Never make the mistake of thinking that you will ever really know what will happen next in the market. Nobody walking the face of the earth knows exactly what is going to happen tomorrow and the sooner I accepted that very fact, my personal trading results took a big turn for the better. This statement of fact may be a bitter pill to swallow for some because we all want to believe that there is a way to predict market outcomes time and time again. However, prediction can be a dangerous game. Human nature dictates that we always want to be right and traders can get pulled easily into the trap of looking for trades to make money, as opposed to trading for genuine objective reasons. It is easy to stick with a trading strategy when it works but hard to stay with it when it doesn’t, often leading to the temptation of deviating from the plan when we want a winner to come in so badly!
Throughout the ongoing Extended Learning Track (XLT) program, I take a different approach teaching students how to be objective and unemotional in their trading, much of which I have discussed in previous articles. I like to deter them from thinking that they have to be right all the time. If one continually attempts to predict market directions and outcomes, they will soon lose sight of what consistent market Timing is really all about: High Probability, Low Risk and High Potential reward speculation, not being right each and every time. In the real world of trading, even “High Probability” does not equate to “Guaranteed Success” and I encourage all of my students to learn to take a loss and enjoy them – they are simply part of trading after all.
However, this is not to say that I don’t encourage students to formulate a forward-thinking approach to their market analysis as I firmly believe it is important to be aware of all of the possibilities of price and direction. It’s almost like preparing yourself for things that could happen, even if they don’t happen. It is never fun to be thrown a curveball, so I keep an open mind at all times and attempt to be mindful of all the things that could happen. You see when I look for a trade in the Forex market, I am not looking for something that is unlikely to make me money, as I only look for trades which offer minimum risk, high potential rewards and stack the odds in my favor. But as I said before, these criteria alone do not mean that the trade will work out. I need something more – I need to anticipate all of the possible outcomes.
I like to think of chart analysis as being more like detective work than anything else. To me, a price chart is a roadmap of subtle clues. This roadmap shows us the events of the past and the events of the present. If I look closely enough, these charts will actually show me the footprints of all the buyers and sellers in the market and what happened at the key market turning points. We can tell if Supply was greater than Demand, suggesting that prices will fall if they come to this area again or vice versa. We can get hints on how a market is trending, showing weakness, telling me to sell or showing me strength to buy. When we know how to interpret this activity on a chart, we have a very powerful tool because we can objectively analyze the events of the past and the present, to give us clues as to what could happen in the future. Sure, nothing is set in stone, but when going back to my previous analogy of detective work, I like to help my students think of themselves as just gathering clues to aid them in their decision-making process. Just like any lawyer fighting their case in court, the more quality evidence they have amassed to support their case, the more likely chance they have of winning that case when they await the verdict of the jury. Needless to say though, that even some of the best fought and well presented cases still don’t get the nod of approval, but like anything, that’s just the way it goes. Nobody really knows what’s about to happen next in any aspect of their life, just like a seasoned lawyer knows they can’t win every case and how a professional football player knows they can’t win every game. They anticipate all potential outcomes yet still play to win with the odds stacked in their favor. Ask yourself, should trading be any different?
At Online Trading Academy we look to identify turns in the market before they happen, which is most easily seen on a price chart when you learn to identify the biggest imbalances between Supply and Demand. The origin of these imbalances then show us, with a high degree of accuracy, where we would like to buy and sell objectively in the future. If we have identified a Demand Zone, then we are prepared to buy at this demand zone when prices fall back to this level. We are not predicting that prices have to rally from this area but we are anticipating that there is a strong chance that they will rally as it is a demand zone. In the eventuality that the trade fails, then we have a protective stop loss to get us out for a small loss. This is in anticipation that we could be wrong or we could be right. We must remain objective throughout all of our trading activities.
When a clear line in the sand can be drawn between the activities of Prediction and Interpretation, it can be a useful exercise for any new trader to clearly observe and embrace this idea as part of their trading plan. To me, attempting to predict what is about to happen next in the Forex market sounds almost ignorant, as I know from my own experiences that even the best laid plans can fail. Yet if I approach my activities in the markets from a point of view that I am trying to simply deduce and interpret all likely events, then I am much less likely to fall foul of my emotions. My XLT students and I understand completely that “High Probability” does not mean “Certainty” in the organized chaos of the global Forex markets. We objectively analyze, we limit our risk, place our stops and targets and then finally let fate do its thing, all the while knowing that the market may not behave as we would like it to, but may actually behave in a manner in which we anticipated it may well do. This is not an easy concept to get your head around but definitely worth acknowledging. Remember if you have all bases covered, what got you in and got you out for a small loss may actually get you back in for a bigger win a little later.
Be well and keep the losses small,