Trading Proverb #3, The Zone

Trading Proverb #3. Getting only one third of a move will make you ridiculously rich.

It is great to identify tops and bottoms. I use semaphores that are based on zigzag calculations and they number the tops and bottoms according to the momentum of the price. They also repaint because price does whatever it wants to do. Obviously this means I cannot trade to the semaphores, right? However, when you are creating or tweaking your method, they are very handy. I use the vertical line function of mt4 and draw dashed lines on the highs and lows. Using historical semaphores I can place lines on the semaphore quickly and easily. That is about the only consistent use for them.

Drawing vertical lines between highs and lows allows you to focus on each profitable move, one at a time. What I like to do is design my entry and exit triggers to occur AFTER the high and low. I do not specifically trade to find the high and low, though sometimes it is completely obvious. In the English language there are rules for speech and writing, and then there are exceptions to the rules.

Exceptions to high and low rules:
1. Super high candle was just formed. There is a high possibility of reversal. Drop to a 1M chart, quickly find a spot for a stop loss. Chances are the 1M chart will have more than one super candle, or at least a series of candles moving together along a trend line. Take the profit of the spike first. You can always enter again if the spike starts a sentiment, or trend.

2. Consolidation before the real high or low. When you see the market going flat, do not despair. NO, NO, NO. All it means is that some time frame has trend lines that are containing price. This is actually GREAT NEWS!!!! Why? When you shuffle through the time frames to find the one that has trend lines containing price, then you are on the same time frame that is moving the market. NOW, you have the SUPER EDGE!! LOL. Now you are about to make SERIOUS money!! When the trend line breaks on that time frame, hold on for the ride. Oh, but anyway, sometimes at the end of consolidation the price will continue in the original direction, sometimes it will not. The market maker is gathering positions and waiting to see which one has the most imbalance and which one will make him the most profit. That is why it is good to find that time frame. Whatever the market maker decides will be instantly seen by you.

Okay, back to normal. If you enter after the high or low, you reduce the probability of getting head faked. You reduce potential profit too, but it is about consistency. Consistency breeds trust, and trust breeds action. If you do not trust your entry signal, then you will just sit there and do the woulda, coulda, shoulda song and dance. Or, you will be happy you didn't enter, and that situation only makes you more fearful on the next signal. Now, you have complete doubt and are paralyzed. You might as well close mt4 and do something else. Why waste your time?

Exiting past the high or low should be a no brainer. It simply means that you rode out the move for all it had in it. You did not make up some profit target that got hit on candle 3 and then left you sitting there for the next 25 candles. You did not calculate some made up stop loss and then multiply that distance to create some fantasy point in the future where you will be a gazillionaire. LOL. Sorry. Someone will surely be offended by that!! No, instead you used the math of the market to stick with the trade until it reached the upper/lower limit of its equilibrium.

By trading from just after the high/low to just after the next high/low sometimes means taking a small loss because you actually got head faked. It does not happen often, but it can happen. Everyone has their own idea of market direction. It causes randomness. Therefore, unless you can read the minds and see what buttons the fingers of all the traders are pushing, you can expect to be wrong sometimes. Does that make sense? Observe any sports game. Let's say basketball. When the team brings the ball down the court, do you know, for 100% accuracy, who will shoot the ball? Do you know if he will make the basket? Do you know if he misses it, who will rebound it? If his team rebounds, will that player make the basket? So many variables, yes? Now suppose there are millions of players on the team. That is trading. You cannot be correct every time. Get used to it.

By trading from just after the high/low to just after the next high/low sometimes means you will break even. If the market has no direction, then it will range. Most of the time, the markets range. To make money in this situation you need your signal to have enough space between the entry and exit to cover the spread and produce profit. Sometimes the range is so tight that entries and exits fall inside the spread. Technically, it is a loss, but psychologically, call it break even.

By trading from just after the high/low to just after the next high/low usually means you make money. In most cases you capture anywhere from 30% to 80% of the distance from the actual high to the actual low. You should win over 80% of all trades taken. The loss trades are those small head fakes and the break evens. Those are completely manageable when you compile the consistency of the winning trades. Consider this...waiting for high probability turns increases your psychological edge and therefore, rather than watching trades do what you thought they would do, you are actually in the market making profit. Sitting there scared made you 0 pips. Trading when the vertical movement actually occurs puts you in the high probability zone. Being in the high probability zone, time after time, compounds your account into wealth.

Taking 30% (or more) of the pips from the high to low, over and over, and even losing occasionally, will make you rich.