5 Aspects of trading that will help you trade with consistent results
Last week I got an email from a trader who is still struggling to get consistent results.
He has been trading for more than 2 years…
I asked him to share with me the strategies that he has used in the past… and guess what?
He has been using technical indicators on all of them…
You can have 2 or 5 or even 10 years of experience, but if you are focusing in the “wrong things” you are not going to make it. I don’t care about how many years of experience you have, you just wont make it.
There is a very famous saying (from Albert Einstein):
Don’t expect different results by doing the same things.
To get different results, you need to try different things and stop doing what hasn’t been working for you.
You know what I’m talking about right?
So, what I want to share with you today is a list of things that you need to work on to get good results.
This is the list where you would send your best friend if he wanted to start trading and do it the “right way” from the beginning.
Are you ready?
#1 Market Analysis
Market Analysis is not about guessing what the market is likely to do, but about understanding and making sense of what the market is doing right now and what it is likely to do in the following hours/days.
This information will help us determine which currency pairs to trade and what currency pairs to stay away from.
However, if you are using stuff like:
- Elliot Waves
- Other magic formulas
Please drop them… they are useless: do you really think a magic formula can determine the market direction? That’s non sense. I’m not going to get into details about it in this article, it’s out of its scope, so you are going to have to trust me on this one.
As I was saying, the key about doing a good analysis is to understand how the market moves… and here is a basic principle:
Most of the time, the market moves in swings, from one level to the other.
If the market moves from one level to the other, we know that:
- If the market gets rejected from an important level, it is likely to continue in the same direction at least until it hits the next level
- Likewise, if the market breaks through an important level, it is likely to continue in the same direction at least until it hits the next level
How can we do this type of analysis?
Since you know that the market moves from one level to the other, the idea is to identify where is the market right now, and where it is likely to go next (the next level).
You need to make sure though that the market has clear support and resistance levels & clear market swings.
This type of analysis is usually done on the longer time frames: 4 hour, daily or weekly charts. And the idea is to look for those swings and try to determine what the market is likely to do next.
Here is chart that I’d definitely trade, it’s got clear S&R levels, clear swings…
What do you think the market is likely go?
Of course up, the NZDUSD broke through an important resistance level, and you know that most of the time the market moves from one level to the other, so it is likely to reach the top of the range.
As simple as that… Oh men, you have no idea how much I like simple stuff like this…
Now, here is a chart that it’s difficult to trade:
It’s got no clear S&R level, no clear market swings, etc.
From the charts above, which one would you trade?
This one is a no brainer, the first one of course. It’s got clear S&R levels, clear swings, I know what the market is likely to do next, etc. I see no point on risking on the second chart, when the first one is as clear as water.
And that’s exactly what we need to do every single day:
Find the currency pairs that have the clearest market conditions and trade them. And forget about trading the currency pairs that don’t have clear swings.
That’s it! You are good to go…
Remember we have plenty of currency pairs to choose from, please trade only the ones that have a clear market condition.
I’d say that if you choose the right currency pairs to trade every day, you’ll do ok, regardless of the entry system that you use.
There are three things that we need to get out our market analysis:
- What currency pairs to trade
- What direction to trade them
- Until when are we going to keep looking for trade opportunities
- The market moves most of the times from one level to the other
- Trade only the currency pairs that have the clearest market conditions
- Our job is to identify where is the market right now and where is it going
#2 Entry Signal
Ok, once you know what currency pairs to trade, everything becomes easier, now the only thing we need to focus on is on our timing.
Don’t get me wrong though, your timing is also very important. Even if you trade in the right direction, you still could get stopped out.
How could you get stopped out when you are trading in the right direction?
You could get caught in a retracement.
Believe me, that is not a very pleasant experience, it goes like this:
“You do your analysis and think the market will continue its way up, you decide to look for long opportunities and after a few minutes you go long. The market starts to go up, and suddenly it drops like a rock. The market stops you out and then it continues in the intended direction.”
