This article is written based on my personal experiences and reflects exactly how I think about and approach the market on a day to day basis. Here’s a close look into how my mind actually thinks every day when I open up my trading screens…
Trading is all about playing the odds. You aren’t going to win every trade; an important lesson to learn early-on in your trading career. But by playing the odds, or trading the odds, you can increases your chances of making money. Playing the odds takes discipline, and it involves patience, but if you want to make money in the market, you’ll have to learn these things.
By understanding things like market bias, key chart levels, stop loss placement and having a mastery of your trading method, you can increase your chances of trading success by trading with the odds in your favor…
Develop a ‘feel’ for the chart
You’ve got to first develop a feel for a chart by developing your bias for that chart. Once you’ve done this, you stick with that bias until it stops working.
By observing the day to day behavior of a market, you’ll start to get a feel for what it’s doing and more important, for what it might do next. This is how you develop your bias. It’s more involved than just looking at a chart once and saying “it’s going down”. You need to develop a relationship with that chart, really get ‘intimate’ with it and its behavior, you do this by following the market, starting on an end-of-day basis. I am not talking only about ‘trends’ here, if you watch the end of day price behavior each day after the New York close, you will be reading the chart. Much like Neo in The Matrix, you’ll start to ‘see’ the market more clearly and get a better feel for what it might do next.
Your aim is to develop a deeper emotional connection with the chart, then your bias will come to the surface and you will know whether you should be looking to buy or sell. Once you’ve developed your bias, you can trade the odds by sticking to that side of the market until it clearly begins to change.
If a market continues dying, e.g. the recent euro / dollar, this is when you continue on the short side; this is playing with the odds in your favor. You’ve got an edge, and that edge is basically that the market is going lower, don’t fight it. Your bias in a downtrend, will generally be selling into strength, and your bias in an uptrend will be buying into weakness.
Playing the odds from key chart levels
Putting the odds in our favor in trading means not only developing a bias and trading with that bias, but also understanding key chart levels and how they allow us to play the odds.
When a market approaches a key chart level, it provides us with a very good entry opportunity and a very good risk reward potential. Thus, we are increasing our chances of making money by waiting for such an entry.
Think about the recent 105.50 key level on the USDJPY chart (see chart below). This was a major level within the existing / overall uptrend in the market. By looking for a buy entry from that level or near it, you were playing the odds (checkout our October 15th commentary for an example of this). You’ve got a key level that you’ve identified, and everyone is selling into it as price retraces down, but this is your ideal chance to buy. People are selling into a major level and the underlying / longer-term momentum is up. This means, by buying at that level or near it, you’re entering the market at your opponents (sellers) worst position, you are taking on their risk.
The risk reward is very favorable at key levels like this because you’re playing the odds. If price bounces from that level, you’ve got huge upside potential, i.e., a small relative risk for a large possible reward.
Wider stops help tip the odds in your favor
Wider than normal stops are something that can help tip the odds in your favor. Many traders are guilty of trading with too small of stop losses, mainly out of greed, because they want to trade a bigger lot size. However, trading with too tight of stops has the opposite effect from what the trader wants; it causes them to lose money because they get stopped out more often.
A slightly wider than normal stop loss helps you stay in a trade longer and lets your edge play out. This is contrast to a guy who is risking 20 or 50 pips on every trade; these stops are going to get ‘picked off’ often, right before the market continues on in your direction (without you on board). For most traders, trading with 20 to 50 pip stop losses is like playing the blackjack table at a casino, i.e., it’s gambling. Consider that the AUDUSD or the EURUSD moves around 100 pips a day on average…having a stop loss of less than 50 pips is a bad idea.
Checkout this article on proper stop loss placement for more information, as well as my article on the trade entry trick, which discusses how to get wider than normal stop losses.
Know your ‘bag of tricks’ and trust them well
Finally, trading with the odds in your favor means you know your ‘bag of tricks’ inside and out and you trust them well. By this I mean, you have mastered your trading strategy and you don’t second guess it. My trading strategy is price action, so when I see a price action signal appear in the market, I believe in it and I trust my gut. This is yet another way I play the odds in the market.
By knowing what my trading edge is (price action) and only trading when it is present in the market, I am trading with the odds in my favor. Trading when you’re edge is not present (over-trading) or not having mastered your trading method, is trading against the odds, obviously not what you want to do with your hard-earned money on the line.
In recent months we’ve called the market very well in our market commentaries, and it’s no secret that we use the same general formula in this lesson; simply by playing the odds and putting it all together, we have a complete plan of action to tackle the market each day and we know we are playing the odds and those odds are in our favor as long as we are consistent with our approach.