended Learning Track (XLT) program, we even teach odds enhancers that allow you to rate a trade to see if it is of a high enough caliber. We should always do this before we commit money to any trade.
Just like a judge or jury, we should remain impartial when evaluating the evidence and before passing judgment. We do not need to take every trade that comes along; we must focus on the ones that offer us the best chances for making profits with relatively low risk. Before you take that trade, remember, court is in session!
– Brandon Wendell firstname.lastname@example.org