Whenever I look at a price chart I want to make sure that there is no rigid preference in my mind for it to go in whichever direction. If I happen to “know” where the Market will be going, I am setting myself up to a failure in the long term.
And still, I do know something about the market. I am certain that the Market will move, and it is about the only thing I can trust it to do. It may take its time, but eventually it will move sufficiently enough up or down to create an outcome for my trade.
Before I even think about placing any trade, I want to build an acceptable scenario how the Market will be moving up as well as how the Market will be moving down. I am building these scenarios fully acknowledging that the Market does not know about them, could care less about them, and ultimately will move only in such a way that it needs to move in.
I then accept the possibility of either scenario to work, and in case my (limited) understanding of the current market situation suggests that one scenario is more probable than the other, I establish the trade.
What’s so great about the market, is that it is a great teacher, and it never hesitates to provide clear, unbiased, very useful feedback about my trading decision. Soon enough it will show the reality of the current market situation and I will be able to compare it with the possibility that I outlined in my trading scenario before establishing the trade. The actual outcome of my trade is completely irrelevant. What’s important is the feedback I get each time I choose to participate in a trade.
Trading in this way, I am making the Market my most valuable ally, instead of trying to make an enemy out of it. It teaches me, guiding me to greater understanding of its actions. Really, all the Market is trying to do is tell us where it is going. Unfortunately it does not speak English, and so it is our only job to learn the language that it does speak – the language of Price Action.
However, like with any other language, we cannot perfect it by concentrating on just the theory – we have to engage in a conversation with the Market by establishing a trade and learning from its response.
When anyone who knows about Your Trading Coach, reads back into my old blog posts, it should become obvious to them that my understanding of Price Action was heavily influenced by Lance’s approach. Even though my trading system is mid to long term, I am reviewing his Price Action articles anytime I feel like I cannot read the current market structure.
I am very pleased that he decided to show some of my trades on his blog, so that his readers can see that the same principles apply to any market, on any timeframe.
I would like to emphasize, that when I say his blog influenced my understanding of the market, I do not mean that I read it once, had an “a-ha” moment and realized how to trade profitably, never to lose again. The only reason his writing is helping me is because I am coming back to it every single week – not only to read his new article, but to look through the old posts in all categories that he writes. We do not learn by reading some idea once, we learn by systematically reminding ourselves the important principles in that idea and applying them in our daily practice.
If you read “Market Wizards” by Jack Schwagger, you will note that the best traders in the world are constantly improving by learning from other professionals in the field. I do not recall a single interview in the book where the trader would not show his respect for other’s work and would not acknowledge the fact that he is still learning from other traders, books, market newsletters and of course the market itself. It goes to show that no matter how successful a professional trader is, he still needs to constantly learn and improve.
Eleven years ago, when I was just starting getting interested in the market, I was believing that I need to learn for a year, possibly two, and then I will just enjoy trading my system and spending the profits. Now, more than a decade later, I am learning much more than when I started, spending more hours each day on learning (certainly spending more time studying the market than actually trading it) and only recently starting to open trades in the right places. I came to realize, that the essence of anything we want to do well in this life, is in constant studying and practice. There is no point where we can stop learning and relax. Instead, we relax by enjoying the learning process, constantly fascinated by the infinity of knowledge we are yet to learn.
Part of my everyday trading process, is reading selected market books. Along with new books I add to my library every couple months, there are some that I continue reading every single day. “Trading in the Zone” by Mark Douglas and “Market Wizards” by Jack Schwagger are only two examples without which any progress in my trading would not be possible.
I have read “Trading in the Zone” in Russian when I just got interested in trading eleven years ago, but unfortunately I could not see how it will help me to make any money trading. I put it aside, and continued pursuing more “Holy Grail” trading methods, confident that I will find the one that NEVER loses – why do I need any trading psychology then? Nine years later I was still learning about the market, developing new trading systems, still unable to make any consistent profit, still not finding the “Holy Grail”. Realizing that I am not getting anywhere I started looking for answers, and noticed the book again on Amazon, while shopping for new technical analysis bibles. I bought it in English about a year and a half ago and it made all the difference for my trading performance (I was very lucky to stumble upon Lance’s blog about six months later as well).
