The Beginning Trader's Mindset:
1. They try to predict what the market will do.
Most beginners think they have to predict where the market is going. I see them doing this on FF all the time. Unfortunately, this is impossible to do consistently over time and will not help them make money. Why? It is extremely difficult to predict the outcome of a given fundamental news event and then predict how the market will react to this event. In fact, It is hard enough to predict the outcome of just the event alone.
An entire industry of financial bloggers, talking heads, FX publishers, reinforces the notion that you have to predict in order to make money trading. These "participants" make money based on the volume they publish not on the quality of their trading. Believe me when I tell you that most could not trade their way out of a paper bag. Trading is about making money, not being a fancy sounding, talking head economist.
If you are starting out and the above does not hit you, stop for a moment and let it sink in!
2. They chase/predict price trends.
Along with wanting to predict the outcome of news events, they attempt to predict trends. The longer price trends, the more confident they are that the trend will continue. In fact, the opposite is true. The longer and longer price trends the more and more likely price is to reverse. This is why they are always one step behind the pro millionaire traders.
3. They rely on lagging indicators
which show them nothing that isn't already present in the price action. Many systems on FF are the same old indicators packaged differently. This is why they never learn to read and get a feel for the markets which in the long-term turns out to be the easiest approach.
5. They don't demo trade.
Demo trading will make you realize how few trades you actually need to grow an account. You will stop over-trading, over-leveraging and due to increased confidence, most psychological issues will go away on their own if they exist at all.
6. They do not trade selectively.
Beginners jump into a trade too quickly without making sure that all the elements of their trading strategy line up.
The Millionaire Traders Mindset:
1. Pros don't predict or chase price.
They know that the longer price trends, the more likely it becomes that it will reverse. Unlike the beginner, the pro will start to look for short-term counter-trend opportunities against the trend or trade in the direction of the trend when price pulls back temporarily. They know that the trend is your friend and they will piggy-back on the momentum of a trend. However, they won't hold their trend trades for long, knowing that most of the trend's move has already taken place.
2. Pros know when to stay out and observe.
Sometimes it becomes impossible to trade, esp. when markets range heavily or become too unpredictable. Pros know to trade only when the stormy clouds part and the market's picture becomes clear again.
3. Pros trade selectively not frequently and don't over-leverage.
They take only the best trades as they know that this approach leads to the most profit. They know that trading too large and being in market all the time does not build accounts but rather destroys them.
4. Pros show no loyalty to a trade.
They will prepare for a trade, making sure all the required elements of their method are met, while at the same time being willing to abandon it the moment the market changes or something unexpected occurs. Once a trade is closed, they move on to the next trade without letting the outcome of the last trade (good or bad) affect how they take the next trade.
Golden Level Mining Plan
STEP 1. What is price doing on the H4, Daily, Weekly time frame?
Is price in a messy, hard to trade, range? Or is price trending is a flowing wave structure?
The following chart is a good example of a ranging mess. This is simply a trading desert that is difficult to trade. You might be able to grab a few pips here or there. However, most likely you should stay out since there is little trending momentum that will push your trades into deep profit.
No need to force any trades in this kind of environment. Look toward other pairs.
Not long after trading in a nasty long-term range, price broke out of it and started trending again. Several trading opportunities followed. If you go long when a currency pairs trends, price is more likely to quickly move away from your position, resulting in profit.
STEP 2. Digging for Golden Price Levels
Golden price levels are not like any other support and resistance levels and are found hidden within ranges. That's why we have to dig and mine them.
Price levels originate from fibonacci levels, moving averages, highs and lows, etc. Most of the time you will not even know exactly what created a level and do not need to. Many Millionaire traders (Institutional Traders, Algos, Hedge Funds) all use these in making their trading decisions. They are the ones that move the market with large order size, and trading along side their orders will ensure that our trades have the best chance of turning a consistent profit.
We locate Golden price levels to trade from by looking at past periods where prices ranged. Price ranges are themselves hard to trade but they help generate price levels to trade from. The highs and lows within ranges will help reveal and define the levels to us visually. It is at these levels that shifts in supply and demand caused prices to reverse in the past. This is an indicator that the market is likely to respect these prices again, especially if a level has acted as both support and resistance in the past.
We want to trade from levels that price has the best chance of respecting and pulling away from as much as possible. This is the most important part of our trading approach. Therefore it is important to be VERY selective when choosing our levels. The following criteria defines quality levels:
1) Level acted as both support & resistance
2) Level needs to be crisply defined. When price respected the level it did so by moving away from it sharply. If it broke the level it did so cleanly without chopping through it for a period of time.
3) Level is located at a golden price that is far away enough from the current market so that price is oversold/overbought when it meets the level and likely to reverse direction.
REMEMBER, IF WE CHOOSE THESE GOLDEN LEVELS WHICH ARE FOUND AT THE BEST PRICES, EVERYTHING ELSE FALLS INTO PLACE. TRADES INITIATED FROM THESE RESULT IN THE MOST PROFIT AND ARE LESS STRESSFUL TO MANAGE.
Here is another example of range with a Golden level buried within. Look at how many more times this level is tested and confirmed compared to the range's ultimate low.
A month later this golden level allowed for a short trade of almost 200+ pips! If you had discovered this level ahead of time and put in the effort to mine it, you would have been ready to take the trade without much stress as price approached it. Many traders would have gone short at the range's low (lower drawn level in chart below). This is a mistake and would have resulted in a loss, not a profit. Price is always more oversold or overbought at these deeper price levels, resulting in higher probability trades.
STEP 3. Confluence
So we found a golden level formed by a range. Now we want locate any other technical factors that cross-over (or overlap) with our level. As mentioned, millionaire traders put their orders around these technicals and this can give price an additional boost as it bounces off our level. We focus on the most frequently used technical factors (mainly on the H1, H4, Daily time frames):
1. .50 and .68 fibonacci levels
2. 200-period Moving Averages (Exponential & Simple)
3. Diagonal Trendlines
These confluence factors are not necessary but they can strengthen our confidence in a level. Here is an example of both 200-day MAs supporting a level (which as before is located deeply within the range):
STEP 4: Entering the Market
Next, we want to determine if there are any fundamental new events coming up as price nears our level.
It is a good idea not to trade around these times are the market becomes too unpredictable, volatile and illiquid. If news is close by, let the market price in the event and monitor what price does afterwards. Very often opportunities reveal themselves after a news event.
How much should we risk? Anywhere from .5% to 2% of equity depending on market conditions. If we determined that the market is heavily trending on the H4+ time frames, our trade is more likely be a winner and result in more profit so risking 2% would not be unreasonable. If we are trading within a range we might only risk .5%.
At 1%, we could lose 10 trades in a row (unlikely if we analyze the market correctly) and still only lose 10% of our total equity.
With no upcoming news and our trade size and stop loss defined, the path is clear to either set our limit orders, or alerts if we wish to enter manually.
STEP 5: Exiting the market
It is important to demo trade in order to determine our trade win rate. Once you know your win % you can determine the minimum R:R needed for your winning trades in order for you to stay profitable.. The chart below shows you how much the math is on your side. With a stop loss of 20 pips you can take profit at 40 pips and only need to win slightly more than 33% of your trades!