Trade the Market That Is in Front of You
Don’t trade your opinion, don’t guess, don’t hold losers, stay in winners. Trade price action. Prices tell where you are right or wrong. CBOT veteran Jeff Wecker shares ideas for swing trading and day trading. Look for more Trading Lessons every Friday on MoneyShow.com.
That’s another way of saying “trade price action.” Why? Because price is the only true indicator of where a market is going. It’s the only point in the universe where you know if you are right or wrong. We spent a lot of money developing our algo that tells us where these inflection prices are; the exact points from where the market will move.
One of the beauties of inflection point trading is that you can enter the market with a minimum of risk. Our algo is able to do it with between 5 and 15 pips of risk. And this is for swing and long-term trades.
Do you realize what this does to your risk/reward ratio? Since our average winning swing trade nets us 250-500 pips and our average long-term trade about 500-1,000, we only have to be right about one out of 5 or 6 times. Traders using wider stops have to be right a lot more often, perhaps 70% of the time and that’s not easy to do.
There’s also a positive psychological element to taking minimum risks when entering a trade; your losses are small and you never hold losers. After all, why would you hold a trade when it was moving away from your inflection point? Similarly, price action trading will keep you in your winners. If price was above your inflection point, why would you get out?
Another aspect to our style concerns money management. Our algo is programmed to take quick partial profits and put breakeven stops on the contracts we keep.
So often a market will jump in your favor and then crash below your entry point making you a loser. And then a trade becomes an investment…the worst possible scenario. And so the magic is, enter your swing and long-term trades with minimum risk, take partial profits quickly and hold the rest with your stops at breakeven, a winning formula.
Another step has to do with what types of charts you are looking at. If you are interested in swing and long-term trades there’s no reason to look at charts below dailies and weeklies.
You are not going to find an 800 pip move on a 1-hour chart. Leave the small charts (5 minutes, etc:) to the day traders. They are more interested in buying small dips and selling small rallies than they are in the big moves. They are going to frustrate you on occasion with their activity because they basically prevent movement during the day unless they are overwhelmed by major news.
Also, you don’t want to be in the business of picking tops and bottoms. It is a useless occupation. Get in the habit of buying strength and selling weakness or another way of saying it is “go with the trend.”
You also want to buy the strongest in any group and sell the weakest. How do you know which is weakest and which is strongest? Just measure them both against the same thing: an industry measure or another currency or index.
One last note. It’s a known fact that basketball teams who press on defense hate to be pressed themselves. Similarly, the markets love to reverse quickly and make everybody a loser but hate to be reversed on themselves.
You can learn how to reverse your position on a dime and take advantage of the fast and powerful moves that come from everybody being wrong and scrambling to get out.
Failed formations (like head and shoulders) or failed technicals (like Fibonacci retracements) are two of the many good places to do this.
In summary, don’t trade your opinion, don’t guess, don’t hold losers, stay in your winners. Just trade price action. Prices tell you exactly where you are right or wrong.