Ramblings of a Forex Junkie

Psychology is vasty Important in enabling the trader to stick with winners until they reach their target. Psychology is also critical in helping the trader to cut his or her losses quickly without reservation. If there is any holy grail in trading it is these two fundamental things. Cutting losses and riding winners is critical to success. Many losing traders actually try and or purchase methods that work however they are not mentally prepared for the games trading plays with your mind.

People are taught from a young age in school that anything less than 90% is failing (less than A). Many people are very competitive and therefore do not like to be wrong. Trading is a bit different in that often a winning strategy may rely on a low win to loss ratio. Many very profitable methods have win rates in the 40 or even 30 percent range. These methods rely on cutting loosers quickly and riding winners. Our psychology often is that a losing trade equals a failure when, in reality, it is not a failure but simply a losing trade. Many novice traders view a losing trade as failure and simply won't close the trade hoping instead that it will come back. Often with a novice trader there is a tendency to fear loss and any trade that goes into profit is quickly cut at breakeven or for a tiny gain. Many traders never get past this stage as they ride loosers and cut winners until their account is ground into nothing.

If you are one of the people I have described here is a little exercise I used to help get past fear of losing trades. Open a small account, 50.00 is fine. Oanda works well because you can trade any size position. Open a fifteen minute chart any pair is fine. Any time the current bar exceeds the high of the previous bar then turns red go short. Do the opposite for long trades. Stop is one tick above the high or low of the current bar. Trade size is one hundred units, penny a pip. You will take many losses with this and it will teach you to kill them quickly. After a couple of weeks of this exercise you should be comfortable with losses. You hold the trade until you get an opposite signal, which should help you to learn to hold winners. THIS IS NOT A TRADING STRATEGY IT IS ONLY AN EXERCISE IN DISCIPLINE.

Now that I said all of that: THE TRUTH:

Psychology is important but only if you have a winning method.

If you KNOW your method will win only then should you begin to train your mind. Having a great psychology is useless if practiced on a losing strategy. The holy grail of trading is to know without question that the method you trade is profitable. Only when you KNOW the method works will perfecting your psychology help you to improve.

I hope everyone had a great first trading week of 2013.

Green pips for all my friends.

feel it difficult to agree

if i know my method is winning, i won't have a pyschology problem

i feel it same for most of ppl.

psychology is mostly because of "being unsure". a trader is "unsure" of the outcome of his action, so his emotions kick in and mess up.

of coz, to be sure is not to be 100% sure, but be "quite" sure.

Your statements show that we do agree. You are correct that the psychology problems come when the trader is unsure of the outcome of a specific trade. If you know, however that your method is profitable you will not worry about the current trade, win or lose. You know that over a large number of trades you will end in profit. So many lose in this business because they do not spend the hard work to verify that their methods work over the long run. So many simply give up on a method (good or bad) after a short losing run. The point I was attempting to stress in that post was to first get a working method, a method that the trader KNOWS is good and then to work on coping with the normal swings in equity.

Also I would like to point out that I did actually open a tiny account to learn to deal with this issue. I did actually go through the trading exercise I described. How many traders would actually go to the trouble of opening an account to deal with their shortcomings. Peter Crowns in one of his posts years ago asked the question, Will you do ANYTHING to learn to trade: Almost anything will not do.

Side note:

I still have the tiny account with Oanda. Opened it in 2009 and still use it to try out new ideas.

Leads to my last truth for the week.

You can do anything on demo, but it doesn't mean a thing until you have REAL money on the line.

The truth: Demo accounts are really worthless but a micro account is Priceless.

It seems to me that all of the successful traders have the same kind of general strategy you do - trading off of supply and demand levels being at the core. Until I started doing so myself, I rarely had any success, and then it was more luck than anything else.

I know gatorinla trades using these session close prices as well, but I never really knew what it was all about (from what I gather he is quite successful). I personally try to stay on the daily time frame, or at least trade off of the levels most obvious on that chart. Is my assumption correct then, that the timing in that case doesn't really matter as much since it's not intraday? Also, is there are logical reason for this level tending to frequently hold?

