Reblog: 4 Simple Steps For Finding The Best Trades – Professional Trading 101
Successful trading is 90% waiting and 10% execution and that’s the exact reason why trading is so challenging. When people think about trading, they imagine a well-dressed Wall Street guy who angrily shouts at his monitors while being on the phone with London, Hong Kong and Tokyo simultaneously to place the next big killer trade which will make him a lot of money. Dead wrong!
In this article, I will show you my approach to trading and explain how you must trade calmly and in a relaxed state of mind if you want to be successful in this business.
I call myself a reversal or early trend trader which means that I look for established and mature trends that show signs of exhaustion. The general trading literature suggests that new traders start with the trend following approach but from my experience I have seen that the reversal approach does make more sense to most traders.
Reversal trading has a bad reputation because people believe that it’s all about trying to predict the next market turn before it happens which couldn’t be further from the truth. Reversal trading is often nothing but early trend following trading as we will see.
And here is my simple 4 step approach to getting better trading results.
Step 1: Look for higher timeframe levels
Every trade starts with a multi-timeframe analysis because it’s the easiest and most effective way to get a good overview of what is happening and we can put price action into the right context. Most amateur traders don’t do that and they never leave their smaller timeframes and then have tunnel vision and miss important clues.
If I want to trade on the 4H, I start my analysis on the Daily chart and I look for support/resistance, supply/demand or Fibonacci retracement levels.
Step 2: Now it’s time to wait
I prefer to trade reversal trades that happen at strategically important price levels which is why my price analysis always starts with step 1 from above. Once I have identified those levels, I set price alerts around those areas. Price alerts help me stay organized and I won’t miss any important moves. I monitor more than 30 Forex pairs and without price alerts that wouldn’t be possible.
Once I have done my weekend top-down analysis and set the price alerts, I just sit back and wait until the alarms go off. I also try to stay away from my charts as much as possible and I usually do not look at the charts until the alerts go off. Being glued to the screen does not improve one’s trading, but it makes you more vulnerable to reacting emotionally or out of boredom. Once I started following this approach, it was a game changer for me and I could finally avoid a lot of impulsive and reactionary trades that cost me a lot of money
Step 3: Look for a reversal structure
When the price alert gets triggered it does not automatically mean that I will jump in a trade. Price alerts are just reminders and help me stay on top of things. When I see that an alert got triggered, I will pull up the chart and then start looking for reversal structures. In my trading, I look for head and shoulders, triangles, double tops/bottoms, bear and bull traps and divergences.
Many reversal traders make the mistake of blindly jumping into the market just because price has reached a previous support/resistance level. You need to avoid such a ‘catching a falling knife’ situation and you must wait for a clear structure before getting into a trade. You should see reversal trading as ‘early trendfollowing’ trading which makes it easier to stay away from calling tops and bottoms. We don’t want to get in at the absolute low or high, instead we wait for clear signals that the price is turning.
Step 4: Staying in a trade
Step 1 to 3 involve a lot of waiting and it’s not uncommon for me to go days without a trade on the higher timeframes which is totally fine. We’re not here to execute trades, we’re here to find the best setups that can give us an edge. This means waiting!
What I have seen over the years is that 99% of traders spent their time working on ‘perfecting’ their entries but then don’t know what to do once in a trade. Finding entries is super easy and it’s just a game of pattern recognition. In our pro area, new students are often able to spot entries within weeks. In the end all trades will, and should, look the same.
What many traders then suddenly realize is that they don’t really know what to do once in a trade because trade management involves a lot of decision-making under stress: is the trade still looking good or should I exit; does the pullback mean a complete reversal or can I stay in the trade; the trade is at a current loss, should I exit and minimize the risk or stay in the trade; should I add to the trade to capitalize on the runner; should I scale out and take some risk off the table…
You see, those are a lot of things that traders must deal with at any given moment during a trade and when factoring in the greed and fear responses that exist when real money is on the line, clear thinking is damn hard. Entries are the most overrated thing in trading. They are just one small part of a trade.
I, thus, suggest that you start focusing on trade management. Start observing how you manage trades. Do you have a structured approach or are you just impulsively reacting to price moves as they happen? I have seen it with many students of ours that once they shift their focus from looking at entries only, to improving trade management, their trading made a big shift.
Conclusion: Successful trading is simple
As you can see, trading can be simple: find important price levels, wait for price to get there, wait a bit more for a signal and then manage the trade effectively.
Yes, in a nutshell, that’s how professional trading could look like. Is it simple? Yes, it sure is! Is it easy? Forget it!
It’s just the same when it comes to losing weight, improving your grades in school or becoming a better employee. We all know WHAT we SHOULD be doing, but then actually doing it is a different story.
This article offers a foundation to completely transform and question your approach to trading. Make it simpler, focus more on what to do once in a trade and become more organized. Stop worrying so much about entries and understand that an entry is just one small part of the trade. It’s important that you have a structured and consistent trading approach because this is the only way that improving your performance is possible.
The original article is written by Rolf, appears on tradeceity.com and is available here.