Every day, I get a lot of queries from traders, and more than half of them are along the lines of "What will X asset do today, will it rise or fall?" or "Do you believe X asset...
Every day, I get a lot of queries from traders, and more than half of them are along the lines of "What will X asset do today, will it rise or fall?" or "Do you believe X asset will reach Y price?"
With very few instances, I say "I'm not sure." My interlocutor will undoubtedly believe that I don't want to tell him/her or that I'm an idiot.
In fact, the correct response is "I don't care."
And now, dear reader, you'll believe I'm not just an idiot, but a full moron.
But stick with me for a while more as I explain using a real-world trading example on EURUSD.
Let's imagine we're thinking about trading this pair, so we ask ourselves, "What do we know about it?"
1. The USD is fundamentally stronger.
2. The trend has been downward for more than a year.
As a result, we intend to trade in the trend's favor and sell this pair.
Looking closely at the chart, we can see that the EURUSD is in a downward channel and has just found support in the 0.99 zone.
Last week, the pair corrected to 1.0150 and reversed precisely from the channel's resistance, leaving a nice and big bearish engulfing on our daily chart.
Taking our reasoning even further, where do we wish to market this pair?
Now, taking my approach into account, I see a nice spot to sell in the 1.0030-1.0050 range.
As a result, we placed a sell limit order in that zone (Remember, professional traders use pending orders)
We are also considering the point at which our pessimistic perspective is no longer valid. For our stop loss, we obtain 1.0150.
Using my personal trade as an example, suppose we set the selling order at 1.0030, with a stop loss at 1.0150, and we have a possible loss of 120 pips.
We know that every pip shift on EURUSD represents 1 USD for 0.01 volume, thus our trade has a potential loss of 12 USD on a 0.01 trade.
Let's talk about volumes now.
What potential loss are we "afraid" of?
Let's say the volume is 0.1 and the price is 120 USD.
Let's see where we can make money now.
So, the 0.97 zone is the support of the dropping channel.
Looking at such a transaction, we have a potential loss of 120 pips or 120 USD and a potential profit of 330 pips or 330 USD. This offers us a risk-reward ratio close to 1:3, which is quite good.
And now, to continue with the title's analogy, the market's "move" turn.
And at this point, the market can only do one of two things: fill our pending order or not.
Given that I do not keep outstanding orders beyond NY's close, if the market does not reach my level by then, I will remove the order and begin evaluating the market again tomorrow.
The second step is to activate our limit order, which is also the case with my trade, and we are now in a running trade.
With a transaction open, the market is once again moving.
So, what are the possible outcomes?
1. The market increases and reaches our stop loss. Although this is an unfavorable scenario, we were aware of its likelihood from the start, and as with any trade, it carries risk.
We thought about it and assumed it from the beginning, and we never traded more than we could afford to lose in a trade.
So, like a stoic, we accept it and go on to the next trade and market analysis.
2. The wonderful scenario in which the EURUSD breaks through the 0.99 support level and falls to our objective.
So, our rationale was correct, and we now had a trade that netted us 330 USD, but more importantly, we traded disciplinedly with a strong R: R ratio.
3. The market dips below 0.99 but then rises again. We can now consider some action.
- Place a stop loss in BE and let the transaction run - Close half to get some money off the table and place a stop loss in BE
- End all trades
As you can see, you don't have to be Gary Kasparov to be a smart trader, because the market's "moves" are only a handful.
All you have to do is be aware of these moves and have a strategy in place for each of them.
This way, you won't wind up wondering every minute "where will the Euro go, will it increase, will it fall," and you won't trade emotionally or carelessly.
As Benjamin Franklin famously stated, "Those who fail to plan, plan to fail," but this is not your case because, as a smart trader, you always trade with a strategy and are aware of everything the market can do from the start.