Hello traders! Like many of my articles, this one was inspired by a question a student asked in class. The question seemed simple enough, but like many simple questions, the underlying thoughts that went in to form the question hinted at some major problems.
As this class of students in the beautiful city of Atlanta were in a trading session (if you don’t know, most of our classes are split into lecture sessions and sessions where we trade in the markets) one of the students in the front row suggested that I take a particular trade. In the following USDJPY chart, it was suggested to go short at the blue arrow.
The conversation that followed is paraphrased below:
Student: I think we should go short there.
Me: I can’t sell there, we are sitting on a demand zone.
Student: But don’t you think it will go lower?
Me: Yes, because the trend is clearly to the downside, but there are two reasons I won’t short there. One is that we are far out on the curve in this time frame (see my last article). The other reason is that we are on a demand zone.
Student: But if you think it will go lower, why wouldn’t you sell it here?
Me: Because my stop loss would have to be above the red line on the chart, giving me a terrible reward to risk ratio.
Student: But don’t you think it will go lower to make money on the trade?
You can guess my answer.
The entire point is that we are rules-based traders. We have certain rules that we follow, and these rules are in your trading plan. Our two very basic rules are as follows:
– We buy in demand
– We sell in supply
These two rules should be ingrained in your thought process, as to where you would not even question doing anything else! The main reasons we have these rules are that our losses will be smaller, our winners will be larger, and (when done properly) our ranked supply and demand zones should increase the probability that you will have a winning trade. Seems like good enough reasons to me to follow those two basic rules! As the price of the USDJPY was sitting on a demand zone, I knew I couldn’t sell this pair because that is against one of my trading rules.
Part of what I believe this students’ problem was that he didn’t trust the rules, not because he didn’t believe that there were valid reasons for the rules, but that he hadn’t seen them in action enough times. One of the most hilariously devastating truths in trading is that breaking the rules sometimes works. Doubling down on a trade going the wrong direction, moving your stop the wrong way just to give it a little more wiggle room, selling in demand and buying in supply – once in a while breaking these rules actually does work. But once in a while I could speed past a police station at 100 mph while texting and eating a cheeseburger, and wouldn’t get a ticket. As I sit in my car a few blocks away contemplating such a foolish scheme, I don’t know if this will be the time I get away with it, or will I get arrested and thrown in jail? Since I don’t know if I will be successful or not, I have to play the odds. Because odds are if I drive past a police station doing 100 mph while texting and eating a cheeseburger that I will go to jail; I will not take such actions. If doubling down on a trade actually works a small percentage of the time, and usually people just lose more money when they do it, I won’t ever take that action. (Believe me, I have broken every trading rule that exists. The only reason that I am still trading after more than fifteen years is that I don’t break these rules anymore!)
My suggestions to this student was to put more time into his trading plan, solidifying which of our odds enhancers to use to score/rank his levels, and even to write on the chart with the text feature his reasons for doing a trade. When you come back a few minutes or hours or days later, your written reasoning will be staring at you in the face! If your reasons for the trade were valid, I would guess you made money on the trade. If your reasons were faulty or you broke the rules, you probably lost money. It doesn’t matter what I “think” price will do at a level; I will continue to buy in demand and sell in supply.
Instead of wasting your own money and time trying to learn these rules yourself, please follow the lead of your Online Trading Academy instructors in both our on location classes and in the Extended Learning Track online classes. Until next time,