Edition 4: Grasping the Basics of a Trade
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Welcome back for this shiny new edition of Chasing Candles, hot off the press. It's time you learn to elements of a trade, wanna deconstruct one together? ☕️ Grab yourself a seat, pour a cup and let's get right to it! |
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Below is a picture of a price action chart. To the untrained eye, this squiggly worm means nothing, but to the keen eye of a veteran trader, there's gold & opportunity here!
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1️⃣ The first observation is the market condition. When price is printing lower highs & lower lows (as seen here), this determines a "downtrend", which means the trader is only going to look for "short" trades, (which isn't anything to do with the length of the trade, but rather the direction. A trader can trade either direction, regardless of in an uptrend or downtrend, "long" (up) or "short" (down). 👉 Fun Fact: a trader may occasionally choose to invert the chart to get a different perspective. |
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2️⃣ Rejecting a Support/Resistance Level Before I lose you in the next image, (it's getting a little congested down there), what you're going to see is a horizontal line running across the chart. This is called a support/resistance level. In short, it's a level that price frequently returns to and rejects by bouncing off. 3 or more rejections quantify a valid level. It's a great level to predict where price is going to turn presenting, you, the trader, an opportunity to place a trade. 👉 Note:
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3️⃣ Stacking Confluence, and the Path of Least Resistance. In the image below you'll see a fine red line called a "50 EMA" which displays the average price of the last 50 candles. The 50 EMA works as a "dynamic" or "moving" support/resistance level that price often tends to bounce off. We now have a few reasons to believe price is not going to go higher from here and likely go down. Combining these 3 observations is called "Stacking Confluence", the more reasons to add in favor of the trade the better. 3 is the minimum, 5+ is ideal. |
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The theory of "Path of Least Resistance" is that price will more often than not move in the direction where there is less 'stuff' in the way. Like a river, price will generally take the easiest path. Now we have that established we can set up a trade. This particular strategy's entry criteria are as follows: |
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Entry: The yellow line where the green & red zone meet
Stop Loss: The red line at the top of the red zone.
Profit Target:
*Note: position is sized to only ever 1% risk of account per trade. The profit target set is 2.78 x the distance of the stop loss, providing a 2.78:1 RR. Simplified, this trade is risking $1 to make $2.78, per $100 account size. R/R Per Account Size:
It's all relative to account size, which is what makes trading so lucrative, rather than working harder, trading is about working smarter. |
4️⃣ The Trade is Now Live!
The entry order we set was triggered and our position is live. Time to kick back and let the market run!
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Hit the beach, get some sleep or indulge in your favourite pastime. At this point, we have no influence or control over what happens next. Many novice traders get caught up staring at the price ticker hoping & praying, but as most of us agree, the market doesn't care for your pleas. 1 of 2 things is going to happen next: 1. Trade goes against you and hits stop loss for a full -1.00% Whichever the outcome it will happen automatically, regardless of whether you're at your computer or not. The lifestyle of a trader can be exceptional if you let it be. There's no reason to be spending more than 2-3 hours a day actually 'trading', go and enjoy your life. |
5️⃣ Outcome of the Trade
As discussed in earlier editions, the outcome of any one trade doesn't really matter on the grander scheme. This lesson concluded in the last section while you were busy drinking a Bintang down Batu Bolong beach. 🍻
There will be wins & losses along the way, the only thing that matters is your net profit after 100 or more trades, also known as 'trading a profitable edge'.
But hey, a win is also nice so let's check how our position went anyway!
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Profit secured 😎 9 candles after our order triggered the position closed, banking a smooth 2.78% profit. How long exactly is 9 candles in human time, you ask? This chart was a "1-hour chart", meaning each candle represents 1 hour of time, but the exact same principles apply to all timeframes, 1-day, 1-week, even the 1-month chart! The only difference is instead of banking profit in 9 hours, it would take much longer or quicker, depending on whichever timeframe you're trading. |
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That's a wrap, ladies and gentlemen! This was quite a chunky lesson, if you need to take a moment to icepack your forehead before re-reading this lesson 3 more times, there's no shame! If you'd like a step by step video training how to become a professional, full-time trader, get started with Pro Trader below. See you next week for another value-packed edition, until then, I have a life to make the most of! Luke ✌️ |
