Getting Paid to Trade by the Market (Part 1)
09/29/2008 12:00 am EST
Most retail traders think the hardest part of trading is recognizing whether the market they are trading is about to go up or down. Don't get me wrong: Getting the market's direction is of key importance! But the real test of whether you will make it as a trader year after year is if you can find a way to take profits out of the markets you choose to trade on a consistent basis. To do this, you have to be able to read the markets; you have to have found a style of trading that fits your own personality; and you have to have refined and mastered this style-finally, you have to embrace money management and use stop, profit, and entry orders effectively in your trading.
I want to show you a method that some of the students I mentor have embraced. There are a few variations of this same idea being used by different students, but it all comes down to this: There's a time when you have a certain amount of potential profit in a trade where you know you not only can no longer take a loss on the trade, but because your capital has been at risk and this has become your daily job, you need to capture some of that potential profit sitting on the table in case the market backs off and yet you still need to participate if the market really takes off in your favor. It is a difficult balancing act, especially since you have to maintain a meaningful risk reward ratio while doing it, but several of my students have adopted this method, and it works very well for them.
Let's take a look at a set of charts and see how they are doing it:
The Euro FX is strengthening nicely against the US Dollar-you can see it gapped higher on Sunday. Price continues to rally for some time and then sells off nicely. Note that the blue up sloping Median Line set drawn here used the low of the weekend gap as Pivot A [this is called a Gap Median Line].
Price has already tested the Median Line from below and the Median Line did a great job showing where price would run out of directional energy-this gives us confidence that this line is vibrating at the same frequency as price and will likely continue to predict the probable path of price in the future.
More in Part 2 tomorrow
By Timothy Morge