The one thing that will kill your trading profits…
Want to succeed in trading? Stop trying to be ‘clever’…
Trading is a ‘game’ that’s overcomplicated by the vast majority of people who ‘play’ it.
I used to be the same, thinking that the more complicated and “clever” a strategy sounded, and difficult it was to follow, the better it would work.
But as time has gone on I’ve realised that’s not true at all. In fact it’s the exact opposite: The simpler your approach to the markets, the more money you will make.
Over-complication is a profit killer, believe me.
My trading “philosophy” is very similar to David’s in that it is very straightforward. It really all boils down to one rule: The markets are constantly moving from one area of value to another.
It’s my job as a trader to identify where those areas are and maximise my bottom line within those value areas.
Value areas are essentially areas between levels in the market where either buyers will step in and cause the price to rise, or where sellers will take control and cause price to fall.
It’s quite similar in this sense to David’s supply and demand concept, which you can read about here.
The market requires liquidity to move and trading value areas allows you to enter the market at prices that maximise your payoff and leaves others paying disadvantageous prices after you.
I like to pretend I’m playing “Hot Potato” with the market and when I’m not content with holding the potato I pass it on to the greater ‘fool’ at a worse price than I entered the market at, thus resulting in profit.
Trader Sam Seiden puts it best: “Remember, the only way to be consistently profitable when buying and selling in markets is to have a strategy that has people buying after you buy, at higher prices than you paid and selling after you sell, at lower prices than you sold at.”
Value areas are commonly used by futures traders in the form of Market Profile charts, and is a concept that was championed by American trading legend, Brett Steenbarger.
I stumbled upon the concept during my quest for profitability a few years ago and after some time figured out how best to apply it to the forex and bond markets to make money.
The great thing about how I trade is that it is not timeframe specific. Whether you have time to be in front of charts all day, or can only take a quick peak at markets from time to time, my approach to the markets can work.
I focus on the major FX currency pairs and major bond markets simply because they tend to have the most action and allow me to put my money to use each day and avail of certain correlations that exist.
However, if you prefer trading equities, commodities, energy, metals or indeed any market that can be charted (which is most, if not all!) then you are in good hands as my strategy can be used profitably in all types of markets.
I’ll explain a bit more about my method in just a moment but first I want to share with you an important piece of advice…
A huge part of being able to profit consistently from the markets though lies away from technical or fundamental analysis and trading strategies.
Things such as performance analysis, looking at market stats and finding new edges to help you navigate whatever markets you trade are all major factors in how profitable you’ll be.
They helped in turning me from a trader than was barely breaking even to having parabolic equity curve growth, and they continue to help me maintain profitable trading performance.
To that end, I keep my very own ‘Trading Playbook’ – a document I’ve created and developed over the years (and will continue to add to) that describes in great detail the market patterns and structures I want to see before stepping up and taking a trade.
I suggest that if you’ve not done so already, to create your own ‘Playbook’ where you record your progress and shape your own ultimate trading approach.
How to spot value areas in the markets…
So where are these value areas? How do you find them?
I’m going to show you now, using the recent action in Crude Oil as an example…
Crude Oil recently presented a fantastic Risk/Reward swing trade opportunity. Using value area trading techniques, I was able to predict that the market was more likely to turn higher.
Now, when looking for swing trades I form a directional bias on the weekly and daily timeframe charts (on any market). I then look for an entry (long or short) into the trade on the hourly timeframe chart.
This allows me to ensure that I risk the minimum amount of pips and maximise my potential return on any given trade idea.
So looking at a weekly chart for Oil, it was pretty evident that in the prior couple of weeks we had broken out of a major level for this year – the highs of 2017’s Value Area.
You can see this price action in the chart below…
Now, I see time spent above prior value areas as an acceptance of a new value and given the fact that, at this point, we’d spent nearly three weeks above 2017’s value, I could see a case for Oil to explore higher.
Breaking out of a prior area of value and creating a new one always involves retesting one of the bounds of the prior value area.
On the hourly chart below we can see how the price spent a lot of time above this year’s highs and performed a rounded retest back to those highs:
What happens at these points is key… if the price stalls or bounces from this area, the odds are good that we’ll trade even higher prices and negate the prior value area.
In this case, we stalled for a few hours and then began to trade violently higher.
In the chart below I’ve highlighted a potential area for price to gravitate towards.
It would gravitate to this, as the prior price action (highlighted) is symbolic of an area on a higher timeframe (weekly) where the market may find a lot of liquidity.
This is because coming in towards the end of the year and heading into a new one, traders with deeper pockets will look towards this sort of area to either initiate new positions or scale out of old ones.
What about the fundamentals…
So that’s how we can approach a trade using technical analysis.
But what about the fundamentals?
Now, I don’t really pay that much attention to fundamentals – even in a market like Crude Oil, which is essentially driven by fundamentals.
However, from a fundamental point of view, the major factor supporting Crude are expectations that OPEC (and the other major oil producers) will agree to extend their deal to limit output beyond March 2018 (a key date for oil traders).
This story has been driving prices higher for quite some time and has recently seen Hedge Funds and Institutional Firms at record net long highs.
I think there is great scope for Oil to make a new high of the year at a bare minimum in this bullish move that we’re seeing at the moment.
A hold above that should see the market gravitate towards the mid-$60 range and beyond.
If you have any questions on any of what I’ve said today, or about the markets in general, send them in by simply replying to this email…