Professionals Are Rule-Based
Professionals want results that are duplicatable, so they trade by rules. Rules empower rather than limit. Retail tends to trade without rules. This leads to lack of consistency and continuity. Over the next eight weeks we are going to discuss the rules Professionals use to Enter and Exit the markets. As we discussed earlier, you know how to enter, exiting is the reverse.
The First of the Four Rules
The first thing a Professional wants to know before entering a trade, is the Condition of any market. All markets have only two states: Consolidation or Trending.
The markets either find a value area that is comfortable and consolidate in a Trading Range. Or they are searching for value either higher or lower, i.e. trending.
Professionals do not care what direction the market is trading. They trade profitably whether the market is consolidating or trending. Retail tends of only make money in bullish trends, that is due to lack of knowledge and experience.
Why is the Condition of the market so important?
The Condition reveals the direction of the market based on the perception of value in the market. If traders believe the market is currently at perceived value, a trading range forms. If traders believer percieved value is higher the market will trend higher. If traders believe percieved value is lower the market will trend lower.
This creates the three conditions of the market:
Trading Range
Bullish Trend
Bearish Trend
The first analysis every Professional does is to look-back. They use the time-frames they are trading: months, weeks, and days. The look-back helps determine which of the three conditions a market is currently in. Like Sir Isaac Newton’s First Law of Motion:
A body at rest (trading range) will remain at rest, and a body in motion (trending) will remain in motion, unless acted upon opposing force.
The current condition will tend to continue. And only chance when an opposing force acts upon the market. The most often opposing force is a breakout/reversal. We will discuss those later in more detail. A short description would be:
a Trading Range may breakout in either direction if traders perceive value to be higher or lower
a Bullish Trend may breakout into a Trading Range at value. Or reverse down if traders perceive value lower.
a Bearish Trend may breakout into a Trading Range at value. Or reverse up if traders perceive value higher.
It is vital to understand importance of value. All markets are searching for value or resting at perceived value. This knowledge allows the professional to decide whether to trade or not.
Remember Professionals can make money in any of the three conditions. So, this rule determines the direction of trade for them.
They next need the next rule to confirm whether to trade now or not.
For most Retail only a bullish condition warrants a trade. Many Retail traders have restriction from policy or their firms. Those who do not have these restrictions can learn to trade like the Professionals.
If you can only trade long, the first rule may help you look elsewhere for a profitable opportunity.
But all is not lost, the next rule will help you know exactly when to enter.
If you want to learn about this and more I have two resources for you:
- if you prefer to study at your own pace, an Online Course: Trade Like A Pro (TLAP) course will help you learn to trade like a Professional. Read the testimonials here.
- if you would like to be mentored, then Group Coaching is available through the Mastermind Group. As a member of the Mastermind Group you get the TLAP course for free.
Be well and trade like a pro,
Lloyd
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