Are You Thinking Like a Novice?
Are You Thinking Like a Novice?
Hello traders! This week I would like to go into the thought process we all went through when learning how to trade, and when we learned how to trust our supply and demand zones. Remember back when you were placing your first trades? All those flashing lights and wiggly lines, not knowing what in the world was going on. If you learned to trade in one of the old SOES (Small Order Execution System) shops in the 1990's, the jargon was easily as confusing. "The tick is up to 900," or "Goldy bidding INTC," or "What's the Dorfman pick?" At least in one of those shops you had people around you to ask questions! These days there aren't a lot of places you can go for live market help when you are in a trade. Sure, internet forums are out there, but do you really know if "traderJOHN123abcinDesMoines" knows what he is talking about? (My apologies to any traderJOHN123abcinDesMoines.) As far as I'm concerned, the best way to get you through the learning curve is an Online Trading Academy classroom, then on to the Extended Learning Track program to get live help on nearly a daily basis.
Looking back at some of the trading mistakes I've made and many others have as well, it was easy to see how experienced traders took advantage of us. The same holds true today. In every class I teach, we can see the mistakes that the novice trader (the 90%-er) makes. The question always comes up, "Who is buying way up there? It's so expensive now?!" The answer is the 90%-er is buying the expensive stock/future/currency pair. Who are they buying from? The 10%-er, the traders who consistently make money from trading. So the next question is why are they buying there? The simple answer is they don't understand the importance of our supply and demand levels. The more complicated answer is that they are waiting for more confirmation that this particular level will hold. Often TOO MUCH confirmation. Let's take a look at a chart and go through the common thought process of a 90%-er:
Figure 1
On the preceding USDCHF chart, I've drawn in an easy supply zone and a difficult demand zone. The supply zone is easy because of the strength of the moves away from it. The demand zone is difficult because of its width. I chose the bottom portion of the tail of the long red candle, ending at the low point of the next green candle. In a future newsletter, we'll discuss different techniques for defining your supply and demand zones. The professional trader will sell at the supply zone because of the supply demand imbalance - notice the strength of the moves away from the level. Where will the novice trader sell? After a significant portion of the last downtrend has already happened! Here is their thought process at each labeled number:
I can't sell now, it was just going up! What if it keeps going up? Maybe this is just a pause, I don't want to take another loss!
OK, it's starting to go down, but I've made this mistake before! No way am I selling this breakdown! They will just turn this thing up and stop me out!
Oh man, this thing is still going down; I knew I should have sold it earlier! Maybe I should sell now? Let me check the chart to see how far this thing will go...
See the bounce!?! Good thing I didn't sell! I knew it was going to go back up, they were playing games with me!
Drat, looks like it will keep going down; I knew I should have sold it earlier! Alright, time to join this trend, time to sell!
That's when the professional buys.
So, what is the novice trader doing wrong? Waiting for TOO MUCH confirmation! We must always have in mind all three parts of our trade before we hit the button - our entry, stop loss price and profit target. If you don't have all three figured out ahead of time, you are doing it wrong. The longer you wait in the trend to enter your trade, the larger your stop gets and the smaller your profit target gets. That is wrong. The more time you spend learning to trust the levels you have drawn, the more they may help get you into trades earlier with a much better reward to risk ratio! These are some of the secrets to trading well.
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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