Featured Article

Why Are You Still Watching That Level?

rickwright
Rick Wright
Instructor

Hello Traders! In every Online Trading Academy class that I teach there is a diverse mix of students – usually a couple of people retaking the class a second time, a few new students who have never placed a trade before, and a few who have been trading but are not happy with their performance in the markets. Between the second two groups of students, the ones who have never traded before are very often the most successful at the end of our week-long classes. How could that be? Shouldn’t someone who has been trading for months or years be able to out-trade someone who is brand new to this endeavor? Often times, no. Usually an experienced trader has a lot of excess “baggage” that must be dumped before they can truly begin to excel at trading, while a new trader listens and accepts what they are hearing.

Think about it – if you were to learn how to play golf and went to a professional instructor, having never even seen a golf swing or swung a club would be ideal! Accepting the instructor’s recommendations of a particular type of grip, stance, club selection, etc. would be much easier if you hadn’t been playing (poorly) for years. “That’s not the way Tiger does it” would never be a reason to not do what your instructor recommended. The same idea applies to trading. Frequently an experienced yet not profitable trader will be in class and say something like “That’s not what I read in XYZ Trading Magazine” or “This book about trading says do the opposite.” This would be some of the baggage I referred to earlier.

One form of baggage would be having too many indicators/oscillators on your chart – this topic has been covered in several Lessons from the Pros newsletters. Another form of baggage is looking at every turn or support/resistance level that has been formed in the past and still consider it as a valid level for our future trades. In class, I’ll draw in a couple of support/resistance levels, then add a few more, then a dozen or two more, then even more to prove my point – you can have too many levels on your charts! Not all are quality supply and demand zones, but not too many new students know when to “get rid” of a level.

Here is a chart with too many support/resistance lines drawn in. I used nearly every turning point on the chart, even levels that have been broken several times after the original change in direction. Trying to earn a living in the market with this many lines will be a bit difficult, as we expect to place trades at nearly every level we draw! Otherwise, what’s the point of drawing in these levels? If a line has been broken, especially more than once, why is it still on your chart? In our Online Trading Academy classes and especially in the Extended Learning Track classes, we refine what constitutes a good, fresh level to trade our hard-earned money. These are called “odds enhancers.” How price leaves a level, how price approaches that level, reward to risk ratio, etc. are just a few of the odds enhancers we discuss in class.

This chart is a little cleaner, don’t you think? I ignored all the price action that has already been traded through, or broken. Concentrating on only the most recent and un-tested swing highs and lows will lead to higher quality, higher probability trades. Fewer trades as well! You must always remember that we get paid on the quality or our trades, not the quantity. If you could make the same amount of money placing 3 trades a week as someone who is placing 333 trades a week, which would you prefer? Most would choose 3, as this would allow you to have a life outside of staring at the charts for many hours every day! As has been discussed in previous newsletters, much of our time as traders is spent waiting – either waiting for price to get to a good supply or demand zone, or waiting while our trades work for us.

So what rule should we use to get rid of a previously defined level? My basic rule is this: when price has traded through the level in both directions, with full candles above and below the level, remove that level. Our basic premise of supply and demand imbalances is still valid with this rule, plus the axiom of “what was supply becomes demand and what was demand becomes supply” is still applicable. Adding a similar rule to your trading plan will help you concentrate on the fresher, higher quality levels instead of every turning point that has ever happened.

So what did we learn this week? That some supply and demand zones are good, but every support and resistance line is unnecessary, if not counter-productive.  Apply a similar rule to your trading plan (you do have one, right?) and you should be taking fewer and better trades.

Until next time,

Rick Wright

rwright@tradingacademy.com

Disclaimer
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.