Lessons from the Pros

Featured Article

Thinking Better Odds

Much of the time the trading articles I write are focused on where to enter a position more than any other topic. This is because it’s the most important part of the trade. If you can’t get your entry correct, meaning low risk, high reward and high probability, the other components to your trades such as the exit and management will not work. Today I want to focus on a simple yet powerful technique related to how you exit positions that should help you increase your winning percentage. To explain this, let’s look at a recent trade from the Mastermind Community Supply/Demand grid.

Profit Zone

In short, your profit zone is the distance from your entry to your target. So in the example below, the profit zone is the distance from the short entry (supply) to the demand level below, which would be our target. The black line on the bottom of the chart is the origin of the rally (demand) that brought price up to supply for our short entry. Many would take that demand area as their target, thinking, sell short at supply and buy back for a profit at demand.

NASDAQ 1/07/16

Find trading opportunities that increase your success and know where to enter your trades at Online Trading Academy

Profitable Thinking

Demand, as we know, is a price level where there is competition to buy. So, if we buy where others are looking to buy we are going to have to compete with them at that level which makes getting filled difficult. So, if we know there is competition to buy at demand that is the last place we want to buy. If we want a much easier time getting our buy order filled, we need to buy before price reaches the area of demand. Instead of buying back our position at the black line (demand area); buying back at the blue line (circled area) will give us a much easier and better chance at getting filled. Another way to say this… Instead of buying when there is competition to buy, buy back for your profit when there is still competition to sell. While you will often miss out on a little profit, that’s ok. You are giving that up for trading opportunities with a stronger probability of success.

The Tip

If you have been reading my articles for a while, nothing I have said so far is brand new information. Let’s get to some of that now. For all our short term and long term trading opportunities, one component that must be present is an ideal/risk reward. No matter how many Odds Enhancers are present, the risk/reward must be there. To help define this for the purposes of this article, when we say 3:1, we mean risking 1 to potentially make 3. Furthermore, the “1” is the distance from entry to your protective stop and the “3” is the distance from your supply/demand level to the nearest opposing supply/demand level. However, given the information we discussed above on competition and how it relates to the probability of getting filled, we have an opportunity to increase our odds of a profitable trade.

Free Trading WorkshopIf you are looking for trading opportunities that offer you 3:1, make sure the chart is offering you at least 4:1. If you are looking for 4:1, make sure the chart is offering you at least 5:1 and so on. If you want to increase your winning percentage even more, try this… If you are looking for 3:1, make sure the chart is offering 5:1.

I employ this concept on most trading opportunities I find and take. Most people who find 3:1 on a chart set their trade up to take action at 3:1, I don’t. Instead, I would make sure the chart was offering at least 4:1 and then take profit at 3:1 or pass on the opportunity.

Of course, to do this objectively you must be able to qualify and quantify real demand and supply in any and all markets with a very high degree of accuracy. All the information you need to do this is clearly seen on a price chart if you know what you’re looking for.

Hope this was helpful, have a great day.

Sam Seiden – sseiden@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.