February 2021
Hello and welcome to the February edition of the Safety in the Market monthly newsletter.
One of the biggest challenges that I face as a trading coach is helping people overcome limitations in their own mindset. I remember the first time I heard trading psychology discussed at a trading seminar – I actually thought the lesson was pointless, so I left the seminar early to go and start looking at trades for the next day. Needless to say, I soon realised that trading psychology was far more important than I gave it credit for.
When it comes to mindset, there are many hurdles that we all have to overcome. One of the first hurdles is believing that we can actually succeed in what we are doing. After all, conventional wisdom (and all of academia) states that markets are random and cannot be predicted. This belief is so deeply ingrained in the thinking of academia that when I completed a Master of Applied Finance degree in 2015, my supervisor would not let me base my final research project on the subject of ‘History Repeating’ because the whole concept of ‘Random Walk Theory’ had already been comprehensively proven. However, as Aaron Lynch points out in his article this month – if markets were random, David Bowden’s lesson on the First Range Out would not work all, let alone in most moves in most markets that I trade.
Once students accept that markets are not random, they are on their way to success, although they will have to overcome other mental hurdles along the way. Another such hurdle is the belief that a ‘3 to 1’ Reward to Risk Ratio represents a ‘good result’ on a trade. To me, a 3 to 1 Reward to Risk Ratio is barely distinguishable from a breakeven trade! And yet, many students will read Andrew Baraniak’s article this month, where he walks you through a trade that returned over 30 to 1 on Cotton and believe it to be the “exception to the rule” rather than something that can be achieved in most months on most markets. When you consider that in this month’s Active Trader Program Coaching, I laid out a 12-step process for targeting a Reward to Risk of 100 to 1 on a market, then 30 to 1 doesn’t seem so big after all. And as for a 3 to 1 Reward to Risk Ratio – do you see what I mean about it being similar to a breakeven?
Until you have experienced a winning trade with a large Reward to Risk Ratio (at least 10 to 1), it is difficult to overcome this mindset challenge. The suggestion that I have for you is to try to keep an open mind. Instead of saying “it can’t be done” or “I can’t do it”, instead ask yourself “how could I do it?” David says that your hindsight will become foresight if it is used often enough, so why not go back over the last big move on your own market and look for ways to enter as early as possible, and hold on as long as possible, to see if you can achieve a 10 to 1 Reward to Risk Ratio in hindsight? Until you can see it in hindsight, you’re not likely to see it in your own trading.
For those who aren’t sure how a 10 to 1 Reward to Risk Ratio is possible on a trade, let me sum it up for you in a single sentence: aim to trade the largest possible swing chart reference range (like a weekly, monthly, quarterly or yearly swing chart) by entering as early as possible using the smallest swing chart time frame that makes sense for the trade. That’s it. That’s the whole description. Now, I’m not saying it’s easy. I spend around 12 hours walking you through this exact process from start to finish in the Active Trader Program Online Training. But if you take nothing else away from this month’s newsletter, reflect on that sentence. It is the key to shifting your mindset to a point where you look on a 10 to 1 Reward to Risk as a MINIMUM return on a trade, as opposed to an almost impossible return.
This month, the students who are prepared to do some work are in for a treat and will gain terrific value as Aaron takes you through a lesson on Prime Numbers in the Nasdaq. This approach is exceptionally powerful on the Australian Dollar, and very relevant to the current market as well. The exercise Aaron sets you is neither difficult nor long, and yet, most students probably won’t do it. It’s up to you decide which group of students you want to be a part of.
Then, Andrew takes you through a trade on Cotton that returned a Reward to Risk Ratio of over 30 to 1. I would encourage you to recreate every part of Andrew’s article, keeping in mind my “one sentence” description of how to find a high Reward to Risk Ratio trade from earlier in this introduction. Finally, Rob takes you through another great article on Tesla, which is a great example of the benefits of focusing on all of your swing charts, not just one swing chart time frame.
This month has seen another new edition to our Active Trader Program Online Training, with the release of a new Case Study on Advanced Ranges Resistance Cards. This is another lesson that in my opinion, completely disproves the ‘Random Walk Theory’ of markets and is something that I believe all students will incorporate into their trading having worked through it. For those students who own the Active Trader Program Online Training course, the case study can be found just below the “British Pound 1992 Case Study”, another example of how to take a trade with a massive Reward to Risk Ratio.
