Lessons from the Pros


Mom, Us Traders Aren’t Unique

Hello traders! With all due respect to all of the fantastic moms out there, I’m sorry to have to burst your bubble just a bit. When we were all told as youngsters that we are unique individuals, much like the delicate snowflake, that just isn’t the case when it comes to trading. This week I would like to show you how we are all very similar, and explore why some people make it in the wide world of trading and others don’t.

My personal belief is that we all have the same learning curve in the trading arena, and what separates the profitable traders from the unprofitable traders is very simple. First off, what is on the correct learning curve? In the beginning, all new traders have to learn the extreme basics. For example, some basic definitions on what things like bid/ask, spread, volatility, and what different order types are used for. Most new traders are unaware that a stop order can be used for both exit and entry. The exit is commonly referred to as a stop loss, but learning how to use a stop order for entry can be extremely useful in our set and forget trades. In the following pair of charts, you could have used the four hour demand zone as your entry level, with a buy stop above the zone for your entry. A sell stop (stop loss) would have been placed below the zone, and a sell limit could have been placed just below the supply zone for a profit target. If the price action went down, through the zone, your entry would not have been placed so no loss would have occurred. If the price leaves the zone to the upside first, your entry would have been triggered.

pair of charts- used four hour demand zone as your entry level, with a buy stop above the zone for your entry

Yes, it is still possible to lose money on these types of trades, but the odds are less that that will happen as you are waiting for the level to prove that it can hold.

Other things that all traders must learn is proper risk management, for example: risk a small percent of your account on each trade, often 1%; going for trades that offer at least a 3:1 reward to risk ratio; taking time away from trading if you are having a “cold streak,” perhaps 3 losing trades in a row. There are many other risk management rules, but this is a good start!

In addition to risk management rules, a new trader must know what to look for on the charts to place their trades. Because there are only three actions a trader can make – buy, sell, or wait – one must know what to look for to determine where to buy and sell. This topic is covered relentlessly in both our in-person and online classes, our Extended Learning Track.

Being aware of the mistakes in trading is something else all traders must know. For example, adding to a losing position, commonly called averaging down; letting a losing trade continue to go the wrong way, with the hope that it will eventually come back; chasing trades, which gives us a poor reward to risk ratio; trading too frequently, etc. etc. One thing is for sure, if you have traded for more than a few weeks you have probably made at least one of these mistakes! You are not alone in making them – every trader has done these at least once. This is where your individual uniqueness as a trader comes into play. If you can learn what the common mistakes are, could you learn not to do them? I believe so.

So everyone has the same learning curve in the beginning – what to look for, what not to do, what you must do, etc. But what makes some traders very successful and other traders not so much? In my opinion, it comes down to your own psychology, but more specifically your discipline and determination. This is where the learning curve for different traders starts to diverge. In every Online Trading Academy class that I teach, I show our students how to start a trade journal. Most new traders will only look at their win:loss ratio, and their profitability. This is taking the easy way out! Here are some suggestions that the disciplined and determined trader might keep track of: time frames/trading style that works best for you; what Odds Enhancer score you must need to place a trade (described below); time of day you entered your trades; perhaps even the day of the week you enter. There are others to consider, but you’ll have to come to class to see them!

If you are unfamiliar with our Odds Enhancers, it is a scoring system we use to determine if a supply or demand zone is “good enough” for us to risk our hard earned money on the trade. A couple that have been mentioned in previous newsletters include the departure from the zone and the distance traveled from the zone. Yes, there are several others! If you have a potential ten points using just five of our Odds Enhancers, how many points do you need to take a trade? Will you adjust your entry style depending on the score of the zone? What are your specific rules for entering with a score of seven out of ten? How about ten out of ten? Again, these are some of the things that a determined and disciplined trader should have set in their trading plan.

The learning curve for everyone in the beginning is the same, so no one is unique. How far you progress up the (proper) curve and how successful you become depends mainly on your discipline and determination to keep track of the things you are good at and do more of them; and keep track of the things you aren’t good at and do less of them! If you want to get good at trading, model yourself after successful traders and learn from their mistakes. These mistakes can be very costly in the long run, keeping many from being successful. Again, with all due respect to the moms out there, don’t be unique, just copy what has worked in the past and replicate these easy to follow rules in the future.

Until next time,

Rick Wright

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.