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[The ONE thing you should never do in trading]
Trading is a mental game.
If you want to excel in this endeavour, your mindset must be at peak performance.
But if you borrow money to trade, you erode whatever edge that you might have.
Here’s why…
Trading with borrowed money = Money you can’t afford to lose.
And when you trade with money you can’t afford to lose, you make poor trading decisions because you have the “I can’t afford to lose” mentality.
So, what do you do?
- You shift your stop loss because you don’t want to take a loss
- You take tiny profits because you’re afraid of watching them turn to losers
- You average into your losers hoping to catch the bounce and recover your losses
Eventually, your poor decisions catch up with you and you lose everything (including the money you borrowed).
Now you’re worst off than before because not only are you broke — you’re also in debt.
Do you want this to happen to you?
Then, don’t borrow money to trade.
Repeat after me…
I’ll never borrow money to trade!
7 ways you can exit a trade:
1. Trailing stops
2. Support & resistance
3. Fibonacci extension
4. Swing high & low
5. Setup is invalidated
6. Previous candle high/low
7. Time stop
Bonus: Margin call
[Why you always get stop hunted and how to avoid it]
Imagine…
You manage a hedge fund and want to buy 1 million shares of ABC stock. You know support is at $100 and ABC is currently trading at $110.
Now if you were to buy ABC stock right now, you’ll likely push the price higher and get filled at an average price of $115 — that’s $5 higher than the current price.
So what do you do?
Since you know $100 is an area of support, chances are, there will be a cluster of stop loss underneath it (from traders who are long ABC stock).
So, if you could push the price lower to trigger these stops, there would be a flood of sell orders hitting the market (as buyers will exit their losing positions).
With the amount of selling pressure coming in, you could buy your 1 million shares of ABC stock from these traders which gives you a better average price.
In other words, if an institution wants to long the markets with minimal slippage, they tend to place a sell order to trigger nearby stop losses. This allows them to buy from traders cutting their losses, which offers them a more favourable entry price.
Go look at your charts and you’ll often see the market taking out the lows of support, only to trade higher subsequently.
Now you’re probably wondering:
“So how do I avoid it?”
Simple.
Set your stop loss a distance away from support to give it some buffer so your stop loss doesn’t get eaten too easily.
Here’s how…
- Identify the lows of support
- Find the current Average True Range (ATR) value and subtract 1 ATR from the lows of support
The idea is to define the current market’s volatility and then subtract it from the lows of support.
This way, you are giving your stop loss a buffer that’s based on the volatility of the markets (and not just some random number).
Pro Tip:
If you want a tighter stop loss, you can reduce your ATR multiple, like having 0.5 ATR instead of 1.
A casino doesn't make money by predicting.
They manage their risk and let their edge play out—and it's the same for trading.
[Support could become resistance, why?]
There are two reasons for this…
Reason #1: Losing traders hoping to get out at breakeven
Support is an area where potential buying pressure could step in and push the price higher.
However, support doesn’t always hold.
When it breaks, those traders who are long will be sitting in the red. The smart traders will cut their losses and move on. But, stubborn traders will hold onto to their losses and hope the price will reverse back to their entry price — so they can get out at breakeven.
So if you think about it, this group of stubborn traders will create selling pressure at their entry price as they exit their positions, and if there’s enough of such traders, support will become resistance.
But that’s not all because…
Reason #2: Textbook setup
Traders familiar with classical technical analysis will look to sell at the previous area of support as that’s what most textbooks teach.
And if you get enough traders “following” the textbook setup, it puts selling pressure on the previous area of support which could now become resistance.
Trading one strategy with discipline beats 10 strategies without discipline.
Stay focused my friend.
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[The hidden cost of copy trading that nobody tells you]
Copy trading is a business.
So, if you’re not being charged any upfront fee, then you’re paying more for the spread and overnight fees.
I’ll explain…
For most Forex brokers, the spread on EUR/USD is 1 pip. But on a copy trading platform, you might pay 2 to 3 pips more.
But don’t take my words for it because you can compare the spreads of a normal Forex broker with a copy trading platform and you’ll see the difference.
So, what’s the implication?
Two things.
#1: If you’re a trader being copied, then bear in mind your trading strategy won’t work as well because you’re paying more in spread (compared to a typical Forex broker).
#2: If you’re copying another trader, then it’s best to follow traders who trade infrequently so the spread doesn’t eat up a huge chunk of your profits.
Now, the spread isn’t your only cost because you still have to consider overnight fees (if you’re holding positions for longer than a day).