This is an experience all traders go through… but some traders experience this more often than others.
So the key here is to have good timing.
And, to have good timing you need to use the right tools.
Never use a technical indicator as your trigger signal.
You see, al technical indicators use previous data to calculate its final reading. So if you trade based on an indicator signal, you are actually trading based on how the market behaved in the last X number of candlesticks… So it has a lag!
So basically what you are doing is going long because in the last “X” number of candlesticks the market went up… but the reality is that how the market behaved in the last “X” number of candlesticks has nothing to do with the way the market will behave in the next “X” number of candlesticks…
You see what I’m talking about?
Nor magic formulas like Fibonacci, Elliot Waves or Gann will work…
I know it sounds fancy: I trade based on Fibonacci and Elliot Waves… but put that aside.
Do you really think there is a magic formula that will tell you when the market is going to retrace back?
C’mon… there is no such thing.
We like to believe there is… but the reality is that there isn’t.
Put your feet on the ground and if you really want to succeed in your trading you are going to have to focus in other things.
I like take another approach, instead of trying to “guess” when the market is going to start going up or down, I just follow it. And to do it, I follow some of the following strategies.
Price Action – I wait for the market to tell me what direction to trade, this is, I wait for it to make its first move, then I make my own.
Candlesticks – I sometimes use japanese candlesticks, there are certain patterns that repeat themselves like: Marubozu’s, hammers, shooting stars, etc. (Focus on how the market behaves, instead of in the pattern itself).
Support & resistance levels – I also use S&R levels. In the long term charts S&R level help you determine the market condition, while on the short term charts they help you find your entry levels.
Retracements & breakouts – Once you are in a clear market condition, you just need to patiently wait either, for a breakout or a retracement.
Swing high/low – Sometimes the market is just too fast and you need to take advantage of it. These swing high/lows can help you get in earlier.
Some of these tools/strategies are used on certain market condition, you need to learn to adapt to the market condition.
Dont try to use everything at once…
Sounds like a good plan?
- Forget about complex technical indicators and magic formulas, they dont work
- Wait for the market to make its first move, then make your own move
- Learn to adapt to the market conditions, and use the right tool on each one of them
#3 Exit Strategy
Let me ask you one question.
What do you think is more important: Your entry system or your exit strategy?
C’mon, I really want you to think about this one.
I’m not kidding… think about it…
Ok, here is what I think.
Yes, your entry level is important… but not as important as your exit strategy.
At the end, your exit strategy will determine how well or bad you did with your trade.
So please make sure you follow a sound exit strategy.
This is the strategy I use to exit my trades.
There are traders that use also magic formulas to determine their take profit orders like Fibonacci projections, Elliot Waves, etc.
But you know trading is not about guessing, but about taking good decisions based on objective data.
Most of the time I use the next LT S&R levels to set my take profit orders.
If you use S&R levels you know the market might react from those levels, you dont know the reason behind that reaction, but you dont need to know it, you just need to know that the market is likely to reach from those levels.
And that’s the reason you set take profit orders just before the market reaches them.
Here is an example.
In this chart, I set all my take profit orders just above the next LT support level which is at 1.5511.
Sometimes I also take partial profits based on the short term charts though.
So, what’s better… using the ST or the LT levels to set my take profit orders?
Well, if you are a short term trader, just use the short term S&R levels to set your take profit orders.
If you are a swing trader or a longer term trader, you can use the long term levels or a combination of both (like I do)
- Your exit strategy is more important than your entry system
- Use S&R levels to set your take profit orders
- You can use short term or long term levels (or a combination of both) to set your take profit orders.
#4 Risk & Trade Management
Sometimes the things that really matter are the things that you do after you open your trades.
Good risk and trade management could help you turn a good trade into an extraordinary trade, and a bad one into a not so bad trade.
