The most important article you will ever read about trading (plus GBPAUD signal update)
Last week I told you I was going to share my strategy with you, and started with a few aspects that are important to understand before going through the main strategy…
What I’m going to share with you today is probably the most important aspect of trading… Ironically, it has nothing to do with your entry, but get this right, and you’ll be on your way to consistent results.
The most important aspect of trading
Every week I get at least this question once:
What do you think is the most important aspect of trading?
And my answer has always been the same:
How you decide what instruments to trade.
If you trade the right currency pair, the right stock, the right commodity, the right index, it doesn’t matter what system you use to find your entry, the market most of the time will move on your favor.
Now put it this way, even if you use the best system in the world, if you trade the wrong instrument, the market will turn (sooner or later) against you.
So how you choose the instruments to trade is a big aspect of trading, as I said, the most important one.
That’s the reason I’ve always said that its a big mistake to focus only on one or two instruments to trade, even if you are a novice trader. You will force yourself to take trades when the market conditions are not the ideal.
So you need to do your analysis before taking your entries, just to make sure you are trading the right instruments.
What do you look for though?
From my previous post on the strategy, you know that:
Most of the time, the market moves from one level to the other.
So you need to look for two things:
- Clear market swings
- Clear support & resistance levels
When you get both of them, you know what the market is doing, what it is likely to do, and because you have clear swings, you know the market will move in a smooth way.
It is then when you start feeling comfortable and confident about the way the market is moving and you start to look for trade opportunities.
To understand how the market moves (and take advantage from it) I want you to take a look at the next image:
Blue lines: Long Term (LT) support and resistance levels (taken off the 4H, 1D or 1W charts).
Green lines: Short Term (ST) support and resistance levels (taken off the 15M, 30M and 1H charts).
That image represents a short term chart (15M, 30M or 1H chart).
When ever the market trades near an important LT level, it will tend to range (we are at the bottom of the chart).
At this point, we don’t know whether the market is going to break that range up or down. The good thing about it is that we don’t need to know.
It’s always better to wait for the market to make its first move, then we follow along.
In this image, the market breaks through the upper extreme of the range, and that’s what triggers a bullish condition, that means that we can start looking for long opportunities.
You see, so its not about guessing what the market is going to do, but about following what the market is doing.
We don’t need a crystal ball, we just need to adapt to what the market is doing.
Now, I want you to pay attention to the second range (around the middle of the image).
That range is different from the first one… Know why?
Because in this case the market is already trading in a bullish condition, that means that we can trade it, because we already know the market is likely to continue its way up (its already trading in a bullish condition).
Does it make sense?
Then, the market continues its way up, and finally reaches the next LT resistance level, and the process repeats itself.
We need to wait for the market to form that range (SF Box) around the LT level, and once again:
- If it breaks through the upper resistance level, we’ll have a bullish condition, and we’ll start to look for long opportunities
- If it breaks through the lower support level, we’ll have a bearish condition, and we’ll start to look for short opportunities
You see how simple this is?
Its not about guessing anymore, we are no magicians, we have no crystal ball, its all about adapting to the market conditions!
If the market is likely to continue its way up, we look for long opportunities.
If the market is likely to continue its way down, we look for short opportunities.
If we have no idea of what the market is doing, we keep looking for instruments that have clearer market conditions, until we find something we feel confident and comfortable trading.
That’s how professional traders work!
So please, take a look at that image again, you’ll learn a lot of things from it.
Dont hesitate to comment if you have any question about it!
GBPAUD Signal Update
The long term market conditions havent changed since my last post in the GBPAUD…
Here is what the ST chart look like:
As you can see, the upper resistance level is pretty clear, I’ve lowered my ST support level just to take the last two rejections.
So my strategy is to wait for a breakout of the upper resistance level:
Stop buy entry: 1.9692
Stop loss: 1.9635
Take Profit: 2.0190
Can you tell whats the risk reward ratio on this trade?
What do you think about the market dynamics image? That image its pretty important, so please review it as many times as possible.
What about my signal on the GBPAUD? Did you take the last one? This one is probable more conservative than the previous one…
Anything else you would like to add?
Please share your thoughts in the comment section.