Important price levels generally hold because that is where traders place their orders. In one of my earlier posts I described the way I understand price moves from level to level. Brokers and banks must fill these orders to get paid and they have lots of money and strategies to shade price into these levels. Think of these areas on a chart as a huge stack of sell orders and a huge stack of buy orders and only uninformed traders trading on tasty looking price bars in the middle. Of course nothing is 100% accurate, but to make really good money all you need is a reward to risk around 2/1 and a decent win rate. If you are happy trading on the daily time frame you can use monthly and yearly levels to trigger your trades.

Gator uses many of the same levels I do but he also uses levels that are quite old. I am not sure his time horizon but I imagine he trades some short term and some longer. He also seems to be successful using pivots but I don't believe in them. A pivot is simply a mathmatical formula using a previous range. I prefer to only trade using a price level I believe will be a place traders (large and informed ones) will be placing their orders. Daily closes is one of those levels. I feel that to be successful at trading it is critical to eliminate from your screen anything that will distract from these critical levels. I also understand though that my way isn't the only way and many successful traders use pivots and fibs and have found a strategy to use them profitably.

I was a James 16 fan when I started Forex and it is a profitable way to trade but I hated the drawdown that is so common to trading bar breaks. With Futures I had used pivots and had marginal success but knew there had to be something better but I never found it. It is when I started to dig into how pins and other price action bars form and investigated the levels that were within their wicks that I really learned to trade. A pin bar trader can be successful but the guys really making the money are the ones entering five or six pips from the top of that pin well within the wick. A big turning point for me was finding Sam Seiden in my investigation. The understanding that orders are what really move the market set me on my path.

For fun, open a chart and start marking what you feel are important support and resistance areas then scroll back and see if those areas line up with an important price level. S&R itself doesn't really mean much but something had to cause price to turn at those levels. It's kind of a chicken or egg proposition because you can trade S&R without really knowing the mechanics behind it but I like to know exactly why I am doing something.

A chart example might help paint the picture:

Thank you for your prompt and thorough reply. I'm actually also a fan of Sam, although commercial interests always plant a seed of doubt in the back of my mind as to intentions.

I know you're not here to discuss your specific trading style, but your mention of looking at levels within the wick of a bar interests me. If you do not want to dive into this, I completely understand. When you say you look at these smaller areas, what are you using to actually "confirm" that an expected reaction is taking place? I find that if I zoom too far into my charts I see many micro levels that may not mean much in terms of daily price action, unless you just take the levels as they are and be willing to take a few losses until you get the right one, with the benefit of being able to have a larger position size.

Thank you for your contributions by the way. I know a lot of people will pass over it but in the future when they're a little wiser they will come back and understand why this is so important.

It isn't so much that I am looking at levels within wicks but that levels cause the wicks in the first place.

Another chart example:

Also note that this level is the .75. Well known in trading that orders often stack up at 00/25/50/75 levels.

I think we're on the same page then. Thanks!

Thank you for the vouch.

No problem, you obviously know what you're doing, and I learned a thing or two.

Hi SP, very informative thread you are sharing some real gems in a clear and concise manner so many thanks.

So looking at historic charts and drawing S/R lines comes easy I would think to most people. Once you have had a bit of screen time you will quickly recognise for example when pa has touched and rejected a certain level or shot through it then returned too make S become R or repeatedly respected it by bouncing off several times etc etc. Drawing in these horizontal levels on yesterdays chart is obviously easy once you know what you are looking for. However trading those levels into the future is a different talent entirely.

If I can as an example say we see price is between two levels 40pips apart apparently aimlessly meandering around like some sort of lost river (in a range). We know price has rejected the above level a few times but the bottom level more so over the past 2days. OK so far. Now price rises just after LO in a short burst over 30mins time span to sit close to the higher level. Great but what do we do about it? We can see exactly what has happened. We see the levels, see the recent pa, we know the market is liquid, but what do we do now?!

