By David Adams – There is a natural desire, especially by beginning traders, to want to trade excessively. This is not difficult to understand. A trader cannot make money unless he or she is in a trade; this is the general outlook of most novice day traders. But this line of thinking has some serious faults, and it is important to learn to select your trades in a systematic and emotion free state of mind.
Of course, selecting high-quality trades is easier said than done. At various times, very unproductive trades form set up patterns that can be very enticing. Low probability trades are like the lure of Medusa, they look great at first glance, but can cause serious losses if systematic analysis of the trade is not undertaken.
How do you know the difference between a high probability trade and a low probability trade?
First and foremost, you must make an assessment of whether the trader is with the trend or against the trend. While many popular courses on trading tout the wisdom of trading retracements and identifying peaks and troughs in trading patterns, these are all unsound trading methodologies and I know of few successful traders who employ them. Great traders are masters at taking what the market offers, and not trying to create trading opportunities themselves. A novice trader’s ability to effectively identify trending patterns is an essential skill because the very best traders trade primarily with the trend. In my view, less than 10% of your trades should be countertrend trades.
Secondly, many novice traders and a plethora of trading systems rely heavily upon oscillators and indicators to choose potential trades. On the other hand, most seasoned traders pay close attention to actual price action when trading. Important principles like support and resistance are prime movers in determining whether a trade has real potential. For example, taking a short trade into a known support is the recipe for a losing trade. Obviously, a trader must have the ability and experience to identify known areas of support and resistance to avoid taking trades into these hazardous trading zones. Most experienced traders can spot support and resistance by glancing at a chart; this skill is learned through observing thousands of charts throughout trader’s career. Of course, there are add-on programs to most charting platforms that can spot support and resistance for a trader who has not acquired the ability to identify support and resistance on his or her own. For some, these add-on programs can be very effective and helpful. In any event, any trade that will lead a trader prematurely into known support or resistance is often a trade that is doomed to failure and it’s important to realize these trades are very low probability in nature. In short, price action is where the real trade selection takes place, and indicators and oscillators supply filtering information to reinforce the strength or weakness of the trade under consideration.
This is among the most difficult concepts to learn in trading, as many traders are looking for a magic oscillator or indicator that will revolutionize their trading results. I am sorry to report that, to date, no such magical oscillator or indicator exists. Look to identify solid trades in the price action of any chart, and then calculate the potential to profit by identifying where support and resistance will affect the performance of your trade. Many traders use pivots and other predictive indicators to calculate support and resistance. For many years, I was in this camp. As I have grown older, I prefer to identify support and resistance as it develops on the chart, not through some artificial predictive means. This attitude is subjective in nature, and his a choice each individual trader has to make.
In summary, we have looked at trading against the trend and concluded that countertrend trading results in low probability trades, on the other hand trading with the trend results in higher probability trades. We have also noted that known support and resistance are prime movers in determining the feasibility and potential profitability of any trade. Price action is the name of the game, and learning to read and interpret what price action is telling a trader is the real secret to trading success. If you can master reading price action, it is highly likely you can become a successful trader.
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