Hello traders! This week’s newsletter comes to you from sunny and warm Sacramento, California. A student of mine, let’s call her Jennifer, had a series of questions that I have heard many times before. However, this time the tone of her voice was a bit different than other students who have asked similar questions and I realized she was struggling with a couple particular trading challenges.
Her questions, paraphrased here were, “What do you think will happen if the Fed decides to not raise rates this year? Do you think the dollar will continue to stay rangebound, fall, or rally for some other reason? Do you think…” and the questions continued. After a minute or so I realized that I had a new newsletter topic! Now, Jennifer is a very smart person, which is very obvious when you talk to her for just a few minutes. She is (self-admittedly) a very strong-willed person. Either of these alone can create trading challenges, but combined can be an especially dangerous combination in the world of trading! Not dangerous to other traders necessarily, but dangerous to these traders’ own accounts.
Why on earth would someone who is smart and stubborn be a danger to their own accounts? Let’s start with the stubborn part. When you have a new trader- someone who is a bit strong-willed, this trader can very often choose to hold trades that are going the wrong way on them. Obviously, by now we should all realize that taking a small loss is the way to go if your trades aren’t headed your direction; but what do some stubborn traders do? Often they will hold on to their losing trades, holding “until it comes back to break even, then I’ll get out.” Sometimes these trades do come back to break even. But sometimes these trades go so far the wrong direction that many days, weeks, or even months of good trading profits can be wiped out by stubbornly holding onto one bad trade. Some traders have even blown up their account by refusing to take the small loss! Please, don’t be one of those traders.
So how do you think being too smart might be a hindrance in trading? Often these traders might be trying to add too many variables and possibilities into their view of the markets. When there are too many variables, the equation becomes unsolvable! When trying to understand the strength of one currency/economy versus another currency/economy, we often look to Gross Domestic Product gains, interest rates, employment rates, population growth, natural resources, central bank leadership, etc. etc. However, what is it that actually moves markets? The ONLY thing that moves prices is an imbalance in supply and demand. Nothing else matters. Trying to figure out if GDP being up .2% year over year vs. another economy being up .21% year over year, and how the chart will react is truly a waste of time. Leave those discussions to the opinion pages of your local business paper and internet bloggers who don’t trade.
In this EURUSD chart, I’ve marked in two simple zones, one supply and one demand. Some of the most successful traders out there are using easy charts like this without a bunch of technical analysis tools, and merely buying in demand zones and selling in supply zones. If you buy in demand and the price goes through that zone, take the small loss. If you short in supply and price goes up through that zone, take the small loss. However, if you buy in demand and it goes your direction, manage your stop properly and let your winners run using whatever technique you prefer. If you sell in supply and it goes your direction, manage your stop properly and let your winners run using whatever technique you prefer. Yes, your trading plan rules can be nearly this simple!
When the really smart new traders start trading, very often they want to figure out the “whys” of market movement. I can respect that; curiosity is a good thing. However, the answer to why a market moves is always an imbalance in supply and demand. So, why was there an imbalance in supply and demand? Most of the time we will never know! It could be a news event was a catalyst, but often the price reaction to news is tough to figure out. Trying to figure out the specific “why” may cause you to miss trades, so I personally don’t bother.
Here is how the smart, strong-willed trader can actually turn those trading challenges into trading advantages. Instead of stubbornly holding on to trades that are going the wrong way, stubbornly follow your trading plan of taking small losses and letting your winners run! You can still be stubborn, but focus that personality trait on good thing in trading! What about fixing the “smart” problem? Instead of trying to figure out why markets moved, ignore that and look for more trading opportunities! Focus your smarts on looking for correlation, or even markets that seem to lead others. Knowing which market turns before another helps you trade the slower moving market. Use your big brain to figure these things out then let me know what they are at the email below. I’ll be at the golf course.
Until next time,
Rick Wright – firstname.lastname@example.org