“I should only take 100% certain signals”

I should only take 100% certain signals – the ones that I know will not fail me

This one is tricky. It seems that it makes good sense. Shouldn’t we all analyze the market properly and find the best possible trading opportunities? Why should we even bother taking the trades that we are not certain about?

So how do you feel, think and act when you believe this?

  1. Reluctant – “This signal does not look quite certain yet…”
  2. Frustrated – “I’ve been analyzing the market for hours now, but no trades look certain enough yet!”
  3. Reckless – “Now that I found this 100% certain signal, I can scale up my position and I don’t really need Stop Loss either – this trade can’t fail!”
  4. Worried – “Well, this trade does not behave quite as I expected, but I am sure it is just a temporal correction.”
  5. Hopeful – “I should just double my bet while Market gives me better price…”
  6. Afraid – “This does not look good so far, I don’t have much margin left…”
  7. Numb – [just stares at the screen…]
  8. Horrified – “It’s all #u?king gone! My whole account!”

The above example might be over-dramatized but it shows what can result from your inability to accept uncertainty.

You certainly get a lot of excitement trading that way, and I guess for some traders gamblers excitement is a goal in itself.

Let’s consider the opposite belief:

I should take any signal my trading system offers, knowing that none of them is certain

How do you feel when you believe in the above statement?

  1. Calm – “I am just doing my job, taking each opportunity I find”
  2. Quiet – “Every trade feels completely the same inside”
  3. Composed – “I know exactly what I am doing”
  4. Safe – “My account is always protected when I trade like this”
  5. Optimistic – “I am looking forward to positive long term results of my trading regimen”

Not much excitement, nor fun. Reminds me of one of my favorite quotes from “Market Wizards” in interview with Larry Hite:

“Larry, how can you trade the way you do; isn’t it boring?” I told him, “I don’t trade for excitement; I trade to win.” It may be very dull, but it is also very lucrative.

If you are excited about your trades, you are doing it wrong. If excitement is what you want, just go to Las Vegas – at least you get free drinks as you lose your money.

Thinking ahead of the crowd

 

When reading Price Action, one of the important concepts is to trade according to your bias before it is already obvious to everyone. You need to look for such price setups where you can already see some hints that the price is likely to move in the direction of your bias. At the same time, there is still no obvious entry setup. At this point we ask ourselves how other traders are likely to interpret the current situation.

How do you know that these early signs of reversal are not obvious to everyone else? Simple – the Market is not reacting to that setup just yet – the price is not breaking through support or resistance levels with enough conviction to show that the majority of market participants are trading in this direction.

If these signs are not obvious to everyone else, how do you know that these are correct signs? You don’t. That’s the main trick in trading – to act under uncertain circumstances. You want other traders to push the price in your direction, BUT after you are already in the market. We are seeking such a situation where not only there are enough traders who will see similar opportunity and start trading with us, but also there are enough traders who are holding the opposite position at this moment and who are ready to take a loss if the price goes against them.

If expecting a bearish move, start trading on a correction, on a bullish failure, on double top, on a bounce, etc. If you wait for the price to break a significant level, you are already too late.

The problem with waiting for too many confirmations is that we really can never be sure enough. Looking for confirmations only strengthens your desire to be right, to find a perfect opportunity. There is no perfect opportunity on the market, there is no situation when you can take a trade with absolute confidence that it is going to be a winner. But, there can be confidence that the Market is already providing a great selling/buying price and refusing it is foolish.

You see, there is nothing we can do on the market without our fellow traders. On the one hand, you need them to create liquidity and take the other side of your bias. On the other, you need them to move the price to your target after the entry – you want enough volume that will agree with your analysis as well. Whether this volume is generated through new entries aiming for profit, or taking old losses, is irrelevant.

 

Long Term Conviction

There are many differences in our approach to short term and long term trading.

When trading short term you can start your day 3-4 hours before the start of the trading session, do your analysis, check the calendar, prepare the trading plan for this session and then follow it. You are only interested what the Market will do in the next couple hours so you only need to remain confident in your plan for this short period of time.

If you are not seeing the Market well today or just not feeling particularly well, you can simply skip the trading session and start over the next day – one trading session is not that different from another, so you will not miss much.

The main difficulty in long term trading is that we are preparing the trading plan for coming weeks and months and the trick is to maintain your conviction in this plan over a long period of time. No matter what the Market will do today it can hardly cancel your long term trading plan. It will gradually update your view with new information and it is up to you to keep the original scenario in your consciousness throughout many weeks until it plays out or is canceled.

How many times I would prepare the plan – a result of careful analysis over many days – just to find myself losing confidence in it over the next couple days. The Market does not cancel my scenario per se, it is just not confirming it yet, and yet sometimes it is easy to lose the sight of the big picture over the course of a couple days.

Two trading styles cannot be compared in terms of being better or worse – they are just different. Interestingly enough, they are not so different in their technical approach – the analysis methods and price action patterns can be very similar. Their main difference lies in psychological demands.

Long and Short term trading will affect our lifestyle differently, require our attention span to be very different and will present us with different psychological challenges every single day.