What Color is Your Football Bat?
What Color is Your Football Bat?
Hello traders! In my nearly twenty years in the financial industry and five years of teaching different classes for Online Trading Academy, I have seen many different trading styles and setups. These different setups can be broken down into two different types of trades: Reversals and trend following. The interesting thing about these two styles is this: A reversal trade on one time frame is probably a trend following trade on a longer time frame!
Figure 1
In this chart, the EURUSD pair started a sharp selloff and retraced to its 38% Fibonacci level, also bumping into the 10 period exponential moving average. This is a very basic trend following trade. Looking at the 15 minute chart on the right, a small supply zone appears at the red arrow labeled #1. Selling at arrow #2 would be a reversal trade using pure supply and demand on this time frame. So, a reversal on a smaller time frame can be a trend follower on a larger time frame. These are the basics of our core strategy at Online Trading Academy.
Now, this leads me to the football bat. Out there in the big, wide world of the internet, you can find hundreds if not thousands of different trading setups using an amazing number of indicators and oscillators to help you make your trading decisions. Each of these setups is its own "game" with its own set of rules. I personally have several trading setups that I use depending on the time of day, instrument I'm trading, etc. What I DON'T do is start one "game" and try to finish it with a different set of rules! If you are using a 10 period moving average to determine your direction and possible entries for a trade, if that moving average breaks/is no longer valid, you must exit that trade! You may not change the game! Adjusting your moving average to a 20 or a 55 to stay in the trade is changing the rules on this trade - like bringing in a bat to the third quarter of a football game. (That would be against the rules, for those of you who aren't familiar with American football.) Why would a trader do something like this? The only reason is to avoid taking the small loss. If this is your first Lessons From the Pros newsletter, small losses are your friend! They are merely a cost of doing business in trading. Small losses keeps us in the business, while large losses can blow up your trading account, or at the very least, wipe out a few days or weeks of good trading. Which means you were working in this trading business for free - which means you are doing it wrong.
In a recent trader Meet-up group I led after an Online Trading Academy class, there was a lively discussion on having different setups in your arsenal. (How many metaphors will I use this week?) One attendee was very adamant about only using supply and demand zones, and nothing else. While I can agree that properly identified areas of supply and demand are the fastest and most effective way to enter and exit trades, occasionally, we may get bored with playing only that "game." If your supply and demand zones are 200 pips apart, are you patient enough to wait a few hours until price reaches your zones? I think that with practice, most of you will be able to take trades between these obvious zones.
I have no problem taking smaller, trend following trades between my major supply and demand zones. I like playing several games, not just one! If you are a member in our Extended Learning Track (XLT) classes, you will hear many different styles of trading from different instructors, from a Bollinger Band gap reversal to an 89 period exponential moving average trend follower. Each style has its own set of rules and must be followed. When someone says, "That's not how Trader X does it!" you must understand that each trader has their own preferences as to which game they prefer. The bottomline is that every successful trader does two things in the same way - they take their small losses and let their winners run. It doesn't matter if you are playing tennis, soccer, football, or baseball - follow the rules! At the end of the game, the person/team with the most points wins. Take your small losses and let your winners run and you should have more "points"/pips/ticks than you did last week.
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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