Hello traders! This week’s Lessons From the Pros article will serve two purposes. The first is to let you know that you are not alone out there when it comes to trading and the learning curve. Most new traders find themselves asking the same questions as new traders from 5, 10, 50, or even 100 years ago! The more students I teach (well over 2,000 now) and the more books on trading history that I read, the same questions seem to always come up. The second purpose is to address a few of those common questions.
Question 1: How far back do I have to look at a chart to find the next supply or demand zone?
The answer is simple – you have to look back as far as you have to, or at least as far as your charts go. When your charts are at multi-year highs or lows, you must look back as far as your charts will allow to find the next zone. Which leads to a very common follow-up question…
Question 2: If our quality supply and demand zones are probably places where institution orders are waiting, are their orders really waiting there for many years?
No, they aren’t. It would be very unusual for an institution to place an order to buy $100,000,000 of ABC/XYZ currency pair, get filled on $25,000,000, and leave the remaining order on the books for ten years! The original reasons for that order to be placed (usually a combination of fundamentals like interest rates, inflation, etc, etc) would probably not still be around that many years later. So why do we look back? Because enough other traders do that the levels will still be somewhat valid. Not nearly as good as a level from a few days or weeks ago where large orders are probably still waiting, but valid enough for us to use as profit targets.
Question 3: Did you say profit targets?
Yes. If the charts are breaking to multi-year highs or lows, do you think we must be in a trending market? The answer would be “Yes.” If the ABC/XYZ pair is hitting ten year highs, we must be in an uptrend. Previous levels of supply in uptrends are potential profit targets, not places where I recommend going short. Why short in an uptrend? That is a hard way to make a living. In uptrends we should be looking for quality demand zones to go long. If we are at multi-year highs, there should be a few quality demand zones showing up from the past few hours or days that we can take advantage of to join the trend.
Here is a chart of the USDJPY over the past few years in which we are obviously breaking to higher highs since 2008. Why look for supply to go short when the easy money is to go long on the pullbacks? This is one of the biggest hurdles that new traders have trouble with. Many new students in class will attempt to go short repeatedly in strong uptrends like this, getting stopped out over and over until they finally sell the top that holds. Congratulations, you finally sold the top! After 20 losses in a row! Meanwhile, the students who are in their first re-take of class, or have been in the Extended Learning Track for a while, have gone long, patiently waiting for their profit target to get hit or their trailing stop to take them out. Much easier to trade with the trend!
The point is, most people have a similar learning curve, making the same mistakes – they just need someone to point out what works and what doesn’t.
Question 4: How long until I will be profitable?
I have no idea. It comes down to your discipline and determination. Discipline to follow our strict money management and trading rules, and the determination to work through the dull times. Some people will never be profitable active traders – they don’t have the temperament for that stressful job. Staring at the screen isn’t the most fun thing to do for hours a day for years at a time – I know, I did it! I believe nearly anyone can learn to beat the markets, again, provided they are disciplined enough to follow our rules. If you aren’t disciplined, you will not beat the market. Sorry, that’s how it works. If you chase trades, move stops the wrong way, over-leverage your account, you will lose all of your trading account eventually. That is how it works.
Determination is another important factor. I learned to trade in 1997 when the stock market was going nearly straight up. If you start your career when the market is in a sideways channel, much like the EURCHF from April to September of last year, your frustration level would probably go through the roof as that pair didn’t move much at all. Thank goodness for other pairs! Just understand that not every day or week will have great trading opportunities. We get paid on the quality of our trades, not the quantity. Wait for the good levels and this job called trading can be fun.
So there you have a few basic questions that you have probably asked yourself once or twice in your trading career. If they do sound familiar, understand that you are not the Lone Ranger out there trying to figure out how to trade!
Hope to see you in class,