Flashback to the early 80s: I had spent over 5 years, over A$500,000.00 in losses, and some unknown amount spent on books, courses and systems BUT still success in my chosen field was a far off dream. At the time I was using traditional technical tools for my trading: moving averages, RSI etc. Clearly I needed to change.
‘When the student is ready, the teacher will appear’.
I read a small ad in Futures for a Market Profile seminar to be run by Peter J Steidlmayer in Chicago. Though it meant stretching our finances, I went off to ‘yet another seminar’. But this one was the one that helped turn my trading around.
Peter said many important things; some I did not understand until much later e.g.
“Once the reason for a trade is gone, you exit the trade.”
I thought then, “what could he mean by that”?For Peter made it clear he was not speaking about price. Indeed he was scathing about traders who relied only on price.
“Traders make money inspite of (traditional technical tools) not because them”.
I came to realize that Peter was referring to structure. Did I find the idea useful? Let me put it this way: this saying has saved me money more times that I can remember.
The latest occasion was the EURUSD trade where I exited for a 3 point gain rather sitting through an adverse price movement of about 140 points, and just 20-points away from being stopped out for a 160-point loss.
Let’s look at the trade.
Figure 1 shows where I added to shorts. The EURUSD satisfied the three change in trend filters I mention in Nature of Trends. And, it had retested the breakout price at 1.4556. For two days after entry, the market formed a 5-period, 290-minute sideways structure. I was comfortable with the way the market was behaving.
On Friday Jan 8, the Non-Farm figures were due out. In write in my daily service (http://tradingsuccess.com/barrotwitter), I wrote that I expected:
- The figure to be greater than the expected range suggested.
- That the initial knee-jerk reaction would be a drop in the US$
- That I expected the US$ to rally after the knee-jerk drop.
- That I expected the US$ to close strong.
Well I was right on all but point (4). And, it was the afternoon rally against the US$ that convinced me that the EURUSD would rally on Monday. So I exited all my US$ longs (i.e. covered my short US$ crosses).
My reasoning was this: my assumption was that the US$ was strong. If this was correct, then in the current environment. the Non-Farm ought to have produced a US$ rally. The fact that after an initial sell-off, and that the lack of US$ buyers probably brought in US$ sellers, meant that on Monday Jan 11, the US$ was likely to weaken.
I also reasoned that if I was wrong and the US$ did rally on Monday, I would re-enter and created scenarios for this.
The trade is a good example of Pete’s dictum. I entered the trade because I was looking for US$ strength. Once the price action suggested that this would not happen, my reason for being in the trade was gone and it was time to exit.
This sort of experience does not come overnight and it does not come automatically. I had to record and review many an incorrect interpretation before I started reading the tape on a relatively consistent basis. On the other hand, I can say that the hard work does pay off.
FIGURE 1 EURUSD