When you turn on your computer each morning and you look at your favorite forex pairs, can you tell me exactly what levels you are most interested in taking action on? Can you give me a good argument as to why you would be looking for longs or shorts at these particular prices? If you can’t answer these two questions in less than 2 minutes, then most likely you are not a prepared trader.
Less experienced traders have a high tendency to be reactionary in their methodology. They “react” to new information as it enters the market. For example, some economic news comes out and causes a large movement in your pair, you then look to take a trade in the direction of the move, or you instantly become biased as to how this pair should continue for the rest of the session. Another example is observing some kind of technical signal, like an oscillator generating a buy or sell signal, you jump in because you see an arrow appear on your chart. Again this is all reactionary trading. The only trader that capitalizes on these opportunities is the one on the other side of your random trade.
The experienced trader in contrast, conducts analysis in advance and knows how to update this analysis as the market provides new information. The analysis that I am referring to is technical, because fundamentals will not yield specific price levels of interest. Once the experienced trader has uncovered potential turning points, analyzed surrounding market structure, recent price sequences and variables from the bigger picture to provide context, the preparation process is complete. Then the waiting begins. What is this trader waiting for? The predetermined support and resistance levels uncovered by the analysis.
Professional traders not only prepare themselves by conducting analysis while the market is quiet or not in play, they also know that when a level is reached, this does not give license to immediately jump in. When a predetermined support or resistance is reached (which could take hours or longer) only then does the next step of the trading process begin: validation. This is where a trader must wait for a specific setup or series of price movements that indicate that there is a greater possibility of a turning point at this level. This is how our traders are able to determine whether it is prudent to buy in front of a particular pivot point or other similar technical level without having to blindly step in front of it.
Preparation is a process and can come in many forms. Some believe that reading someone else’s analysis and watching the news is adequate for finding trading opportunities. This is not how the professional prepares for a trading session. At SMB we provide an entire methodology complete with the preparation, validation and performance evaluation processes that help our trainees grow into professional traders. Trading is more than watching a chart and pressing a button, it is a well defined framework of thought. Not having such a framework is usually the greatest obstacle for the inexperienced trader. And learning by trial and error takes years. You know where to find us.
Marc Principato, CMT
*No Relevant Positions