Lessons from the Pros

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What Are You Waiting For?

Hello traders! As we often like to say in our Online Trading Academy Classes or even in these Lessons from the Pros newsletters, trading is very simple but not easy. You can make it as complicated as you want it to be – adding multiple levels of indicators and oscillators, Fibonacci levels and moving averages, Elliott Wave counts, or whatever makes you happy.  Adding too many of these extras doesn’t always simplify trading nor make trading increasingly profitable. What makes these things “extras”? The only things you need on the charts in my opinion are properly identified supply and demand zones, and perhaps a way to determine trend direction.

This leads us to a very important subject in the trading community: why do traders (especially new traders!) try to use so many extra decision support tools? The very simple answer is that they don’t think or believe that trading should be easy. It is somewhat counterintuitive. “The ability to make six or seven figures should be difficult, otherwise everyone would be doing it” is a very common type of comment I hear when talking to someone about trading. My response is always that trading is simple, just not easy. So, what makes trading so difficult for new traders? In my opinion they are focusing on the wrong thing: charts! The difficult part is in your head, not on the screen!

Very often this is what new traders believe a chart has to look like – many wiggly lines/decision support tools. Too many of these things will give you conflicting information at different price points. One may say buy, one may say sell, another may tell you to wait. By the time all of your decision support tools line up to tell you to take a trade, the train has left the station and you are left chasing! Professional traders don’t chase trades, we wait for the trade to come to us.

This chart is much cleaner and allows us to wait for the trade to come to us. Using properly defined supply and demand zones will allow us to take the higher quality trades, and ignore a lot of the “noise” that often accompanies the charts.

What is a quality supply or demand zone? There are several factors that we discuss in our Online Trading Academy classes, but none of the qualifications are difficult. One factor is how far the currency pair went when it left the zone. On this chart I labeled the first move away from the zone as “A”. On this fifteen minute chart of the AUDUSD, this original move was approximately 60 pips. Depending on how we get back to that zone, we have a reasonable expectation of a 60 pip move again if we get back to the same zone. Yes, that did happen a couple of days later when price re-entered the zone.

So what makes trading so difficult? If it isn’t the chart, was else could it be? The answer is you. The psychology of trading is the most difficult part to get around.  Here are a few potential psychological hurdles:

  1. Moving your stop loss as price approaches it – not wanting to take the small loss. Small losses are your friends in trading because they aren’t big losses!
  2. Taking profits too quickly – the market doesn’t go in one direction forever. Many traders want to book their profits as soon as they see “green on the screen”. Professionals let their winners run and cut their losses quickly which is the opposite of new traders.
  3. Taking too many trades, or every trading “signal” they get from their indicators. Professionals are paid on the quality of their trades, not the quantity.

There are many other hurdles out there, please read Dr. Woody Johnson’s Lessons from the Pros articles to get you past them. Don’t ignore the most important aspect of trading: your mind!

So let’s review the original question, the title of this article, “What are you waiting for?” There are only three things that you can do while looking at your computer screen: buy, sell, or wait. These are our only options as traders! If in a high quality supply or demand zone you should be looking to buy or sell; if you aren’t in one of those zones you must wait! Professional traders often spend the vast majority of their time waiting for the high quality trades to come to them instead of button mashing and placing dozens of trades a day (scalpers aside). When you are waiting for a zone, you are planning both the long and short side of the next possible trade. Every trade has three parts: entry, exit for small loss, and exit for larger profit. If you don’t plan all three parts of the trade BEFORE you enter, you are doing it wrong.  On this AUDUSD fifteen minute chart, the plan would have been to enter a short trade at approximately 1.0380 with a stop loss above 1.0390 (above the supply zone) and a profit target of 1.0327 (just above the demand zone.) This would have had a reward to risk ratio of about 5:1.

Focus on the difficult part of trading, your psychology, and identify the high quality zones, and trading will be much simpler!

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.