That’s why you need to learn and apply some of these techniques.
The following technics are a few techniques I use:
As the trade goes in our favor we keep adding positions. This technique is rarely used by traders, but one that can lead to profitability over time.
This technique is rarely used because acts against human natural reasoning to “lock some profits”. This natural tendency keeps us from gaining further profitability over our trading careers.
We need to make some things clear, once we are in a trade, and the trade goes in our favor it has a higher probability of success. If it goes against us right away then it has a higher probability of failure. If we add positions to an already losing trade, we have a higher probability of losing more; on the other hand, if we add more positions to an already winning trade then we have a higher probability of winning more. Makes sense doesn’t it.
Don’t get us wrong though, probabilities are just probabilities not certainties. It does not mean that if a trade is already winning it is going to win. It means that most of the time, when a trade starts in our favor we will win that trade.
Averaging up should be part of a well developed plan, otherwise we could end up with a very large position which is difficult to handle.
In addition, increasing our trading size at higher prices will also increase our average entry price exposing you to a potential loss even during a normal market correction. This is the reason we recommend adding smaller positions as the market goes our way.
Adding positions randomly will definitely have disastrous effects on your trading account, and as with all Risk Management you must have a well developed plan.
Averaging up does not violate the principles of “the trend is your friend” and “Let your profits run and keep your losses short”. In fact as you can see, it follows them.
Scaling Out (partial profits)
This is a very common technique where traders take partial profits when a certain amount of pips, money or levels are reached. This should be calculated prior to opening the trade and need to be strictly followed in order to avoid fear, greed and other in-trade psychology issues affecting your decision.
When scaling out we need to pay special attention to the RR ratio of the overall outcome (which is exactly the opposite of pyramiding in).
When scaling out this way, we are actually going against two basic principles: “the trend is your friend” and “let the profits run and keep your losses short.”
When a trade goes in our favor, it means that we probably made a good decision; we probably caught a good trend. By taking partial profits we are limiting our overall gain.
Another important factor to consider is that as the trade moves in our favor, the chances are greater that we will win that trade, and as the trade moves against us, the greater the chances are that the trade will fail.
Wouldn’t it be more logical to scale out the other way? When the chances of losing our trade are greater? So that if that particular trade resulted in a loss, we lose less money?
The idea is this, when we win a trade we want to be all in so we can make the most of it. Moreover, when the market goes against us, we want to be partially in, so we lose the least we can. When the market moves in our favor the trade has a higher probability of success, so it is not a good idea to take partial profits or to scale out, on the other hand, when the market moves against us, the probability of success gets smaller so it is a good idea to scale out. This way we are letting our profits run and keeping our losses short.
NOTE: An excellent strategy would be to pyramid in when the market goes in our favor and scale out as the market goes against us. If you spend some time developing a strategy like this one you will added another string to your bow in a very promising trading career.
So – what do you think suits you out of those Money, Risk and Trade Management approaches? It is most important to choose something that suits your style, personality and risk profile. Why not experiment with a few different approaches. Words of warning though; do not do this randomly or without a definite plan! We stress to our students that all trading decisions should be as part of a reasoned approach before you enter a trade, and not driven by emotions or indecision while the position is open.
I am sure you have heard the common saying “never let a winning trade turn into a losing trade”. Getting out of the trade is more important than getting in a trade, at the end your exit will determine whether there is a profit or a loss.
Trailing stops maintain a stop loss order at predetermined values below the market action (or above in the case of short positions). Trailing the stop works best on trending markets, allowing each trade to ride most of the move, closing the position when the trend is more likely to reverse.
I always use trailing stops based on market levels. When I see that the market created a new level (e.g. support level) , in some cases I move my SL just below that level (or above it in the case of short opportunities).
Other traders use a predetermined quantity of pips, or % gained, etc. But I still recommend using market levels.
#5 Trading Psychology
You can fix everything related to trading psychology by understanding risk.
