Posted: July 12, 2009 | Categories: Steve Rising's Trading Success Series
We’re going to pick up from our previous video where we discussed the beginning stages of the three steps of trading; step one: identifying which condition we have on the daily chart, range-bound condition, which is the more prevalent condition, or momentum-based condition which is the less prevalent. In other words, 80% of the time market’s trading sideways, 20% of the time we’ve got momentum-based activity.
So picking up there after we’ve determined that range, we then start to create our trading plan, and then step two, we then look for our entry strategy to develop in relationship to that trading plan.
Now here at the Trading Institute, we teach two specific entry strategies, and it’s important to understand that entry strategy is critical to the, and in fact it’s why when people try to attempt to trade what we discuss in just these free videos they’re not successful with it is because they don’t have a solid entry strategy.
But critical criteria from entry strategy is, one, entry strategy has to be black and white, and two, it has to get you in what’s known as the beginning of a price move, because then it allows us to use a much tighter stop.
Using The Candlesticks Correctly
So here at this point, we have price here trading at a significant number, which is part of strategy number seven, and then our entry strategy develops right here, and now it’s based on a specific candlestick that we’re looking. But let me clarify here, we use a Japanese candlestick chart simply because it’s easy on our eyes. And our trading methodology and with the strategies that we teach we do not use any Japanese candlestick patterning whatsoever.
The entry candlestick that we’re looking for meets our very specific criteria. But the key is, it has to be black and white. In fact, I interact with individuals all the time who use oscillator-based entry strategies where we’re looking for indicators to hook over or cross over or identify a potential entry point, and you can poll five people trading the same oscillator-based entry strategy, and you’ll find that they all have five different versions of where the entry can be. And that’s the trouble trading oscillators or indicators is they’re very complex, there’s a lot of subtle nuances to them, and most people can’t trade them consistently.
And so trading needs to be as black-and-white a process as possible, so step two for us is entry strategy, and here we have one of our entry strategies develop, we have an entry strategy that we use when trading strategies one and two, and we also have a second entry strategy that we teach when trading strategies three, four, and five.
Taking Your Profits
Then step three comes into play, and it’s profit target. Now it’s interesting, most people don’t even have a solid exit strategy. And the reality is, we teach a form of scalping here at The Trading Institute. Now, by pure definition, a scalper is somebody who’s going in looking for small fractional moves in the marketplace and they’re trading repeatedly throughout the day, that’s not what we do, we use the spirit of the term scalping, and the reason for that is, the majority of forex brokers do not allow that style of trading.
But we use the spirit of the term scalping where we go for a fixed profit objective. We typically look for a net 10 pip profit objective. That’s the average sized move that we look for.
On occasion we’ll go for 15 or 20. We work off of a 10 pip stop, we work off of trading ratios of one to 1:1, 1:1.5, or 1:2, where we’re willing to risk up to one dollar to make up to two dollars. But the reason why we use a scalping approach, well there’s actually a couple of reasons, the primary reason is it’s statistically shown that an individual who has a predetermined profit target prior to a trade will make 10 times more money than the individual who tries to ride a move. The individual will make 10 times more money over a five year period than the individual who rides the move.
And the reason why we do this in forex is we know that price has some very specific characteristics of where it will stop or stall at specific numbers. We also know that the directional bias is consistently changing; one candlestick we’re bullish, two candlesticks later we’re bearish or vise versa, and so we go in and we try to, we scalp a portion of a planned move. The reason being is the way we grow our account in a positive direction is we simply become more consistent in the trading process and we then begin to add more lots.
In other words, in this particular move, a one lot transaction would have netted us out a hundred dollars. A five lot transaction would have netted out five hundred dollars. It’s a common principle that’s been in trading for decades. In other words, what’s easier, to buy one share of stock, and wait for it to move a hundred dollars, or to buy a hundred shares of stock, and wait for it to move one dollar to achieve the same hundred dollar profit objective?
The Danger Of Trading Big Moves
And this is where people get into trouble trading the forex market, is they try to find and attempt to trade big moves, but what happens is price stops or stalls, or slows or stalls, and then reverses on them because the directional bias is constantly shifting as discussed in step one, so please review that video if you haven’t seen it yet. But the key here is, is really market conditions discern what size profit target we can go for.
You know, there’s an old saying in trading, if you’re looking to hit the home run all the time, you’re going to strike out a lot as well. So we can forecast where price should slow or stall, and then our objective once again is to just scalp a piece of that move. Because we’re also safer and have a higher probability of longevity the less time that we’re in the market.
So on occasion, market will open up, for instance when we had the last half of last year, when the bailout activity started to be announced, the forex market was a fantastic market to trade, the average size of the moves were much bigger, and we were able to capitalize on some 30 and 50 pip trades, but those conditions have dried up, we’re back to standard FX conditions where we scalp typically 10, 15 to 20 pips based on market conditions. There’s another age old saying in trading, you’re never going to know where the top or the bottom is until after it happens.
So once again, we use the spirit of the term scalping where we go for a fixed profit objective, but the key here is, remember, in step three, we want to have a predetermined profit target. Because once again it’s statistically shown that individuals who have a predetermined profit target will earn 10 times more than individuals who try to ride it out and wait to see if they can get some additional pips.
So based on step one, we identify which condition we have, range-bound or momentum, then step two, we apply which strategy relates to that condition, and plug that strategy in, create a trading plan, and then wait for one of our two entry strategies to develop, and then we go for a scalped planned profit objective of anywhere from 10 to 20 pips based on market conditions.
So once again, if you didn’t have a chance to watch that first video, please do so. I’m Steve Rising with The Trading Institute, I encourage you to attend one of our free online trading seminars where you can watch and listen to this information applied into a real time market to learn more about our trading methodology and the training program that we offer here at The Trading Institute. Thanks for viewing.
