Hello traders! It’s been another fun couple of weeks in the forex market since I last wrote this column. The EURUSD has moved up about 300 pips, essentially shrugging off the news about Cyprus. The USDJPY has moved up over 500 pips, proving that Japan’s central bank is winning the war of weakening currencies, not to mention the 1,000 pip moves in some of the JPY cross pairs. Fun times we are living/trading in!
Over the past couple of months I have had the pleasure of teaching our forex class in Houston, Baltimore, and currently Charlotte, NC. Several students in these respective classes had been to more than one in-person class, and most have enrolled in our online course, the XLT Extended Learning Track. Many times a student in class will mention that “I took a class with Instructor A; he loves using this technical analysis tool, why don’t you use it?” or “Instructor B in the XLT hates this technical analysis tool, why do you like it?” This tool could be a moving average, Fibonacci retracement/extension, or perhaps the MACD (moving average convergence/divergence.) My response is always along these lines: There are only two things that successful traders have in common. We cut our losses short, and we let our winners run. That is all.
Many of our instructors at OTA have been trading for many years, if not decades, predating the internet, and some even home computers in general! Learning to trade in the pits of Chicago is a lot different than trading from a laptop on a beach. Several others became instructors after sitting through our classes, watching and trading with our XLT rooms for hundreds if not thousands of hours, until they became good enough traders that they wanted to help others by sharing their knowledge. We all started in different places, but we are all where we are in trading by doing those two things repeatedly. Cut your losses short, and let your winners run.
Different people have different personalities, obviously. Different traders have different styles, ranging from time frames that they like to trade from, to what tools they use to help with making their trading decisions. The consistently profitable students and instructors I work with all use quality supply and demand zones to enter trades, placing their stops on the other side of the respective zone. Most use the next supply (for longs) or demand (for shorts) as a profit target. If this is all you need, why use the other tools? The answer is simple: if you have several choices of demand zones, a moving average (for example) can help you choose which demand zone to use. An intersection of that moving average with a quality zone would merely be an odds enhancer for that particular zone.
Another odds enhancer for zones could be a Fibonacci retracement level. Many traders wait for a 61% retracement of a larger move to enter a trade. The tools you could use to enter your trades are too numerous to list here! As a new trader you must keep track of the reasons you take trades, and if a particular tool/reason isn’t making you money, stop using that tool! Any trader who continues to use a tool that actually hurts their performance must not be keeping track of their performance closely enough.
Please be aware that using more tools usually eliminates a lot of trades, very often too many trades! If I am looking at a chart with 6 supply and demand zones, I have 6 places to trade. If I insisted on a moving average intersection, that may eliminate one or two zones. If I also insist on a MACD crossover (for example), that may eliminate another zone or two. Suddenly I am left with only a couple of levels to take trades from. Over time, many traders remove these extra tools because they have greater trust in the zones that they have chosen. If you trust your levels, do you need anything else? I think not.
So what happens if your level is broken by the price action? Without question, you get out of the trade. Cut those losses short! Moving your stop loss the “wrong way” – taking a larger than originally planned loss – is one of the reasons many traders do not make it in the big wide world of trading. Your stops should always be pre-planned, not just an after-thought. Many traders believe that the stop loss is the most important part of any trade, and I tend to agree with them. Without a doubt, one of the main things that consistently profitable traders have is the discipline to cut their losses short.
So how do traders “let their winners run?” This actually has a couple of meanings, in my opinion. The first meaning is to allow your trade to “work” until your profit target is hit. Based on the charts, if you were expecting to make 50 pips on the trade and you exit the trade when you are only up 10, are you following your plan? I doubt it. (I understand exiting before a central bank interest rate decision, but exiting just to lock in those 10 pips is usually a mistake.) The second way some traders let their winners run is to manage the trade by moving the profit targets further and further in the direction of the trade. For example, if you were in a long trade with an original profit target of 45 pips and a stop of 15 pips, as the price action approached your profit target you could move it out another 20 pips. Also make sure you are trailing your stop in some way! Each time the trading price approaches your target, move it further out. This is similar to the technical stop technique you may be familiar with. The great thing about this technique is that occasionally what would have only been a 45 pip winner turns into a 100, 200, or even greater pip winner!
We do recommend that you model yourself after successful traders – by cutting your losses short and letting your winners run, you will be doing just that!
Until next time,