This week I’d like to explain a little bit about what profitable traders all have in common and then discuss the differences, because the differences are what makes trading difficult!
So right out of the gate I’m going to give you the Holy Grail in trading that all successful traders have in common. If you’ve done more than twenty minutes of searching around the internet or read a book or magazine article about trading, you are probably aware of the phrase, “Cut your losses and let your winners run.” The often funny yet nearly always frustrating thing for new traders is the fact that this phrase is amazingly simple, yet putting it into action is seemingly difficult. Why is cutting your losses so difficult? Many new traders believe that professional traders don’t take losses, that every trade makes money. That is absolutely not the case! The good traders I know take losses every week. Not necessarily every day, but certainly every week! (This applies to the somewhat active traders I know. Longer term traders might not exit any trade for several weeks, thereby not taking losses every week.) One question that I ask in the Online Trading Academy classes that I teach is “How many bad trades does it take to blow up your account?” The answer is one. One bad trade that you let keep going against you without taking the small loss can wipe out your trading account. Is that bad trade THIS trade? Since we never know for sure, we must always take the small loss if price goes the wrong direction on our trade.
Since many new traders believe that taking losses is doing it “wrong,” their mindset must be changed to accept the fact that small losses is merely a part of being a trader. So what about the other part of the Holy Grail phrase, “Let your winners run?” This is definitely easier said than done! Many new traders are too quick to take their profits, as they don’t want to let a winning trade turn into a losing trade. I understand the thought process, but I want to try and change your opinion on taking quick, small profits. As mentioned, it only takes one bad trade to blow up your account. How many GOOD trades does it take to DOUBLE your account? The answer is also one! If you take your profits very quickly, when you are in the money a handful of pips, you will never have one trade double your account. But if you can get in the habit of letting at least part of your winning trades keep running (scaling out of a portion of your position to lock in profits), this could be the trade that doubles your account.
There are several ways we teach traders to manage winning trades. One way is a close below a trendline in uptrends, or a close above a trendline in a downtrends. The main problem with this technique it that very often the market will pause, yet not retrace – commonly called basing or consolidating. While the market is basing, oftentimes the trendline is broken, but the market hasn’t actually moved against you.
To get past this shortcoming of trendlines, a moving average is often used. A moving average will “flatten out” as your currency pair is basing, often keeping you in a trade for longer than the trendline technique would.
My personal favorite technique is what we call a technical stop, which has been mentioned and explained in previous articles here. In my opinion this technique will make you the most money over time vs. the other, somewhat arbitrary lines or moving averages.
So that has been a brief explanation of what successful traders have in common. What do we do differently? Ah, that is where the dizzying array of choices in trading comes into play. I, for one, am glad there are so many ways/choices in how to trade. If there was only ONE way to trade to make money, everyone would know it by now and there wouldn’t be any money in trading anymore! Because there are so many way to make money, obviously we believe there is still plenty of money to be made doing it.
In addition to our Core Strategy using supply and demand zones, many of our instructors use different classical technical analysis techniques as odds enhancers for specific zones on the charts. If you’ve read these newsletters for a while, you may have noticed that instructor X likes Bollinger Bands, instructor Y likes moving averages, and instructor Z likes Fibonacci retracement percentages. It is up to you as the individual trader to experiment with the different tools to find one that makes sense to you and your trading style.
I would like to offer a word of caution. When adding these extra tools to your charts, start with only one. Try it for 30 demo trades. If it is making you more money than you otherwise would, keep using it! If you are making the same or less money, get rid of it. DO NOT keep adding indicators and oscillators attempting to find that one combination that will work for you every time – it doesn’t exist. Only keep them on your charts if you are more profitable, not less.
By adopting the habits of successful traders, you can certainly learn to make money in the markets. Take your small losses, learn how to let your winning trades keep running, and (perhaps) adopt an indicator or oscillator to help with your supply and demand zones. Be disciplined about following our simple rules, because there is absolutely room for more profitable traders in the world!
Until next time,
Written by Rick Wright. Rick Wright’s goal as an Online Trading Academy Instructor is to accelerate the student’s learning curve, whether they are interested in High Frequency Trading or Investing for Beginners. He teaches classes on Online Stock Trading, Forex Trading and Futures, among others. 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.