Have you had a chance to think about risk? I mean, really think about what it is for traders? How can we use it on our favor, is it possible to eliminate risk?
If you haven’t, please do so … because once you understand what it really is (and accept it), you’ll trade with ease, you’ll trade with more confidence, you’ll be more disciplined and patient… and at the end, you’ll trade with better results.
I can guarantee it…
And you know something, in some cases, you might have already experienced what it is to accept and embrace risk (even unconsciously).
Oh men, when this happens, almost every trade goes on your favor, you get out of the market just when it starts to go against you, you take profits just at the right time, you trade the right trade-size, etc, etc, etc.
Everything is just right!
Have you gone through a phase like this?
I think every trade with enough experience has… And it’s a very very pleasant feeling!
You see, all these happens because you don’t block any type of information (more about this in a minute) that you’d block if you didn’t embrace risk.
Now the question is how can you get to trade like that every day?
Well, that’s what this article is about, you’ll find out when you are done with it.
Heh, there is no free lunch buddy!
Ok, we talked about accepting and embracing risk… but what happens when you don’t accept it?
If you don’t accept and embrace risk, things will get complicated, I can also guarantee you that.
Unfortunately, there are also periods where every decision you take seems to be the wrong one, it would be something like the inverse-Midas touch.
These are the sort of the things that tend to happen when you dont accept risk:
- Taking profits too early
- Trading with no stop losses
- Getting out of the trade to soon
- Getting in to trades too soon
- Taking larger trades than you are supposed to
- Chasing the market
- Letting the market go against you when in profits
When you make these mistakes over and over, it’s a very very unpleasant feeling.
Ok, So now, you got 2 scenarios:
A pleasant feeling: When you embrace risk
An unpleasant feeling: When you don’t accept risk
Which one would you choose?
Looks like an easy answer right? But then why is it that we keep making the same mistakes over and over?
So maybe you have not fully embraced risk?
Think about it, specially think about how you can improve your trading results once you embrace risk.
Every trade would be like the first scenario, over and over. You’d take profits at the right time, you’ll be choosing the right currency pairs to trade, you’ll be trading the right trading size, etc.
Like this scenario?
Ok, then keep reading :)
There is just one way to get rid of risk
That’s right, there is just one way to get rid of risk on your trading, and it is:
I suspect though that since you are reading this article, you want to keep trading, so I will not consider that quit trading is a possibility for you. Or is it?
So please, stop wasting time and resources trying to eliminate risk (aka looking for a system that is right 100% of the time), because it is just impossible to do.
Risk is what defines us as traders, it’s part of what we are, it’s our identity.
What do we do as traders?
We risk an amount of money to get another amount of money.
risk money + get more money = Trader
That’s the equation that defines us, that’s what we are. We are risk takers.
We need both sides of the equation, we need to risk money to get more money, there is no way around it.
Let me ask you another question: when you open a trade, do you really accept the fact the market has the possibility to go against you?
Let say you open a trade, you use a 30 pip stop loss and a 50 pip take profit order.
Do you accept the fact that the market could move against you? The possibility of getting stopped out? The possibility that you took the wrong decision?
Or you just think about the profit side, about how much time it will take the market to get there, that once your TP gets hit, you are going to be +5%, etc?
Of course we all want the market to move on our favor, but that it is just one possibility, there also the other possibility, the market could move against you.
There is no way we can get rid of any part of the equation, so think about it, when ever you open a trade, two things can happen:
- The market moves on your favor, or
- The market moves against you
It doesn’t matter what trading system you use, what market you trade, what currencies you choose to trade, anything. We’ll always have these two possibilities and you need to learn to live with it.
Why fear makes you block information
Our brain is wired in a way that it tries to avoid all information that is painful for us, that’s just the way it works, whether we like it or not, it’s human nature.
How is this related to trading?
Think about this, if you fear something like: losing a trade. How would this affect you?
