How do you survive and prosper in the forex business for 25 years? A few reasons: you understand that trading is all about risk/reward, execution and emotional control, writes CBOT veteran Jeff Wecker. Look for more Trading Lessons every Friday on MoneyShow.com
It’s not about signals, order flow, order imbalances, chart formations, technicals, or even fundamentals and news. Everybody knows that stuff and consequently it’s not worth knowing.
I figured something out about price points in my early days as a trader in the 30 year bond pit, as a member of the Chicago Board of Trade. There are certain price points above which you want to be long and below which you want to be short.
Finding those price points is difficult but extremely rewarding. Why? Because it is only at these exact prices that you can take a 5 pip risk to enter a trade. And tiny risks with big rewards put the math in your favor.
We have found that at these critical price points, we tend to win only about 17% of the time, but that our risk/reward is about 25:1. With this kind of risk/reward, you become the house in a Las Vegas casino, not the player. And that’s why you win, and why I am still in the business after 25 years.
When the math is on your side, you win in the long run.
After risk/reward comes execution. I can use anybody’s signals, but if I execute properly I’ll win over time. Perfect execution requires extreme control and patience that 95% of traders lack. For this purpose you can use an automation tool that forces you to wait for the low risk entry point; it can probe that entry point as many times as you wish. It can move the entry point a few pips further away to make the market come to you: it can take partial profits quickly and place break even stops on the part you keep. It keeps you in the trade until objectives are reached and then places trailing stops in case the market decides to go even further (which it often does).
In other words, it does the exact opposite of what most traders do. It gets you out of losses quickly and keeps you in your winners.
Another huge advantage of an automation tool is that it allows you to play both sides of the market simultaneously. Talk about not having to guess a direction! And what an advantage that is when playing news events. Because you can play both sides of the market, you'll have about an 80% win rate during news events with an average win of 100-200 pips.
After risk/reward and execution, comes emotional control. That is something lacking in 90% of forex traders.
Most people can't keep their fingers off of the keys. They feel they have to do something. And of course that’s almost always wrong.
Most traders get out of positions just when they should be adding; and they add just when they should be getting out. Or they commit the mortal sin of moving their stops which always ends up in bigger losses.
And this is why 90% of traders will benefit from an automation tool which permanently eliminates these human tendencies.
The Currencies, Coffee and Croissants group is open to all traders interested in currencies. Just contact Jeff Wecker here to join CCC.
