Hello traders! This week’s newsletter comes to you from warm and sunny Dallas, TX, where I used to live before I moved to Colorado. Is it weird to say I actually miss the humidity? Anyway, let’s discuss the difference between smart profit targets and silly profit targets, or what I call smart and dumb greedy.
As regular readers should know by now, there are three parts to every trade we take as traders: the stop loss, the entry, and the profit target. All three parts of the trade should be clearly identified in advance of placing the actual trade. This helps to keep us from trading emotionally, which often happens when the price action is moving quickly. If the chart you are watching is moving rapidly but without you, very often new traders will chase the price, entering their trade with no regard to where their stop loss or profit targets will be. They just need to be in the trade because it is moving, and moving right now! Some call this being greedy. In my opinion, this is actually another form of fear: the fear of missing out.
These inexperienced traders will pay nearly any price, because their belief is that if they aren’t in this particular move, their success as a trader will be diminished. Nothing could be further from the truth! By chasing trades or trading in this fashion, their long-term success will be diminished! That being said, what then constitutes being dumb greedy vs. smart greedy when we actually do plan out our trades in advance?
The dumb greedy trader will expect or try to squeeze out every last pip in a move, attempting to enter near the absolute bottom and exit near the absolute top. While this sure is nice when it happens, in my 20+ years of trading I think it may have happened to me once. It certainly isn’t something we expect to happen, and here is why:
In this NZDJPY four hour chart, I’ve marked in an obvious demand and obvious supply zone. We could consider going long at the demand zone, around the 72.50 price with a stop loss at the 72.20 price. In this instance, if you were very lucky, you may have been filled near the very bottom of the zone at about 72.35. If so, nice entry! Since our rules state that our stop loss goes below our entry zone for a long trade, 72.20 is fine for discussion’s sake. This then gives us a 30 pip stop loss. Again, according to our rules, our reward should be at least three times what our risk is, so a profit target of at least 90 pips is in order. Ninety pips above our entry would place our target at a minimum of 73.40, and on this chart, we could do much better. But how much better?
Some traders, who use the old method of support and resistance, would look at the 75.25 level and say that our exit order should be place at that point. But, because we at Online Trading Academy believe that institutions trade with zones, and that these institutions truly move the markets with their orders, I want to exit my trades BEFORE the institution orders affect the chart. In my opinion, I would rather get out of this long trade at about the 74.95 price point, expecting the big institution sell order that created this supply zone to push prices back down. This would be smart greedy, taking what I believe to be the majority of the move instead of trying to squeeze every last pip out of the trade. The greedier you trade, the more pips you miss! Imagine trying to get out of this long trade at 75.25, and as you watch the candles slow down, you might not get out until 74.70, or even 74.50! If you had set your exit order ahead of time, 74.95 would have been an easy, no stress exit.
So, to summarize: Trying to make every last pip in the market moves is truly a waste of time; it will stress you out as well! Go for a significant amount of the move, relax and take the easy pips. Be smart greedy, not dumb greedy!
Until next time,