NEWS / Foreign Exchange

"Set It and Forget It" - The Key to Taking Emotion Out of the Game

By Sam Seiden

In Boston this week, the leaves falling from the trees are bright yellow and red. The Boston Red Sox and Colorado Rockies are battling it out for the World Series. It is truly a very special time to be in New England. What I am most excited about, however, is what is happening in a small classroom just south of downtown Boston. I taught the futures trading class here at the Boston Online Trading Academy center and thought it would be a good idea to share a simple trade from a student in hopes of passing along a nugget of knowledge to our readers. Next week is an off-teaching week so I will try and fill the letter up with low risk/high reward trading ideas. Let's have a look at this student trade.

Entry and Exit:

ER2Z7 B 1 808.20

ER2Z7 S 1 815.20

This trade was taken in the Russell Futures (ER2). The Russell is a big futures market as you are making or losing $100 each point (twice the E-Mini S&P) and this market moves very fast. Early in the pre-market, he identified an objective demand (support) level and added his demand (support) lines which carried forward on the chart (green lines). His very next step even before the market opened was to enter a buy limit order at 808.50. He knew this was a very strong demand level because of the strong initial rally from the level. This suggested that supply and demand were really out of balance at the level. In other words, there were many more willing and able buyers at the level than sellers. When price eventually declined back to the level, even though trading was VERY new to him, he knew he was buying from a seller who was making two very big mistakes.

The seller was making the same two mistakes all consistent losing traders make. First, the seller was selling AFTER a large decline in price. Second, the seller was selling right at a level where we already knew, demand EXCEEDED supply. These two mistakes can only be the actions of a novice speculator. The laws of supply and demand ensure that the seller who sells after a decline in price and at price levels where demand exceeds supply will consistently lose. The consistently profitable speculator would never take that novice action. They couldn't - they would not be consistently profitable if they did. The student did have a protective sell stop placed just below the demand level in case the trade didn't work out. While this trade produced a nice gain, the more important factor was the low risk entry taken to achieve that gain.

If someone came into class and looked at the trades students had taken all week, one thing they might think is that this class is really boring. This is because all the trades look exactly the same. All the long entries look the same as this Russell trade and all the short entries are just this entry flipped upside down. As a trader myself, it is really a boring activity after a while because you are simply taking the exact same action over and over and over. Making money is not boring however. It allows us to spend more time with our families and helps create financial security and opportunity. Our job is simply to find a market where price is at a level where supply and demand are out of balance and trade that market back to balance, period.

The action of trading can be extremely emotional if you let it. After quantifying supply and demand in the market, the next most important thing is a subtle sentence earlier in this piece. I mentioned that the student set this trade up as a limit buy entry long before the entry was taken. In other words, he "set it and forgot it". He did this with a limit buy at the level along with a sell stop order just below the level. Doing this helps take the trader out of the picture which is crucial for success in my opinion. Don't forget, traders are people and people are not programmed to take proper entries into markets. From birth, we are conditioned to run from things that cause pain and run toward things that make us feel good. Most of the time, if you take this action in the trading markets, you will lose your money fast. With the trade above, keep in mind that price was crashing down with nasty red candles seconds before the order to buy was filled. At the time of entry, there was no green candle, no indicator gave a buy signal, and so on... To sit there and push the buy button can be almost paralyzing if you're just "winging it". Again, the key is to have an objective plan that is void of illusion and to pre-set your orders as often as you can.

Question:

What does it take to achieve consistent low risk profits in any market with one strategy?

Answer:

An unshakable belief system and the discipline to follow a simple set of objective and mechanical rules based on the laws of supply and demand, and nothing else. Or, the technology that allows you to pre-set all your orders in a trade long before the trade is taken. These days, swing traders and day traders have this technology and it's really cool. I use it all the time.

I would love to say I am some super human trader that fights off emotion but I am not. I tie my shoes the same way everyone else does. What I do to eliminate emotion is use bracket orders and contingent orders.

If you want to keep your batting average high, your risk very low, and your profits substantial, make sure you have a mechanical set of rules that focus ONLY on the governing dynamics of supply and demand.

With next week being an off week for teaching, I will try and fill the letter up with low risk/high reward trading ideas.

Lastly, not every trade is a winner. We all have losses and always will. There are three outcomes to a trade:

1) Small Loss

2) Big Loss

3) Small Gain

4) Big Gain

As you can see, all we have to do is eliminate #2 and we are happy to live with the other three.

Hope this was helpful. Great job Boston traders!

Have a great weekend!