Lessons from the Pros


Quantity vs. Quality

Hello traders! This week I’d like to discuss a common misconception that new traders have – that professional traders sit and stare at their computer all day, making dozens of trades during their trading day. In addition, I’ll suggest a progression of trades you can add to your trading plan to help keep you from over trading.

During many of the Online Trading Academy classes that I teach, the question often comes up as to how many trades I take during a day or a week. Many new students are surprised when I give my answer of “between zero and three trades a day.” Their surprise is especially evident when discussing the forex market because it is open 24 hours a day, from Sunday afternoon to Friday afternoon! With all that time to find trades, why don’t we trade dozens of times every day? My answer is always, “We don’t get paid on the quantity of our trades, but on the quality.”

In this GBPUSD 60 minute chart, there are a couple of supply and demand levels drawn in, with several blue arrows indicating potential trade entries from those levels. (Trade exits have been discussed several times before, and I’m sure will be discussed again in the future!) Seeing these high quality supply and demand zones would lead us to take only about five trades in this period of time-about 10 days. Why only five? Aren’t their several other support and resistance areas, plus maybe a trend following trade or two in there? Of course! But the professional trader and the Online Trading Academy student knows to take the high quality levels, those which offer them the highest probability of being correct in a trade. Each one of the numbered trades would have potentially earned the trader anywhere from 70 to 150 pips per trade over the next few hours or days.

In this GBPUSD 10 minute chart, covering only a portion of the previous 60 minute chart, there were a couple more opportunities with correspondingly smaller profit targets.  Common knowledge of trading says that the smaller the time frame you watch, the more trading opportunities you will have – with both smaller stops and smaller profit targets. Which then leads to one of my favorite things about the markets-you get to customize your trading style to your life, instead of living your life around the markets! Not many experienced traders want to stare at the screens for hours a day, trying to take advantage of every potential move that shows up. Most of us want to set up our trades and walk away from the screen, letting us enjoy the rest of our time pursuing other interests. This is the beauty of our current trading technology available to the retail trader! Many platforms allow us to “set it and forget it” – meaning we can place our entry, stop loss, and profit target(s) with a few quick keystrokes in a matter of seconds. Twenty years ago when I first got into the markets, active traders had to be a lot more hands-on during the trading day, rarely leaving our trades alone. Once you have a few high quality supply and demand zones on your charts, most of our time now is spent either waiting for price to get to a level so we can enter our trades, or waiting for price to hit the next level so we can exit our trades! The actual time spent doing the physical activity of trading is negligible.

In our Extended Learning Track programs, most classes begin with what is called a “splash screen” where different levels are chosen by the lead instructor.  These levels are potentially tradable supply and demand zones. You will find that there are only a couple of quality levels marked – again, quality over quantity of trades.

This leads me to our next topic this week, overtrading. As previously stated, many new traders think that you must take many trades a day to make a living at trading. Your broker will love you for being an active trader, but your profitability may not be much higher than someone who takes far fewer trades than you. In fact, it may be worse! During class I suggest new traders to take only a small number of trades per day or week, and only increase that number as they become more and more profitable. Here is my suggestion: if you plan on being a daytrader, consider only taking 2 trades a day. This way, you will concentrate on the higher quality levels, and not chase any trades. If you know you will be near your trading computer for several hours today, but only allow yourself two trades, I doubt that you will fire them both off in two minutes!

When do you get to trade more often? When you are bored making money with 2 trades a day. That sentence has two very important components. The first is you HAVE TO BE MAKING MONEY! I wouldn’t want to trade more often if I wasn’t profitable – all you would be doing is losing more money faster! The second component is you have to be bored with that level of activity – you have to want to trade more often. When do you get to do 4 trades a day? When you are bored making money with 3, and so on and so on.

What about swing traders? Try 2 trades a week, until you are bored with it. Position traders may do 2 trades a month. Eventually you will get to a point when trading more often isn’t really adding much to your P & L, but it is adding to your time in front of the computer. Walk away and do something else with your time!

In conclusion, concentrate on the higher quality supply and demand zones, take fewer trades, and maybe make more money! 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.

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