I originally intended following up on Monday, but my working vacation got in the way a little. As you can see, this trade hit his profit target at the blue line. For those of you who have been reading my work for a while, you will notice that I focus my comments on the decision making process a trader uses, and market information such as indicators and high probability setups are just basic stuff. The reason traders fail is because they lack the ability to make good trading decisions. No amount of market information or tools will compensate for the inability to make good decisions.
This trade, like all others is taking place in a larger context. Matthew is taking 100 trades over time in order to develop a decision making process that removes his emotions from trading and creates a baseline for what his method will produce. These two aspects are largely ignored in the Forex industry, which explains the unusually high rate of failure. To look behind the curtain, check out my free download 8 Things Nobody Tells Forex Traders. I think you’ll see why some of the smartest people in the world are confused about what is actually going on, and why.
Matthew will be taking notes, and a few trades from now, he’ll be reviewing his last series of 20 trades. If you were just focused on market information, from a win, you would learn almost nothing.
In the mind of a trader who is trading “market information,” a winning trade is really nothing more than a confirmation that the method is working. This is sort of silly when you think about it for five seconds, knowing that any given trade is a random event in the market. Yes, you can count on the repetitive patterns, but only in a series of trades, not when examining a few trades. This is not complicated, just a simple fact.
Matthew won’t be just accepting this win as a confirmation of anything, just as he treats his losses. As he reviews that 20 trades, he’ll be able to rate each aspect of his trades, and a special spread sheet we use will tell him which of the trades were the low risk setups, and which were higher risk. This evaluation will reveal weaknesses in his trading plan.
For example, WHY did he take a higher risk setup? Was it a mistake not following his plan, or was there something about his plan that was not written such that he avoids the higher risk setups and only takes the low risk setups? In addition, since the trades are rated on the quality of each aspect of the setup, whether you won or lost the trade is irrelevant. Only with objective approach can you see how your method is performing, and how you are doing at execution. We already know what the method will product historically. What we are learning through this process is how you plan and execute, resulting in long term good decisions, and hence consistent profits.
What can Matthew consider about this trade? This gets a little more complex, but for those of you with some experience, this particular setup had an interesting trigger pattern. We have three basic trigger patterns that we teach. What was unique about this trigger pattern is that it ended up qualifying as two trigger patterns at the same time (pin bar and outside bar). We enter pin bars (in this case) on the break of the low. For outside bars, we wait for a retrace – in other word, price must “pull back” some in order to give us a better price entry point.
Matthew chose to trade this as an outside bar, and was able to get a great price, even better than the 38.2 retrace in his trading plan. The downside of this is that price might not have ultimately returned in the direction of this trade. There is no indicator in the world that is going to tell you if this is a good decision. Only your experience, in time, and what the decisions produce can tell you that.
For the trade who decided this trade was a pin bar, the target would not have been reached. This trade would have been a loss. For that trader, there would be other things to consider in the future, such as barriers that might impede movement to the target, or trend exhaustion.
None of this is really complicated so long as you view trading success as the result of good decision making. Future good decisions will include what you learned from all of your trades, and the adjustments you have incorporated along the way.