More than half of the questions traders ask me on a daily basis are variations of "What will X asset do today, will it rise or decrease" or "Do you think X asset will reach Y price."
I generally respond with "I don't know". My conversation partner will undoubtedly assume that I don't want to tell them or that I'm a complete moron.
The proper response is actually a different one: "I don't care."
And at this point, dear reader, you won't think I'm an idiot; you'll think I'm a total moron.
But if you'll indulge me, allow me to elaborate with a genuine trading example on the EUR/USD.
What do we know about this pair, for example, if we are thinking about making a trade on it?
1. The USD is fundamentally favored
2. The trend has been downward for over a year.
Therefore, we wish to trade against the trend and sell this pair.
By carefully examining the chart, we can observe that the EUR/USD currency pair is now trading within a downward channel and has lately found support in the 0.99 area.
Exactly from the channel's resistance, the pair reversed last week, reaching a high of 1.0150, creating a nice and powerful bearish engulfing on our daily chart.
Where do we wish to sell this pair if we had to use our judgment in deeper detail?
Now that I've thought it out, I think the range between 1.0030 and 1.0050 is a decent area to sell.
In that zone, we therefore set a sell limit order (Remember, professional traders use pending orders)
We are currently thinking about the point at which our negative forecast is invalidated. We reach our stop loss at 1.0150.
Let's use my own trade as an example once again. If we set the selling order at 1.0030 and the stop loss at 1.0150, we might lose 120 pip.
Every move of a pip on the euro represents 1 US dollar for a volume of 0.01, thus our transaction has a potential loss of 12 US dollars.
Let's think about volumes now.
What Possible Loss Are We Willing To Accept?
Let's use 120 USD as an example, which equals a 0.1 volume.
Let's now look at potential profit areas.
The support for the dropping channel is in the 0.97 zone, so there.
Looking at this trade, we have a potential loss of 120 pips, or 120 USD, and a potential gain of 330 pips, or 330. This results in an extremely favorable risk-reward ratio of almost 1:3.
The market's "move" turn, continuing the analogy from the title
And at this point, the market has only two options: either fill our pending order or not.
If the market hasn't reached my level by then, I will delete the order because I don't keep open positions after NY's close. Then, tomorrow, I'll start anew by evaluating the market.
The second is to cause our limit order to be activated, as it is for my trade as well, and we are currently in a running trade.
The market is moving again with a transaction open.
What Are The Potential Outcomes Then?
1. The market moves upward and reaches our SL. Even if it's a bad scenario, we were aware of the possibilities from the beginning, and like any trade, there is a risk involved.
We took that into account and made the assumption from the beginning, never trading more than we could afford to lose.
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We therefore accept it with stoicism and move on to the following trade and market analyses.
2. The wonderful scenario in which the euro falls to our target after breaking the 0.99 support level.
Therefore, our rationale was sound, and we now have a trade that has given us 330 USD, but more importantly, we traded methodically with a solid R: R.
3. The market declines to 0.99 but then recovers. We can now think about taking some action.
- Close part of the trade to remove some money from the table and shift SL into BE.
- End all trades
As you can see, you don't have to be Gary Kasparov to be a successful trader because the market only makes a small number of "moves." Simply being aware of these moves and having a strategy for each one is all that is required.
By doing so, you can avoid trading emotionally or foolishly and stop wondering where the euro will move, climb, or fall every minute.
According to Benjamin Franklin, "Those who fail to plan, plan to fail," but that is not the case with you because, as a competent trader, you always trade with a strategy and are aware of all the market is capable of.
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