For obvious reasons you want to win this trade, and so does your brain. So as an effort to “not experience” a losing trade, your brain will start to block any information that tells you that the market will go against you.
This mechanism is triggered automatically, you don’t have to consciously think about this to trigger it.
So your brain blocks the information that would had helped you to get out of the trade (i.e. a reversal signal), but for you its impossible to see it because your brain doesn’t want you to experience a losing trade.
This is why everything becomes so clear and apparent once everything is over. Why I didn’t see this? Why I didn’t see that? The market was obviously going against me, why I didn’t close my trade sooner.
Well, the answer is that your brain was blocking this information from you.
Since there is no way to have “the serious talk” with your brain to stop blocking this information from you, you can approach this through a different angle:
Not being afraid.
If you are not afraid (i.e. of getting stopped out) your brain wont block any information from you.
And the only way to the rid of fear is by accepting and embracing risk.
Are you still with me?
Accepting and Embracing Risk
These are some of the most common fears in trading:
Taking profits too early
What is feared: When you take profits too early, you fear that the market will go against you and everything you have earned in that trade will get vanished.
Accept risk: When you analyzed the market and decided to take that trade, you also thought about the stop loss and take profits order. Why would you take profits now in the heat of the moment, if you had a well structured trading plan?
Remember, the best trading decisions are always taken before your trade takes place.
To take full advantage of the market swings, you need accept the fact that sometimes the market will go against you. Just accept it.
What’s good is that most of the time, the market will continue in your favor.
Trading with no stop losses
What is feared: When you trade with no stop losses you are only taking in consideration part of the equation (the “get more money” side) and blocking the fact that the market has the possibility to move against you.
Accept risk: Accept the fact that the market has the possibility to move against you. Once you train your brain to think like this, you will force yourself to use stop loss orders.
What is sad about not using stop loss orders is that if the market goes against you by the right amount of pips, you are going to blow out your account.
Is it worth it? To risk your complete account just because you are not considering losing one trade?
By the way, mental stops are just the same thing as no using stop losses at all.
Getting in to trades too soon
What is feared: That you are going to miss out an opportunity to trade.
Accept risk: It’s impossible to take advantage of every market swing.
Yes, sometimes the market will move without you, there is just no way of capturing every market move.
Just focus on the ones your system signals, only then is when you have a real opportunity, a low risk trading opportunity.
You never know before the fact if your signal is going to get triggered. Patiently wait for the right moment.
Taking more risks than you are supposed to
What is feared: You are not going to get the results you hoped for, to make up for it, you start taking more risks.
Accept risk: You need to be patient.
You need to know that every trade has the possibility to move against you, so if you start risking more capital and the market goes against you, you’ll be in a very unfavorable position.
It’s always better, to risk what you are supposed to risk according to your plan, nothing more.
Trading in the Zone
Mark Douglas in his book Trading in the zone puts it as clear as water:
Accepting risk means accepting the consequences of your trades without emotional discomfort or fear. This means that you must learn how to think about trading and your relationship with the market in such a way that the possibility of being wrong, losing, missing out, or leaving money in the table doesn’t cause your mental defense mechanisms to kick in and take you out of the opportunity flow. It doesn’t do you any good to take the risk of putting on a trade if you are afraid of the consequences, because your fears will act on the perception of information and your behavior in a way that will cause you to create the very experience you fear the most, the one you are trying to avoid.
Then he adds:
This is where professional traders really separate themselves from the crowd. When you accept the risk the way the pros do, you wont perceive anything that the market can do as threatening. If nothing is threatening, there is nothing to fear .If you are not afraid, you don’t need courage. If you are not stressed, why would you need nerves of steel?
What do you think?
Please leave a comment and tell me, what do you think about these 5 aspects of trading?
Do you agree with me?
Is there something else you think I left out?
I’d also like to know if you disagree with me… So please, leave a comment.