Since then I have read “Trading in the Zone” fifteen times, taking notes, highlighting important parts. I cannot emphasize enough how many new insights I am getting with each new reading. Every single day I put a timer for 10 minutes and read it again. Today I am on page 87, and as soon as I am done, I simply go back to page 1.
Last year I was living in Cabo San Lucas, Mexico, and on 15th of September we had the biggest hurricane in modern Baja history – Odile – hit the town. After one scary night we found ourselves in a house without a single window, ocean water covering everything. Almost all the books in my library got damaged. Still, I decided not to buy them again and instead try to restore them. Here is a photo of my copy of “Trading in the Zone” today:
I am not trying to say that this particular book or Price Action based trading system is a “Holy Grail”. Instead, I am saying that the attitude of constant learning and improvement, such as you can clearly see in Your Trading Coach blog, is that illusive “Holy Grail” that every trader is trying to find outside, not realizing that it’s always been inside – hidden by our ego and only waiting to be developed.
Depending on trading timeframe that we use, we will also have different breadth of the market that we can cover. Intraday traders and scalpers generally will not closely monitor more than 1 or 2 instruments, simply because the speed with which they receive information for each instrument is too fast, and they can’t handle many markets. Longer term traders on the other hand are more likely to watch many more instruments on higher timeframes, because if they concentrate on just one, it may be hard to find good entry signals frequently enough.
One trading approach is not better than the other, they are simply different. As I mentioned before on this blog, personally my preferred method of trading is watching many markets on higher timeframes and trying to choose the best trading opportunities available.
I prefer to trade using scenarios. I build a scenario of how the future may look like and then support it with technical and fundamental information. As the future unfolds, I see if my scenario is being confirmed. If it is, I have a trade.
Often times, however, I am trying to anticipate what the market might do based on the current price action. This way I am able to open trades at a much better price then most methods would allow. The price for such great entries is that they will not happen often – when I am trying to catch the top or the bottom, I am fully aware that the market can easily defy my expectations and I will be stopped out. But when the price does go in my direction, the return on such trade is many times greater than the initial risk and getting even 20% of such trades right is enough to offer a very good return on that 5th trade that does work out right.
To trade with such method, we have to let the profits run for long term targets. It is not of much use if we accept 5 losses in a row, and then when the market finally moves in our direction, we take 2:1 or even 1:1 profit. In many cases I would only engage in such trades if I see an opportunity to take at least 10:1 profit compared to my initial risk, so that any failed attempts are easily covered by the profitable trade.
At the same time you need a lot of confidence to put new trades as long as the market does not defy the general trading scenario. There were times when I would open 2-3 trades, the market would go in my direction (giving as much as 3:1 profit) and I would move the stop in BE, but because I was looking for a much larger move, I would let the market stop me out. Finally, I would lose my confidence to pursue that particular trading idea just before the big move finally happens.
Let’s take a look at the recent example, CADJPY sell trade that I’ve been holding for 5 weeks now:
You can see how this trade dragged on for 4 weeks, basically giving no return on the risk. Since price has not been breaking the lower support I could not move the trade to breakeven either. As I kept analyzing CAD and JPY currencies, I saw no reason for closing this trade. At no point during these first 4 weeks I could say “I would like to buy this pair here” and so I kept my short.
The trade turned out to be the most profitable during the last week, as CADJPY made the strongest weekly move of any other trading pair, but it was not smooth sailing to reach that point. Because I was anticipating what the future techincal picture might look like in CAD and JPY currencies, as well as anticipating the fundamental difficulties for Oil becoming bullish, and overall fundamental market uncertainty, leading to possible appreciation of “safe heaven” currencies such as JPY, I was able to let the trade go. Even though the market was staling, it was not cancelling either my technical nor fundamental scenarios.
Such entries require very strong trading psychology, as well as confidence in one’s analysis. One comes from the other, really. You are confident in your analysis not because you are 100% certain that it will work, but vice versa – because you KNOW the market might turn against you and you have accepted such possibility without any emotional discomfort. No matter what market might have done during the time that I was holding my CADJPY short trade, it would not be able to hurt me in any way whatsoever.