Having a winning edge over the market is crucial to all traders long-term success.
Without an edge, all traders would be found out by the market eventually. Everyone can get lucky and go on winning streaks and on extended winning streaks. This often tricks people into thinking they are profitable or a good trader when in fact, they are just lucky.
If the trader does not have an edge over the market, eventually they will start to lose and give back all the profits they have made during their winning streak. Because they don’t actually have an edge; eventually overall, the edge is with the market and that edge will play out in favor of the market ensuring that they lose.
It is just a matter of enough trades being traded. So, whilst every trader can get lucky, if they don’t have an edge and the edge is on the side of the market, it is simply just a matter how many trades it takes before the edge plays out and the trader becomes a loser.
So, What Exactly is an Edge Over the Market?
The best example of an edge at play is with casinos. The reason casinos make regular and consistent profits, even though they are gambling and playing games of chance is because they have an edge over the people who are playing the games. In other words, all the games, such as blackjack and the pokies machines etc, in the casino have the odds stacked in favor of the casino.
What is super important for you to note about this example is this; the casinos know they are going to lose and know they will go on large losing streaks. For example, someone may come to a blackjack table and get on a big roll and make a lot of money and the casinos know and understand that.
What the casinos also understand is that whilst they may lose here and there, they OVERALL, after many, many, many hands of blackjack, ALWAYS win. The casinos know that people are going to come in and win the jackpots on the pokie machines, but OVERALL, they will ALWAYS win.
This is the casinos edge and this is the exact same way you need to start thinking about your trading. A huge mistake many traders make is that they are short-term thinkers and they are only thinking about their next trade, rather than thinking about trading within an overall edge.
You need to be trading a Forex business, and with an edge over the market. These next five steps are going to show you how exactly you use an edge with price action to become more successful.
#1: Focus on the Price Action Story
As a price action trader, your primary focus needs to be reading the price action. This would seem like a super obvious statement to make right? Do a quick google search or a search of any of the major forums and you will quickly find that a lot of the traders that think they are price action trading are; in fact, “pattern trading”.
Pattern trading is simply looking at the last one or two candles of the chart, and then making a trade based on this last candle. Whilst the last one or two candles can be super important and we can use them as really great entry signals, they are only one or two candles on a price action chart that is full of many candles.
If you are to become a successful price action trader, you need to learn how to read the whole price action chart and learn how to put the whole price action story together. This is done by reading the live order flow, major support and resistance, and trends and trader behaviour through the live price action.
#2: Perfect One Price Action Trigger at a Time
To make a really high probability A+ price action trade, we must first find a really solid price action story and a great area on the chart to enter from.
As a price action trader, you would be looking at things, such as; is there a strong trend? Is price rejecting support or resistance? Is there space for price to move into? is this is a good area to make a trade from?
Once we find a really solid area to make a trade, we can then look for a price action trigger to make an entry. Price action trigger signals are candles, such as the pin bar reversal and the engulfing bar.
A mistake that a lot of traders make that slows down, rather than speeds up their learning is that they try to learn and perfect all the price action triggers at once, rather than picking one that really suits them personally and they like, and then making that trigger signal their own and perfecting it.
When a trader takes this route and they decide to perfect just one trigger, instead of becoming okay at all setups, they can become a master at one at a time. If you perfect just one trigger at a time, you will be spending all your time with just that one trigger, learning everything about just that one trigger until your master it. There will be nothing else to take your concentration away.
Once you are happy that you have mastered it, you can then move on and repeat the process with the next trigger signal.
#3: Be a Sniper Behind the Bushes, and Not a Machine Gunner Wide Out in the Open With a ShotGun!
A great example of one of the biggest trap traders fall into in overtrading. This is without doubt the biggest trading account killer.
As a Forex trader, you want to be a sniper who hides in the bushes, well camouflaged, and when your trade comes up, you take just one single shot and make your profits. “One shot & one kill”. Precise trading. You sneak up to the great areas on the chart and then BAM you pull the trigger on the trade.
YOU DO NOT want to be the machine gunner who stands out in the open or is standing on the back of a vehicle, spraying bullets everywhere. The machine gunner is rapid fire, laying down a lot of rounds and drawing a heck of a lot of heat, but hardly any of their rounds are actually hitting the target.
