Learning how to understand market behaviour…..
As traders, two pivotal inquiries preoccupy us:
How might we enhance our comprehension of the market so that we can predict its trajectory with high certainty?
Building upon this understanding, how can we identify the setups we'll utilise for our entry points?
How to understand the markets….
Why is it important to understand the market and not simply learn certain patterns for entering trades? Patterns are nothing more than setups. Patterns can be, for example, specific candlestick formations that can predict a certain output with a degree of certainty. The emphasis is on "can" because, as we know in trading, nothing is 100% certain; everything is based on probability. Consequently, trading a specific pattern may seem to guarantee a certain result, and one enters a trade accordingly. Unfortunately, it's not that simple.
The market is constantly in motion, and setups don't develop exactly as they appear in textbooks. This variation in how patterns develop depends on the context—the price action that occurred before the setup. This webinar aims to help you understand that context, the story the market tells us every day. If we understand it, we can think ahead with a higher probability about the direction the market will move.
If you want to make money trading, and do so long-term based on consistent profits rather than gut feelings, you must be interested in the market's context. This is also referred to as the narrative—a story the market tells us anew each day. It tells us which prices it rejects, which it particularly values; it tells us whether it's in the process of significantly raising the value of the companies it represents or whether it believes company valuations are far too high. The narrative is about understanding how the market behaves and, more importantly, WHY it behaves that way. Why is all of this so important for trading? Because we can then infer what the market will do in the next moments, always with a certain probability.
It's like flipping a coin. We always face a 50:50 probability regarding the direction it can go; knowing a bit more and having more experience means having a 60% probability that our trades will be correct. A 60% probability is sufficient to enter trades. At a 70% probability, even more market participants see this and place their trades. Those who entered at 50:50 or 60:40 now exit and take their first profits. For this reason, the probability then drops again from 70% to 50%; the probability of a pullback or reversal increases again. You see how important it is to accurately assess the probability, and how can we do this?
With experience, screen time, and knowledge of how the market works. Many traders face the following hurdles they must overcome for successful trading: They don't believe in their own edge—the ability to quickly recognize setups in the market and then act on them. They don't understand the market and don't study the index. For example, which stocks and sectors underlie the index? Because they haven't looked at the context before trading, they don't have the most important levels in mind.
News isn't important to us; we want to know when the announcement of this news is, if it's about the release of economic figures. But that's it—we're not interested in their interpretation, as fascinating as it may be, because the market takes on that interpretation for us, and that's what we adhere to.
Let the winners run. Cut the losers short.
That sounds great, but how do you set your targets, where exactly do you place your stops?
What happens if you enter a trade and it goes against you in the short term? Do you exit immediately and realize the loss, or have you understood the narrative, see that it's a pullback and not a reversal, and stay in the trade? The top goal is not to lose money through bad trades, but to reserve the risk premium for good trades.
A Trader's Journey: From Novice to Consistency
As a novice trader, the world of trading can be overwhelming and intimidating. The fear of losing money and the desire to succeed can lead to impulsive decisions and costly mistakes. However, with time, dedication, and a set of guidelines, one can navigate the treacherous waters of trading and emerge as a more consistent and profitable trader.
When I first started trading the ES (E-mini S&P 500), I was eager to dive in headfirst. I quickly realized that this approach was not sustainable, and I needed to take a step back and focus on learning. The first and most important lesson I learned was to trade only one micro emini. This allowed me to gain experience and develop my skills without risking too much capital. It was a humbling experience, but it laid the foundation for my growth as a trader.
As I progressed, I began to understand the importance of adapting my strategy to market conditions. On trend days or large range days, I learned to wait for the full profit target instead of scalping out early. Conversely, on small range days, I discovered that it was better to be selective and only take the best setups or even avoid trading altogether. This helped me maintain a favorable Traders Equation and avoid the pitfalls of hoping for a trend that may never materialize.
One of the most crucial lessons I learned was to trust my analysis and avoid trading when I felt uncertain or confused. If I couldn't confidently identify the setup, profit target, and risk, I knew it was better to stay on the sidelines. This discipline saved me from many potential losses and helped me focus on high-quality trades.
As I gained more experience, I began to appreciate the importance of context in trading. I learned to analyze both sides of the trade and determine which side was stronger. I also started to pay attention to the market cycle and its transitions, which helped me make more informed trading decisions. Additionally, I realized the significance of understanding support and resistance levels, particularly those based on the previous day's price action and higher time frame charts.
To further refine my skills, I focused on mastering a select group of setups, such as Al's 10 best setups. This allowed me to specialize and develop a deeper understanding of these particular patterns. I also learned to be aware of the bar number I was trading on and how it could impact the likelihood of a reversal.
Throughout my journey, I encountered many challenges and setbacks. However, I learned to view these as opportunities for growth and learning. I developed a set of guidelines that helped me stay disciplined and focused, even in the face of adversity. These guidelines included avoiding trading when bored, tired, or distracted, using price action stops, and confirming that I was not in a larger trading range.
As I reflect on my journey from a novice trader to a more consistent one, I realize that the path to success is not a straight line. It is a winding road filled with obstacles and challenges. However, by staying committed to learning, adapting, and following a set of guidelines, one can navigate this path and emerge as a more confident and profitable trader. The key is to be patient, disciplined, and always willing to learn from one's mistakes. With time and dedication, consistency in trading is achievable, and the rewards are well worth the effort.
Novice Trader
As a novice trader, focus on trading only 1 micro emini to minimize losses while learning. On trend days, wait for the full profit target, and on small range days, only take the best setups or avoid trading altogether. Only trade when you can confidently identify the setup, profit target, and risk. Avoid trading when confused, tired, or distracted. Assess both sides of the trade, and only take setups that offer at least twice the risk. Know your target before entering a trade, and use price action stops. Aim to stay in swings for 1-2 hours.
Intermediate Trader
Understand the characteristics of bull trends (higher highs and higher lows), bear trends (lower highs and lower lows), and trading ranges (reversals, tails, and overlapping bars). The open sets the mood, but be aware of significant changes in price action. Know what the market is testing and avoid trading in the last hour unless there is a clear trend resumption. Be cautious when trading near the close of the hourly bar, as reversals often occur between bars 16-18 on the open and bars 38-42 for mid-day reversals. Confirm that you are not in a larger trading range.
Advanced Trader
Expert traders should focus on mastering Al's 10 best setups and understanding the nuances of market cycles and their transitions. They should be able to quickly assess the strength of signal bars and identify key support and resistance levels, such as Yesterday's High, Low, Open, Close, Globex High, and Globex Low, as well as measured move targets and other major levels based on higher time frame charts. Expert traders should also be aware of the bar number they are trading on and the potential for reversals at specific times during the trading day. They should continually refine their ability to read price action, manage risk, and adapt to changing market conditions while maintaining strict discipline in their trading approach.
