Are You Willing to Receive What the Market Is Willing to Give?

There are all kinds of traders. While one may sit and stare at every wiggle, another will enter his trade and then go mow the lawn, only checking hours later to see how the trade worked out.

Often, traders with an engineering orientation focus on developing and testing ‘systems,’ thinking they can strap a set of rules onto an ever changing market. In contrast are artistic traders who stress getting and staying ‘in touch’ with the ebb and flow of daily price movement.

Watching wiggles can drive you nuts! Pursuing a profitable system can drive you to drink! And, staying ‘in touch’ with ebbing and flowing can make you seasick!

So what’s the answer?

Well, I can only relate what works for me, of course, and who knows how long what works this week will last … With that, here goes:

Rule # 1: Watch out for ‘News.’ News trumps everything else!

Trends up, down, or sideways get quickly crushed if the Personal Consumption Expenditure (PCE) is a surprise number … or, if jobs created are way out of line compared to expectations … or, if the FOMC moves rates more or less than traders have priced into the market. News is numero uno and, if I’m being a responsible trader, I know what news is on tap and the precise minute it is due to be released. (Google ‘forex calendar’ to find schedules of daily economic news.)

If volatility makes you anxious, stay away during red hot news hours.

Rule # 2: Read the Charts. Charts reveal information when viewed from different time perspectives: 6 month, 60 minute, 30 minute, 15 minute, and 5 minute charts tell stories. What story does each currency’s chart tell? Which way is each currency moving … up, down, or sideways? Are there obvious formations unfolding? What about MACD and price divergence? Very often, the next move can be predicted by the direction the current move which reveals itself as you zoom in from afar. And, be sure to make note of the MACD trends and MACD histograms when sifting through the various currency charts.

Rule # 3: Look for Waves. No one surfs on a flat sea! Without waves there is no surfing and without price waves there is no trading. Prices move in rolling waves, unless ‘News’ pops up and creates a ‘Rogue Wave’. Traders don’t make waves. Traders, like surfers, ride waves and profit from the ride. In addition to moving on news events, waves are created when lots of traders move the market in one direction or another … who knows why? The point is, if you look for waves by reading charts, watching price action, and using all number of indicators, you can see (and feel) what’s happening … and what’s likely to happen next.

Rule # 4: Take Small Bites. Small, of course, is relative to the total you can afford to risk. Let’s say that everything you see indicates a wave is approaching … perhaps a currency has had a rapid rise or decline and the buying and selling looks to be exhausted … or, indicators show an overbought or oversold condition … or, a currency that normally trades ‘in sync’ with the currency you’re watching has reversed and is moving in the opposite direction … In any of these examples, it may be time to enter a position, but to do so without committing all of your forces. Take a small bite and see what happens. If conditions appear to be working in the direction of your expectations, take another small bite. And take another if conditions confirm the validity of your trade. Small bites allow traders to inch their way into a solid trading position, rather than suffering fits of anxiety over every price wiggle had they gone ‘all in’ with a single entry.

Rule # 5: Place Stops. Never, never, never, enter a trade without placing a stop. Stops are insurance when price movement doesn’t go as expected. Traders have the ability to change their stops as conditions change … but I’ve learned to bless the stops I’ve placed because they’ve saved my trading account more than once.

Rule # 6: Let the Trade Mature. While some trades can be profitable in seconds or minutes, most require time to build profits. In other words, I’ve learned to let the energy of the wave carry my position and build profits on the ride. Traders can’t force this … and it does take discipline to let the market do the work so that it gives you profits from the wave. Learning to ‘let profits come’ isn’t easy as most people are accustomed to ‘making profits come’.

Rule # 7: Record and Review. I’ve developed my own shorthand for noting the reasons for entry and the risk levels for each trade … followed by more shorthand describing the results. Profit or loss, of course, is one result, but it doesn’t explain the reason for either one … and you learn from reviewing what you did wrong and what you did well. Keeping a daily log helps me keep things in better perspective as the days, weeks, and months go by.

That’s it! But, I’m certain that I’ll be adding to this list as I mature and improve my trading skills and perspective.