Small Changes That Yield Big Results
05/18/2012 6:00 am EST
Expanding knowledge to go beyond simply buying and selling when a trading system says so is critical to becoming a more well-rounded and profitable trader, in forex and beyond, writes Coach Shane of NetPicks.com.
Over the last few years, I have written a ton of articles and made many trading videos, some of which have appeared here on MoneyShow.com. They have ranged from strictly system-based methodologies to subjects such as supply/demand, the importance of news, order flow, stops, support/resistance, along with a host of other topics.
Why would I write about those topics when they are not really covered in depth in many educational strategy services like Netpicks? After all, over the long run, these strategies perform quite well, right, so why clutter up your mind with other issues?
Simply put, at the end of the day, I don’t like half measures. Let me explain.
I have played guitar for decades. You can actually master three chords and be able to play most any song you choose to play with a basic strumming pattern. The problem is that it does not have much style, nor does it sound very interesting. It is functional, and you can just get by, but by learning a few more things, you can take your playing up many notches.
As a trader, I want to expand my knowledge, but only the knowledge that makes me a more well-rounded trader and takes my performance up many notches. I look at trading on a macro level, and the strategy by itself makes up one of the micro levels that make up the whole.
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There certainly is a lot of fluff out there that people try to teach you (ever see that system that depends on lunar cycles?), but for me, I want to learn what the professionals that move large amounts of money know.
One thing I want to cover in this particular article is how important it was for me to step out of the micro level of simply “system” and actually learn something that took system trading up a level. There’s more than what I will cover here, but you will get the picture.
Anybody who ever contacted me about trading knows that I am a huge fan of marking off highs and lows (on higher time frames) as well as key confluence areas on a chart. By key confluence, I refer to areas where many technical factors (round numbers, trend lines, fibs, moving averages) line up around the same price zone.
Why do I do that? Because my gut always said there was more to trading. When I started to step outside the box, someone saying to never buy into resistance or sell into support became meaningless.
That sweeping statement does not take into account riding the bigger players into stop hunts (no, it is not your broker, but the big money looking for liquidity). It ignores sentiment of the day and disregards where orders are placed at those levels.
There are conditions that not only make breaking those “rules” the right thing to do, but also, you could front run a fade before the system would indicate one. Breaking the rule under the right conditions not only gave you a quick paper profit, but would also allow you to hold on past the system-generated exit, therefore making the paper profit a real profit, but at a greater gain.
Here is an example.
At a key resistance area and as price is approaching that level, you can expect that there will be sell limit orders as well as buy stops. When the bias is bullish and all signs point north, there is a great chance that the sell limits will be absorbed by buying pressure, thus pushing the price past the sell limit order block right into the buy stops.
Once the buys are triggered, price jets further north, taking you with it. Breaking that “rule” gives you some handsome profits, and depending on the type of trader you are, some seriously quick profits.
What about confluence areas? Well, they sort of go hand-in-hand with what I wrote above. There are moving average traders, fib traders, support/resistance traders, and can you guess what you call it when many of those technical indicators meet around the same price zone? If you said confluence, you are correct!
Understanding how those traders will trade at those levels gives you a huge advantage. Never underestimate the herd mentality, as it can increase your win rate and profits.
An example is needed.
The day is bearish on the EUR/USD and price is rallying up to an area where the higher time frame has many technical indicators lining up. Is that a good place to look for a low-risk, high-probability trade? You bet it is. That’s trading with an edge.
You are seeing where many traders of many stripes are looking to take action and you are simply taking advantage of what they will probably do.
On the flip side, if the day is bullish and all signs point north, you know that they will have protective stops above that area, and if price is pushed into those, say goodbye to the stops as you use their losses to propel your winner.
Now, I don’t have to state the obvious, but just in case, that was a very rough insight and I hope you don’t try to trade that information. I hope it does whet your appetite to start thinking there is a lot of information out there that can increase your trading skill, however.
I will say it until I am blue in the face, but don’t settle for what you know! The devil is in the details, and as a trader, you must be familiar with much more than simply “buy when the system signals a trade.”
You can bet that those on the other side of your trades know more than that, and you at least want to be close to an equal footing. Your overall success will depend on it.
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By Coach Shane, forex trader and contributor, NetPicks.com