Two weeks ago I wrote an article, which explored the similarities between gambling and any other business venture and you can read it by clicking here. In that article we looked at how all businesses take controlled risks in their daily activities but operate with an edge in their plan, so as to tip the odds for success in their favor and of course, give their venture the very best chance of attaining growth and profitability. When you choose to treat trading for short-term income and investing for long-term wealth, like you would any other business, you too can have a decent chance of making it work and achieving your financial goals. In this article, let’s take a look at how we can go about enhancing the odds in Forex.
I encourage traders to build a solid trading plan from the ground up, starting with firstly knowing how to manage their risk, then how to find trading setups which put the side of probability in their favor and then finally using a safe leveraged asset class in a responsible manner to maximize returns. When each of these fundamental dynamics is addressed and applied in a responsible manner, we then go live to the markets. Seeing it and doing it in a real time environment is the final and most important step in the learning curve, as this then gives you a chance to see it demonstrated in a professional manner and builds confidence for the future. As long as you always keep your edge in mind and the odds stacked in your favor, then it simply comes down to having the patience to wait for the best opportunities to come along.
Let’s take a look at an example of putting the odds on our side, from a recent XLT (Extended Learning Track), which was held in our live trading and analysis room on the 21st of May specifically. Below is a snapshot of the live session. In this case, we were looking for some near-term trading opportunities on the popular EURUSD currency pair. We were especially eager to find some setups which could be used for short-term intraday trades but which could also be potentially left alone for a little longer and transitioned into more of a swing or longer term position. With this in mind, our attention was drawn to this particular level:
So the next question is: why this level? Well, as I stated previously, the aim of any business opportunity is to firstly make sure that it offers a low level of risk in case it doesn’t go according to plan and secondly, we should be sure that if it does work out in our favor, then the reward should be worth the initial risk that we took. This is a key element of gaining the all-important “edge” that is key to longer-term success. One method we can use to sharpen this edge is by using one of our odds enhancers. Take a good look at the level for a minute. We can see that clearly institutional selling was taking place because of the ferocity of the initial fall from the area. See how sharp the move was to the downside? Clearly there were many more residual orders to sell Euros than there were to buy them. We know this for a fact because if there would have been an equilibrium of buy and sell orders, then the price would not have moved. Somebody was trying to sell a lot of Euros here and didn’t get anywhere near as many of those orders filled as they would have liked, so for us, we will take a shot at selling Euros in this Supply level if price returns to the area in an attempt to get on board with major banks and market players who were trying to sell the first time around.
Another thing we can pay attention to is how far the prices move away from the Supply zone before stalling and returning. In this case, we can see that the EURUSD fell at least 3 times the size of the Supply zone width itself, suggesting to us that this has the potential to do so once again if the level holds again. Of course should the trade trigger, we will always use a stop loss order just above the zone, so as to ensure limited loss on the position if it fails. We can also use the current support level as our first objective target and then trail the stop if the current downtrend decides to continue. Let’s take a look at the results:
As we can see, the opportunity worked out well in our favor and offered a very attractive risk to reward profile, even if you would have closed the trade out at the first target alone with the EURUSD dropping over 400 pips from our Supply level, which required only around 30 pips of risk. Sure, the trade could have stopped out and that happens too. However, if we aim to stack the odds on our side at all times, and keep that all important edge as sharp as we can, then we can of course afford to take more losses than wins because when we allow the winners to play out, profitability is attainable. Every time you see a potential trading setup that matches your plan (should you have one), get out that checklist and make sure probability is on your side for both the winners and the losers. It may require a little patience and discipline but it is well worth it in the end.
Written by Sam Evans, Online Trading Academy Instructor. After leaving University in 1999, Sam thrust himself into the media world, working as an executive producer and part-time presenter for London’s Capital FM. Roles in the record and film industry followed, where Sam conducted many promotional interviews and honed his presentation skills for nearly 7 years. With a strong desire to work for himself, Sam left the media industry behind and spent an intense 18 months studying to become a professional Life Coach, embarked on various property investments and gave in to his childhood fascination with the money markets by training to become a trader with Online Trading Academy. Since his graduation, he has been a full-time trader, specializing in Stock Index Futures and Forex.
Under the guidance and mentorship of some of Online Trading Academy’s best instructors, Sam himself joined the teaching roster and forged his own unique style of trading. A devoted student of the Market, Sam’s focus is on strict risk management discipline, combined with a realistic approach to understanding the true nature of Price Action. Fuelled by a passion for the markets, Sam now teaches and presents for Online Trading Academy, welcoming and helping others into the rewarding world of trading.