Why Are You Still Watching That Level?
Why Are You Still Watching That Level?
Hello Traders! In every Online Trading Academy class that I teach there is a diverse mix of students ñ usually a couple of people retaking the class a second time, a few new students who have never placed a trade before, and a few who have been trading but are not happy with their performance in the markets. Between the second two groups of students, the ones who have never traded before are very often the most successful at the end of our week-long classes. How could that be? Shouldnít someone who has been trading for months or years be able to out-trade someone who is brand new to this endeavor? Often times, no. Usually an experienced trader has a lot of excess ìbaggageî that must be dumped before they can truly begin to excel at trading, while a new trader listens and accepts what they are hearing.
Think about it ñ if you were to learn how to play golf and went to a professional instructor, having never even seen a golf swing or swung a club would be ideal! Accepting the instructorís recommendations of a particular type of grip, stance, club selection, etc. would be much easier if you hadnít been playing (poorly) for years. ìThatís not the way Tiger does itî would never be a reason to not do what your instructor recommended. The same idea applies to trading. Frequently an experienced yet not profitable trader will be in class and say something like ìThatís not what I read in XYZ Trading Magazineî or ìThis book about trading says do the opposite.î This would be some of the baggage I referred to earlier.
One form of baggage would be having too many indicators/oscillators on your chart ñ this topic has been covered in several Lessons from the Pros newsletters. Another form of baggage is looking at every turn or support/resistance level that has been formed in the past and still consider it as a valid level for our future trades. In class, Iíll draw in a couple of support/resistance levels, then add a few more, then a dozen or two more, then even more to prove my point ñ you can have too many levels on your charts! Not all are quality supply and demand zones, but not too many new students know when to ìget ridî of a level.
Here is a chart with too many support/resistance lines drawn in. I used nearly every turning point on the chart, even levels that have been broken several times after the original change in direction. Trying to earn a living in the market with this many lines will be a bit difficult, as we expect to place trades at nearly every level we draw! Otherwise, whatís the point of drawing in these levels? If a line has been broken, especially more than once, why is it still on your chart? In our Online Trading Academy classes and especially in the Extended Learning Track classes, we refine what constitutes a good, fresh level to trade our hard-earned money. These are called ìodds enhancers.î How price leaves a level, how price approaches that level, reward to risk ratio, etc. are just a few of the odds enhancers we discuss in class.
This chart is a little cleaner, donít you think? I ignored all the price action that has already been traded through, or broken. Concentrating on only the most recent and un-tested swing highs and lows will lead to higher quality, higher probability trades. Fewer trades as well! You must always remember that we get paid on the quality or our trades, not the quantity. If you could make the same amount of money placing 3 trades a week as someone who is placing 333 trades a week, which would you prefer? Most would choose 3, as this would allow you to have a life outside of staring at the charts for many hours every day! As has been discussed in previous newsletters, much of our time as traders is spent waiting ñ either waiting for price to get to a good supply or demand zone, or waiting while our trades work for us.
So what rule should we use to get rid of a previously defined level? My basic rule is this: when price has traded through the level in both directions, with full candles above and below the level, remove that level. Our basic premise of supply and demand imbalances is still valid with this rule, plus the axiom of ìwhat was supply becomes demand and what was demand becomes supplyî is still applicable. Adding a similar rule to your trading plan will help you concentrate on the fresher, higher quality levels instead of every turning point that has ever happened.
So what did we learn this week? That some supply and demand zones are good, but every support and resistance line is unnecessary, if not counter-productive. Apply a similar rule to your trading plan (you do have one, right?) and you should be taking fewer and better trades.
Until next time, Rick Wright
About Rick Wright
Rick studied economics and psychology at Iowa State University, and entered into the brokerage business in 1992. He earned the NASD Series 4,7,9,10,24,55,63, and 65 licenses. He helped grow an online brokerage business which was eventually sold off. Rick has also held positions as broker, branch manager, and several VP positions in the brokerage business.Rick began trading equities in 1997, and was introduced to the Forex market in 2002. Currently trading from home in Dallas, Rick is also a frequent contributor to various TV and business talk radio shows.Rick's goal in class is to accelerate your learning curve of trading, instead of figuring things out with your own money. He will show you several examples of trading mistakes that he and others have made, which cost thousands of dollars in the past so you won't make the same mistakes.You will learn how to recognize the differences between long and short term trends, where to enter trades, and where to exit based on previous price action.
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