What will be our entry signal to sell if price is going to be rejected again? What is our entry signal if the level is shot through? Are you anticipating a rejection based on previous pa then entering as price reaches the level? Are you anticipating nothing and watching price behaviour at the level before entering? Are you using candles for entry signals or just price levels or pa on a 5m chart? The thing is there are so many ways to trade the same levels and the same pa - or rather there are many different entry signals someone could use for their trading method. And the difficulty I see is trading around the levels successfully not actually in recognizing where the levels sit. I really appreciate the info you have imparted here but its not difficult to look at historic charts draw lines and say this is what you should have done. There is a world of difference between seeing what you should have done and somehow using that to create a successful future trading method that works to the right of the chart rather than to the left. So my question is about entry signals. What is an entry signal?

You have raised some valid and interesting questions.

First point: It is very easy to draw S&R in hindsight, in fact the zones are everywhere and they are constantly violated and or respected. In the example chart I posted for Kanzler however you will notice that I only highlighted one level. Lots of time staring at charts and testing to find levels that hold show me the levels I want to rely on. This is something that is going to be personal to each trader, I am simply trying with this thread to help people to learn to make these choices.

With regard to trading these levels, that is up to each trader to decide. Some might choose to trade bars around the level (pins engulfing etc.). Some might simply wait for a rejection or a close past the level then enter on retest. Personally I have tested the levels enough, and I am picky enough that I am a touch trader. It is the most aggressive style but the entries are normally the best and through much testing I know how far the price should move past my level before I stop it out. I have also tested well enough to know that once I stop out I normally get a retest of the level to enter in the opposite direction and that normally the profit on the reentry will give my normal target plus the stop distance. The way I trade is definately not for everyone, you have to be comfortable to jump in front of a moving train and comfortable to take a loss without fear.

I will not reveal all my levels. I have the shown the weekly close twice so that is a place for people to start. There are other levels and they can be found with some hard work. I will say that all my levels are based on a specific price at a specific time. I do not trade levels that just pop up on a short term chart throughout the day.

You are right there are many "S&R" levels on any chart, the trader's job is to research and locate the ones that hold often enough to make a trading strategy.

One more point I would like to make with regard to price level trading. As with any other type of trading method we will never achieve 100% accuracy. Historically I have 58% winners and I average about 1.8:1 reward to risk. I am right only a little over flipping a coin if you think about it. It is definately enough though to make a comfortable living.

Some things one should think about if they plan to begin the journey to learn this trading style:

What are the important times during the day for my chosen currency pair.

What are the important price levels throughout the day for my chosen currency pair.

What is the base currency in my chosen currency pair and which markets might be more likely to print important prices (London, NY, Asia, etc.)

Which markets will it be more likely that I will see reactions for my levels. (ex, are we really trading GBP/JPY after London close and before Tokyo open?)

Have I studied the distance as a percentage of ATR my trade should travel before I should stop it out.

There is more but this is certainly enough to study for the coming weeks.

Why not this level its S&R right?

I must have missed something or this is related to a timing issue, as it looks like a pretty valid price pivot. Acted as resistance, re-tested as support, broken and re-tested as resistance again.

Scroll back and ask yourself is there a specific price supporting that level or is it just something that appeared.

Posting a new chart here, has another level. I took this trade. Look hard at the level, why would I have had the confidence to step in front of that train. I can tell you it was cooking with gas when it hit my level. I only was using 20 pips plus spread stop with the ATR at the time. I can tell you that the way price was moving at the time I could have easily bought fifteen or twenty million and not even slowed the price down. The draw down was only 17 pips. you can see the profit potential was over 100. This is how the market operates. Big traders need liquidity and that was a price level where big traders trade. Why? Where are stops here? Will Large traders use stops to get long or short? Have you googled market structure and started studying yet?

Not trying to be an azzhole here I just want to get you thinking about what levels are really important. Every S&R on the chart is not trade worthy.

I hope I'm not being dense here, and I don't want to be lazy. I've taken a look for "market structure" and the best I came up with was a subsection on market highs and lows on this page. Looking at the times for closes doesn't seem to help either, as neither line seems to be based off of a London close at 11 EST.

From 9/14 to 9/17 it acted as a supply level on the first chart, and actually it did react as expected on the next touch, although it was a short lived bear rally. The new chart, I see another area where we had a supply zone that turned demand. I would have been cautious jumping on that one personally though because that would have been the second exposure.