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Trading Mistakes That May Keep Your Profits Inconsistent

The goal for most traders is consistent profits, life-long income from speculating in markets. The key word in that sentence is consistent. Anyone can have profitable trades here and there, but do they produce consistent income and profits from trading. I have a friend who day trades the S&P E-Mini and has a winning percentage of around 80%; but the problem is, he doesn’t make consistent income from trading. Sounds crazy I know, but one loss for him tends to wipe out all the profits (hope he doesn’t read this article)…

At Online Trading Academy, one of the “Odds Enhancers” we focus on for every trading opportunity is Profit Zone. Without a clear and ideal risk/reward (profit zone) showing on the chart, there is no trading opportunity. What we are looking for are supply and demand levels that are far apart from each other with clear room in between for price to move. There are many supply and demand levels on a chart. Often there are very quality supply and demand levels on a chart but the problem is, they are too close to each other which means no trade due to a lack of “profit zone.” Typically, but not always, we are looking for opportunities on the chart that offer us at least 3:1 reward to risk to the first target. Often we are looking for more, but this is a safe minimum to make a trade acceptable to take.

S&P Futures – Oct 29, 2015

Learn to evaluate trades with a good profit zone and low risk, high reward ratio

At this point, you’re probably wondering what any of this has to do with the title of the article. Let me explain through a trade I took from the OTA Supply and Demand grid we produce each day. This was a trade in the S&P (ES). Notice the supply level (yellow box) and demand level (circled area) on the chart. The supply level is the origin of a strong decline in price and the demand level is the origin of the strong rally in price seen on the chart. The trade was to bet on a downside move, selling short at the supply level for a move in price down to the demand level. To measure risk reward, we need to do two things. First, we need to compare the distance from entry to protective stop against the distance from entry to profit target (the demand level). This opportunity offered a little less than 3:1 according to the chart. Second, we have to adjust position size to make sure we are never risking more than we are willing to lose. If I stopped writing about this trade here, most readers would think to sell short at the supply level and take profits at the demand level. That is something I never do and is the most important edge building consistency tool I can offer here. Two things specifically:

  1. 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 want a 4:1 setup with a much easier time of attaining consistently profitable trades, make sure the chart is offering you at least 5:1 and so on… I think you get the point. When the chart offers you 3:1, actually getting 2:1 is much easier than if that opportunity offered 2:1 on the chart.
  2. When taking profits at demand from a short position, don’t wait for price to come all the way down to demand to take profit, make sure you take your profit with your buy order just before demand. The reason is that there is competition to buy at demand, that’s why it’s demand. When we are taking profits on a short position we are buying, so why would we want to buy at a price level where there is competition to buy? Why not buy when there is competition to sell, which is right before the demand level, as price is falling. The same but opposite holds true for exiting longs just before supply levels.

Consistent profits for a trader are much easier to attain if you take profits at 4:1 when the chart is offering you 5:1. They are also much easier to attain when you exit positions for profits right before demand levels for shorts and supply levels for longs. One other side note on this trade that also helps me with consistency is limit orders. In doing this, you are removing the biggest risk to trading, which is you and your emotion. My hope is that this little nugget of information helps you achieve the consistency 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.