This fee is calculated by taking Libor + X%.
(Libor stands for inter-bank offered rate. It’s an interest rate that banks charge to other banks for borrowing the money.)
So, what is X?
Well, this is the mark up that’s determined by the copy trading platform and you’ll need to check with them for the exact amount.
The good news is, you don’t have to worry about calculating all these because the platform will likely do it for you—so do check it out before placing a trade.
Now, there are probably other fees to consider but the spread and overnight fees make up the chunk of it.
You can give excuses or become a profitable trader. But you can't do both.
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[Why support and resistance are not lines on your chart]
Let me share with you a story…
In my early days of trading, I used to think my support and resistance lines are the best and the market will respect it to the pip.
But it didn’t take me long to realize my support and resistance levels keep getting breached, and I thought it was a breakout.
So I traded the breakout.
The next thing I know, the price quickly made a swift reversal in the opposite direction and I got stopped out.
So, I looked back at my charts and asked myself:
“What the hell went wrong?”
Well, it seems the levels I drew did hold up, albeit not to the exact pip.
And that’s when I had an “Aha!” moment…
I realized support and resistance are not lines, instead, they are areas on my chart. Here’s why…
There are usually two groups of traders in the market:
- FOMO traders
- Cheapo traders
I’ll explain…
Traders with the fear of missing out (FOMO) would enter their trades the moment price comes close to support.
And if there’s enough buying pressure, the market would reverse at that location.
On the other hand, some traders want to get the best possible price (cheapo traders), so they place orders at the lows of support. And if enough traders do it, the market will reverse near the lows of support.
But here’s the thing:
You’ve no idea which group of traders will be in control. Whether it’s FOMO or cheapo traders.
Thus, support and resistance are areas on your chart, not lines.
They say you can never go broke taking profits.
But it only takes one bad loss to wipe out a bunch of small profits.
[This is the most important technical level one the chart]
Here are a few reasons why…
Reason #1: Losing traders hoping to get out at breakeven
Multi-year highs represent extreme optimism in the markets because most traders (and investors) are in profits.
But as you know, the price cannot go up forever. Eventually, it has to retrace or reverse altogether.
When that happens, many traders will exit their long trades.
However, not everyone will do the same. Some will continue holding, hoping the price could breakout higher to give them even more profits.
But when the market collapses even lower, they’ll regret not selling earlier as their open profits have been eroded and they are now sitting on their losses. They hope the market could re-test the highs so they can get out of their trades at breakeven.
Reason #2: Bearish traders looking to short the markets
For bearish traders, multi-year highs present an opportunity to short the market at a “high price” because they can reference the highs to set their stop loss.
So as the price approaches multi-year highs, the short interest from bearish traders will increase.
Reason #3: Momentum traders looking to buy breakouts
Momentum traders buy breakouts as the price moves above a certain level. It could be breakouts of a range, swing high, resistance, etc.
But what’s interesting is if the price breaks out of multi-year highs, it’ll attract attention from traders across different timeframes.
That’s because whether you’re a day trader, swing trader, long-term trader, etc. the multi-year highs will be something visible on your timeframe (and charts).
Now, whether you’re bullish or bearish, multi-year high is a significant level for traders.
If you’re bearish, then you can reference it to set your stop loss above the highs.
If you’re bullish, then you can look to buy the breakout and have your stops below the previous multi-year highs (anticipating that it could become previous resistance turned support).
(And vice versa for multi-year low.)
There are 5 possible outcomes for your trade:
1. Breakeven
2. Small win
3. Small loss
4. Big win
5. Big loss
Eliminate #5 and you’ve just taken a big step forward.
[The truth about support and resistance nobody tells you]
If you read most trading textbooks, they’ll tell you that the more times support and resistance are tested, the stronger they become.
But that’s not true, because the more times support and resistance are tested within a short period, the weaker they become.
Here’s why…
Support exists because there’s potential buying pressure around a certain price level.
(This buying pressure could be institutional orders, retail orders, smart money, etc.)
So what happens when the price re-tests support multiple times?
Well, these orders start to fill up.
Eventually, when all these orders are filled up, there’s no one left to buy and that’s when support breaks.
This means the more times support and resistance is tested (especially within a short period), the weaker it becomes.
Why a short period?
Because it’s unlikely new orders will be “replenished” so quickly.
And that’s why the more times support and resistance are tested within a short period, the weaker they become.
One trade isn't going to change your life. But 1000 trades with a positive expectancy will.
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