“Always know the reason you are getting in and the reason you are getting out”

Steven Ickow

From our upcoming book Millionaire Traders

The more I am in this business, the more I despise trading gurus who pull up a chart of past price data and demonstrate with uncanny precision how they would have traded every peak and valley the movement. There are many very smart and legitimate technically based traders who have interesting insights and can teach us a lot about the underlying logic behind the classic chart patterns. However, the longer you trade the more you begin to appreciate that every pattern can turn into anti-pattern. Head and Shoulders can turn into a channel and instead of being a reversal pattern can turn into a continuation. Same with double tops and double bottoms. In a range a tag of a Bollinger band is a great place to fade, but in a trend, the same setup is a great place to join the price action. In short everything depends on context and all trades look easy in retrospect. The easiest way to expose a charlatan is to ask in real time, ”Would you be short now or long?” and have him or her agree to answer that same question at least 10 or 15 more times during their presentation. Few if any “gurus” would be willing to subject themselves to such a test, because underneath their smooth banter, they know the real truth – trading is essentially guessing.

Well those you who have joined us in this journey in reality based trading you know that the one thing we will not do is lie to you. Trading is guessing, pure and simple. But before you shake you head in sheer disgust and walk away know this - so is neurology, meteorology and for that matter any business. investment. Medicine is perhaps the best example to look at because so many of us hold doctors in awe, but anyone who has ever had the misfortune to have a family member come down with a serious illness especially if its neurological or psychological in nature, will quickly learn t how inaccurate and imprecise most of medical diagnosis can be. “House MD” -one of my favorite TV shows – only gives us a glimpse of how frustrating the art of diagnosis can be for even the most educated professionals. Yet, we afford doctors far more benefit of the doubt that we do ourselves, although they can often be wrong many more times in their medical analysis than we are in our trading analysis.

Imagine if the weatherman on TV had to predict not just if today would be sunny or cloudy, but the exact temperature reading to 1/10th of a degree at say 3PM this afternoon. Furthermore, if the weatherman was wrong he or she would not get paid that day. How many meteorologists would be willing to work under those conditions? Yet we as traders do just that every day.

Hopefully however, understanding that trading is nothing more than intelligent guessing allows you to accept the fact that we will be wrong. A lot. Ironically enough, long term success in this game depends on the traders ability to disregard a monumental amount of short term failure. “Quitters never win and winners never quit,” is a trite old saying of every football coach I ever knew, but nevertheless it applies to trading.

Knowing that trading is guessing, however, does not absolve us of doing serious work. In fact the opposite is true. The difference between novices and pros is that novices guess randomly trading strictly from impulse, while pros spend enormous amount of time observing and thinking about everything from news flow to price flow in order to determine the proper speculation. So to trade effectively, whether it be proactive or reactive you need to plan and be prepared. As Steven Ickow, one of the traders we interviewed for upcoming book says, “You must always know the reason for getting in and the reason for getting out of a trade.” In a business rife with uncertainty, the only factors under our control are the entry and the exit, and we should understand the reasons for both of them before ever getting into the trade.

So let’s look at this week’s trades and see if we adhered to Steven’s rule.

Long GBPUSD +132

This was the best trade of the week because we had a great reason for getting into the trade, namely that the hot PPI would likely translate into hot UK CPI numbers and would therefore push the pound higher. The numbers printed as expected and our speculation paid off.

Long GBPUSD -90

We made a key mistake on this trade, trading reactively rather than proactively. Normally, given the good data, that should not have mattered, but with price action so overextended the pair was just too vulnerable to a sell off. We did however properly limit our risk by stopping at 2.0065 as cable tumbled to 2.0011 before leveling off.

Long GBPUSD +20

After the initial profit taking we felt confident that buyers would return to the pound given the strong data. We made T1 on the trade, illustrating the importance once again of using the two lot approach. Since we can only control risk not return, taking some profit on par of the trade ensured that we did not turn a winner into a loser

Long EURUSD-80

The worst trade of the week. Why were in this trade? For the worst of all reasons - because it was going up at the moment that we looked at it. We had neither a reactive nor a proactive reason for why the price action might continue and got stopped out. Just like poker, price action lies all the time. Without a reason this was a classic chase trade gone wrong.

Short USDCAD -20

Unfortunately, a great example of a good plan improperly executed. This was supposed to be a proactive trade which I botched up by turning into a reactive trade. In short I was a minute late and a penny short. What would have worked well proactively, did not work reactively as prices did not extend. The only saving grace was my realization that the trade was not responding and quickly covering it for a nominal loss.

Long GBPUSD +20

A very good example of how you can make money even if you are wrong by properly controlling risk. We were wrong in our assessment of the strength in UK Retail Sales, but the price action before the announcement allowed us to make T1 and exit the rest at breakeven when prices turned down.

We’ll be back next week, with Steve’s rule burned firmly into our minds.

Have a great week-end

B&K