Forex Trading Insights Mar. 23rd – Wait For Your Price
Last week I was busy traveling on business so missed it but am back now for my weekly forex trading insights.
Yesterday on my facebook page, I wrote about a short term bottoming formation in the NZDUSD as it was approaching a key support level. The traders in my price action course also noticed this setup and were looking for an entry as well. Below is the chart around the time I sent out the possible bottoming formation and potential price action setup on the kiwi.
The prior touchdown on the left side of the chart at .8059 sent the pair north over 200pips as it formed an engulfing bar and then took off. On the right side of the chart, price was also approaching this key level and potentially giving a long setup – hence why I alerted traders on my facebook page.
Price had already rejected 2x off this level on this second trip, and had formed two inside bars in relation to the large bar 2bars back. The inside bars were either a pause before the breakdown through this level, or sellers taking profits in anticipation of this level holding.
If the latter theory is correct, any pullbacks into this level could offer a really good long opportunity, with a tight stop below while targeting the 4hr 20ema which had held resistance already in this down-leg. Since it held price action the last time, this would be a good target for a bounce off this level. Keep in mind this last bear candle closed at at .8079 which is 20pips above the key support level.
Instead of getting in on a pullback into the level which offered the least amount of risk, one of my students (perhaps a little impatient to get into this possible trade setup) got in on the open of the next candle and put their stop one pip below the key rejection level. Their thought was if the entry was at .8079 and the 20ema target was approximately .8130, they were getting a 21pip stop and a 50pip target for an approximate 2.5:1 reward to risk play.
The following chart is how the next candle formed.
Price action rejected off the key support level, went one pip past it, but then pulled back to close up (barely). Two back to back closes were rejected lower and closed exactly at the same level communicating this level is likely protected. Unfortunately, this one pip break stopped them out. Below is how things progressed after this candle.
As you can see, price went on to their original target which would have made this a profitable trade. They asked me after what went wrong and I asked them what was their reasoning for getting in. They told me, ‘I wanted to get in off that key level as I suspected it would hold.‘ I then asked them, ‘if that is reason why you wanted to get in and the basis of the signal, why did you get in on the close of the last red candle and not take a pullback much closer to the level?‘ Their response was, ‘I didn’t think I’d get my pullback but wanted to take the trade.‘ They then asked for some advice on this and I told them I’d write about it in my forex trading insights article today which they were excited about as they are serious about learning and do not take things like this personally.
This mistake is very common amongst developing traders and this student has only been trading for two months so I cannot blame them as they are still learning crucial things about trading and building experience. But it is critical to wait for your price and get in based on the reason or level you found the trade setup on and this is the point of the lesson.
Many times, you will spot a trade setup, you are waiting patiently for it to come to your level, but the trade doesn’t quite get there, so you say to yourself, ‘I think this is a good trade setup, its going to go long and I missed my entry, so I better get in on this one and not let this setup go away…although my stop is a little bigger and I am away from my entry, its still good so it should work….i’ll just get in here and since its going up, i’ll make money‘.
Does this sound familiar? Has this ever happened to you before?
Early on in my career, I made this same mistake – a lot. But when I went back over the trades after, I realized price more often than not went to my original entry. So I could have participated in the trade with a smaller stop, greater profit and greater precision. The key here is to wait for your price as it most likely will give you the smallest size stop and the best entry. What most people fail to realize is this also adds to your bottom line and these small increases add up over 100’s, or 1000’s of trades. Think about it, if you add 2-3 pips over 1000 trades, your talking possibly all the pips you might make in one entire year. These little things all add up over time and can really add to your bottom line as your trading career goes on for a while.
A Few Other Things to Consider
Lets say you were prepared to take a 20pip stop risking 1%, so you use x amount of lots to risk that 1%. If you got in say 9pips above the level, this gives the trade about 11pips of buffer beyond the entry using your 20pip stop. Maybe you don’t need that much, but 1pip is a little tight, especially when going for 50+.
However since you got in higher, you only had room for a 1pip stop, giving this trade a lot less room to breathe or possibly set a trap by piercing the level by a few pips before going higher. So getting a worse entry and not waiting for your price often puts you at a disadvantage.
Lastly, there is the another consequence from a psychological perspective which has to be considered and this is the kicker.
When the trade starts to go against you and closer towards your original entry, the first thing you are going to do is likely beat yourself up for not waiting, saying something like ‘shoot, I knew it was going to go to my entry, I should have waited.‘ That is the first likely consequence.
The second thing is you really were more prepared to accept a losing trade if you got in at your original entry and it failed, as you gave it a proper stop and were giving yourself a really tight entry which hence, increases your potential upside while having the same downside.
But if the trade goes against you and causes a loss, you are less likely to accept the lesser entry because you originally wanted to be in lower. Result – you will more than likely beat yourself up, or criticize yourself for not being patient and waiting for you price as the reason why you lost.
The smallest mistake in trading can make the difference between a winning and losing trade. Even a single pip can make the difference between profits and losses. For the rock climber, it is very much the same, the smallest mistake can make all the difference in the world – life or death. In trading, we are not facing life or death, but we are climbing a mountain, which is really our own psychological tendencies, fears, emotions and conditioning, all which make it hard for us to ascend to the top.
As Sir Edmund Hillary, a beekeeper, and the first person to ever ascend Mt. Everest said, ‘It is not the mountain that we conquer, but ourselves.‘ In trading, you are not conquering the markets, but your mind.
So the next time you’re thinking you must get in because its going to go and you will not get your entry, take a moment to pause, breathe slowly and deeply, then realize how critical it is to wait for your entry. This not only gives you a greater potential for profit, but also allows you to psychologically deal with the losses.
Again, taking a loss when you did everything right and the play just didn’t work out is much easier to swallow when you did something you know you shouldn’t have, whether it is taking too large a position, not waiting for all the rules in your system to line up, or waiting for your price. This waiting will build patience and discipline, which will lead to making better decisions down the line. Better decisions generally = better trades. Better trades generally = more profits.
In trading, you must do everything you can to eliminate your mistakes. Trading successfully is often like trying to fill up a bathtub with water. Any mistakes or bad habits you have are like holes in the bathtub. No matter how much water you put in the bathtub, you will still leak a lot of water and never fill it up. By plugging up the holes in your trading, you give yourself the greatest edge to make money, as its more often than not those mistakes which make the difference between a win and a loss.
I hope this helps and welcome your comments and feedback.
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