Lessons from the Pros


Forex Core Strategy Review: The Mind Game

Thanks for all of your positive comments and feedback from my article I wrote 2 weeks ago that reviewed our Core Strategy and why we teach our students to buy and sell like the biggest banks and institutions at key levels of Supply and Demand. In that piece, I explored a selling setup on the GBPCAD currency pair and why we would have chosen such a level for a trading opportunity. If you missed it, the level in question was this:

Learn to read charts and find profitable trading opportunities using OTA's core strategy.

We explored exactly what happened at the level, explaining that the reason we would be interested in selling at the level of supply was for 2 very specific reasons:

  1. There was clearly an imbalance between the orders to buy and to sell, with the sell orders being vastly greater than the orders to buy. These sellers didn’t get all of their orders filled resulting in Supply being greater than Demand and the dramatic fall in prices.
  2. The level was very likely created by major banks and institutions, simply because they have far greater buying power and larger order size than those of the retail crowd, so we want to be entering the market when they do.

As we saw, the price did return to the level and dropped a decent way down. Here is an updated snapshot of the trade:

learn to identify trading opportunities on a chart

Now, it is always nice to show people a trade setup which works, but in reality there are also plenty of them that fail too. Does this really matter if we win big and lose small though? Of course not. Remember that the task of a trader is to time the markets for entry with a high degree of accuracy, getting into trades when the risk is low and the reward is high. Looking at the above opportunity, we can clearly see that the size of the risk as defined by the size of the zone is very small, yet the drop away from the zone was significant enough to generate a healthy reward. This, in turn, gives us plenty of chances to lose trades and still maintain a strong level of profit.

When we understand this dynamic of risk to reward ratios clearly, it removes the pressure of attempting to “know” what is coming next. I say this because one of the many emails I got in response to my last article was from a gentleman who saw the level on the GBPCAD and asked me how I knew that the trade was going to work. He explained to me that there was no reason for the trade to fall from that area and just because the market respected the zone once before, there was no reason for it to do so again. I think he made a fair point but here is the thing: the minute we begin to think about the consequences of a trade before we actually take the trade itself, is when we begin to run into trouble. We now have a Demand zone approaching on the same GBPCAD pair and the rules tell us this is a low risk chance to buy. It may or may not work, but the only way to find out is to take the trade as we find it:

Banks buy at demand and sell at supply and so should you. Learn more at Online Trading Academy.

The issue is with the thinking. Do you really think that the major banks and institutions know when something is going to happen? Do they have a secret that they are not telling us about? Is there a trading crystal ball in existence somewhere? I faced the facts many years ago and realized that nobody knows the outcome of a trade before it happens and nobody ever will. In fact, it is this element of the unknown which allows some to make good money from the markets and others to fail repeatedly. When a major bank sees an opportunity to buy or sell with low risk and high reward, do you really think that they worry about the trade not working? Why would they? It’s not their money after all, is it? In fact, I would go so far as to say that they would be more concerned about not taking the trade and it then going on to work. It hurts far more to lose out on a large profit than it does to endure a small loss.

Free Trading WorkshopTo anyone out there thinking there is a magic trick to the markets, know this: the trick is to not get into your own head. Trading is as much about the strategy you use as it is about actually ensuring your mental game is strong enough to implement this strategy without question, regardless of what you think. After all, as I said before, nobody knows what’s going to happen next. It’s more important to stay consistent enough to do what you need to do on a regular basis without worrying about what may or may not happen before it actually does. I hope this was helpful.

Take care and be well,

Sam Evans – sevans@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.