Who Likes Their Time To Be Wasted?

Rick Wright

Hello traders! Have you ever had one of those weeks, or months even, where everything seemed to go your way? Nearly every trade made you money, you even considered adding to trades as they continued in the trend? It seemed as though the trading gods had suddenly given you all of the knowledge that until now had eluded you. Pips were raining from the sky, as you surfed the internet looking for expensive cars or even homes. You were walking down the street, head held high, believing you were a Master of the Universe? Guess what? You are probably in an easy trending market, and you had better be making money! These are the markets that make up for the sideways chop that often follows an easy trending market!

As I write this newsletter, the EURUSD and GBPUSD have been in very easy and fun uptrends for a few weeks. This is the kind of market where you almost can’t help but make money when you use our core strategy – that is buy (go long) in uptrends at demand zones, and sell (go short) in supply in downtrends. There are times when this basic strategy is so ridiculously easy and profitable, that many new traders tend to believe that they are a trading prodigy. Guess what? You aren’t. Sorry to rain on your parade in this holiday season. Have you heard the phrase that everyone is a genius in a bull market? Welcome to a short term trader’s bull market.

In this 120 minute EURUSD chart, I’ve marked down a total of eleven potential long trades over a month of trading where the pair has rallied over 500 pips. In trending markets like this, I hope you are buying the dips! As you may have read before, the market does one of three things-goes up, goes down, and goes sideways. The sideways markets are the harder ones to trade, as the market doesn’t seem to be going anywhere, what looked like a trending market keeps stopping you out. This may last for days or even weeks! What happens after a sideways market? Either a continuation of the previous trend, or the trend reverses. The funny thing about trading is that the market can ONLY do those three things. Our task as traders is to determine what phase of the market we are in, and trade accordingly.

As traders we must be flexible – NOT insist that the previous uptrend (or downtrend) will continue forever, and stubbornly trade in the original trend direction. What that does is cause us to take unnecessary losses, and perhaps give back many of the pips we had previously made. A trap that many new traders fall into is that after a prolonged trend, when they have become a Master of the Universe, they believe that they can do no wrong. What had been a great trading month is starting to become not so great as the stubborn new trader continues to believe that the previous trend will reinstate itself. Think that doesn’t happen? In every Online Trading Academy class that I teach, I tell a few of my own personal “war stories” of trading. I have personally lost all ego when it comes to trading, as I have had the market humble me more than once. Every mistake that you have ever made in the market, I’ve made as well. Probably more than once.  Whenever I find myself feeling a bit too confident, I know something is about to change, as the market knows when you are overconfident. What is my personal war story for this? Several years ago when I first started trading the forex market around 2002, I found myself in a very nice trending market. With a $25,000 account, I was making $5,000 a week, and every Friday sent myself a $5,000 check. After 13 weeks (oddly enough, a Fibonacci number) of this return, I thought I could do no wrong. As I extrapolated out how much money I would have in my account if I left the money in instead of paying myself, my eyes were getting a little wide. “I’ll have my first Lamborghini by Christmas, my second by Memorial Day, and a couple of million dollar vacation homes by my birthday!” Yes, the ego was out of control. What do you think happened next?

Yes, the easy trending market decided to turn to chop, even a slow reversal of trend – which I didn’t recognize. I continued in my belief that the original trend hadn’t changed, and got stopped out repeatedly. On the fourteenth week, my losses compounded as I stubbornly added to money losing positions, all the while believing that my own personal trading awesomeness would overcome the trend reversal.

It didn’t.

After 3 ½ days of week fourteen, I had given back $15,000. This meant that I had given back three weeks of profits, essentially wasting my time for nearly a month! Many times in class I hear similar stories from students, who traded with strict rules for days or weeks, and then got overconfident, broke their rules, and gave back much if not all of their gains. Has this ever happened to you?

Here are a couple of rules I have added to my trading plan to help combat this issue. The first rule is: after doubling my trading account, I take a few days off from the market. This helps my ego deflate a bit, and my (potential) overconfidence to subside. Who doesn’t like a vacation?

The second rule is this: put in a moving average, and ONLY trade in the direction it shows you. If it is trending up, only go long. If trending down, only trade short. If wiggling flattish, trade another pair that is trending. There are many different moving averages you could try, which one you choose will be based on your trading style. Experiment with a few of them to find the one that suits you.

So there you have it. Don’t let your ego get the best of your trading, causing you to get stubborn because you know better than the market! Reap those pips when we are trending, because the pros are doing it too!

Until next time,

Rick Wright

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.