Hello traders! In a few of the latest Online Trading Academy classes that I have been teaching, a consistent question has been popping up. After having a few supply and demand zones on my charts, a student will often ask, “If you think that prices are going up to that point, why not just buy here to make a few pips, then short at that supply zone?” This is similar to the question posed in my article from October 15.
I have been pondering the psychology behind these questions, and I would like to pose another tactic to help get past this. Very often new traders will put too much emphasis on the current trade they are considering taking-meaning they may think that this trade is wildly important to their success as a trader. Whenever you have chased a trade, buying after it has already gone up or selling after it has already gone down, you were trading with too much emotion, fear and greed are the common emotions tossed about in trading conversations. Fear of loss, fear of missing out on money (greed!), fear of failure, etc. But why would someone believe that this one trade will make or break them as a professional trader?
When a new trader starts out, they usually don’t have much history in the trading world. They may have years of buy and hold/investing experience, but little experience in trading. This obviously limits their ability to detach emotion to this one trade. If you have made 4 trades, the fifth would represent 20% of the trades you’ve made! I can understand putting a lot of emphasis on this one trade!
Let’s now change the perspective a bit. In my more recent classes, I’ll ask the students how long they want/expect to be a trader. So far, the answers have ranged from “forever!” to 20 years. I haven’t had anyone yet say they wanted to only trade one year! So let’s now do a little math. In a calendar year, there are 365 days, of which about 250 will be possible trading days (take out weekends, holidays, maybe a day or two after a holiday.) Then we will subtract a few days or even weeks for the inevitable vacations, and days you just don’t want to trade. So now we are down to 200 trading days in your year. So the next question I’ll ask the class is “What kind of trader do you want to be? Daytrader? Swing? Long term?” Obviously the answers vary, but generally we narrow it down to averaging one trade a day. To many of you this will seem like a very active trader, to others it will seem not nearly active enough!
So let’s continue with our math exercise: twenty years of trading, 200 trading days in a year, 1 trade a day. So, you can reasonably expect to do a total of 4,000 trades over the course of your trading journey. Suddenly, this one trade you are considering doesn’t seem so important to your long term success! This one trade isn’t even one percent of your trades this year, let alone the entire span of your trading! The point is, there is no reason for us as traders to put so much pressure on making money right here, right now, on this particular wiggle in the market. This one wiggle is almost nothing when you consider the amount of pairs you could trade and the times you could be trading them. Relax! There will be another trade set up later today, or maybe tomorrow! You certainly don’t have to chase this trade. Be patient, and wait for the next good one to come along – they always do.
I was almost finished writing this newsletter, and one thing struck me. Could this one trade be your last? Possibly. Have you ever traded without a stop loss? I hope from now on you never will! A stop loss is our exit on a trade that is going the wrong direction. I strongly recommend always having the stop loss in the system, have it be a live order. There are too many reasons to not use a “mental” stop. (A mental stop is the price level on the chart where you will take yourself out of the trade. What happens if the price hits that level and you aren’t watching it? Or your power goes out? Or your computer crashes? Etc. etc. If you were trading for me, you would always have a stop in the system or you would be fired.)
The point is this: one trade won’t make you a success, but one trade could wipe out your account. (Or at least blow up this trading account.) Please don’t think that you have to take this trade or you will fail as a trader, and please always use a protective stop loss so you can live to trade another day!
Until next time,