In the Forex market, more does not equal more. This is something that can often take a lot of traders a long time to come to grips with, but the sooner, the better because overtrading is the number one account killer without a doubt.
More trading does not always equal more profits as FXCM look at in their study of 43 million trades. The mindset needed for trading is very different for the day to day mindset needed in everyday life.
A common example of this in the markets is; a trader makes a trade when they probably shouldn’t, just because they are wanting to make more trades. They lose this trade because it was a very average trade. Another trade then forms that is a very good trade. The trader also plays this trade and makes a profit.
The problem is that the trader is now only back to break even because whilst they have played two trades, the first average trade that they should not have played cost them money. Whereas, another trader who would have only traded just the one trade would now be in profits, the first trader is sitting with zero profits at break even. This is a clear example of how more does not always equal more.
#4: Work Down the Time Frames – Not the Other Way
This is super important, and so often done the opposite way. Often, traders come to trading and will go straight to the smallest time frame they can find, such as the 5 min or 1 min charts. The massive problem with this is that price on the smaller time frame is moving quicker, is more erratic, has more false moves, and has a lot more support and resistance areas to deal with.
The higher the time frame, the easier swing trading price action becomes, and the more time you have to make decisions, the less choppy price is going to be. A major reason that a lot of traders are on the smaller time frames is because they think that the smaller the time frame, the more trading opportunities and whilst this is true to a degree, it is no good playing a heap of trades if you are losing money. Why look for more and more trades to lose more and more money?
Instead of working from the smallest time frame, you need to move to the daily chart and earn the right to be trading on the smaller time frame charts by being profitable. The daily charts are by far the best time frame for you to not only learn on, but also, continue trading on for your lifestyle.
Daily charts can offer profits without needing to stare at charts all day whilst still having a lifestyle. They are also the best price action charts for you to have success on. Daily charts have the clearest support and resistance levels with the most defined trends.
The other major note of importance is that you can build discipline on daily charts that is going to hold you in great stead on all the other smaller time frames. The daily charts only close once per day, and so you have to learn the patience and discipline not to over-manage or fiddle with your trades. These are great skills to learn early on in your trading career.
Once you are profitable on the daily chart, you can move to the 4 hour charts and learn to become profitable on them. Once profitable on the 4 hour charts, you can then move to the next smaller time frame and become profitable and continue repeating the process as far down the time frames as you like.
A lot of traders never leave the daily charts simply because they love the stability of the profits that the daily charts give them and they love the lifestyle factors of being able to only look at charts for an hour or so per day, and then do other things with their lives.
#5: Have a Pre-Trade Plan
This is HUGE! And, that is why I have left it until last last, but definitely not least. Managing your trades and setting targets is where you are going to make your profits. This is the part of your trade that can literally decide whether the exact same trade is a winner or a loser.
A lot of traders have a very “‘fly by the seat of their pants” approach to managing their trades and they just wing it each trade. If you want consistent results from your trading business and you want to make consistent profits, then you need to manage your trades consistently and have the same rules with the same plan.
So, how is this done? With a pre-trade plan. A pre-trade plan is something that you write out before you enter your trade. It states exactly how you intend to manage your trade. The best time to make trade management decisions is before you enter a trade and before any real money is on the line.
The pre-trade plan should include things like; your profits targets. If you have multiple profit targets, then include them all. Do you plan to move to break even? If so, include the price point you plan to move to break even. Where is your stop? Do you plan to use a trailing stop at any point? If so, how and what sort of trailing stop?
Are you starting to get the idea? Basically, you should be writing down this pre-trade plan, so that someone else who does not know your trading strategy could come along and read your pre-trade plan and manage your trade effectively just by reading your plan.
Making this pre-trade plan is going to stop a host of of human errors. As humans, we don’t make great traders, and by making and following this plan, we can prevent a lot of these errors from ever occurring.
Recap: Your Trading Machine
The key to your long-term success is with you being able to build a profitable edge over the market. With a profitable edge, it ensures that whilst you will have losses and losing streaks, after all is said and done; overall, the edge will come out on top and you will make a profit.
When you have this, you have a trading business and a trading machine, and it is just a matter then of finding as many trades as possible that meet your trading edge; thus, turning the machine over to churn out the profits.