Successful traders think like chess players

19. Sept. 2022

Every day I get many questions from traders and more than half of them are: "What will X asset do today, will it rise or fall" or "Do you think X asset will reach Y price?"
With very few exceptions, I say "I don't know". Surely my interlocutor will think that I don't want to tell him/her or that I'm an idiot.
In fact, the correct answer is another: "I don't care"
And now, dear reader, you will think not that I am an idiot, but a complete one.
But bear with me a little more and let me explain using a real trading example on EurUsd
Let's say we consider taking a trade on this pair so, we ask ourselves what do we know about it?

1. Fundamentally the USD is favored
2. The trend is down for more than a year.

So, we want to trade in the direction of the trend and sell this pair
Looking closely at the chart we see that EurUsd is contained in a downwards channel and recently found support in the 0.99 zone.
Last week, the pair corrected and reached a high at 1.0150 and reversed exactly from the channel's resistance, leaving a nice and strong bearish engulfing on our daily chart.
Going further with our judgment, where do we want to sell this pair?
Now, considering my approach, I see a good place to sell in the 1.0030-1.0050 zone.
So we set a sell limit order in that zone (Remember, professional traders use pending orders)
We also consider at this moment the point where our bearish outlook is negated. We get 1.0150 for our stop loss.

Now, using again my personal trade, let's say we set the selling order at 1.0030, with a stop loss at 1.0150 we have a potential loss of 120 pips.
We know that every pip move on EurUsd represents 1usd for 0.01 volume, so 12usd potential loss on 0.01 trade for our trade.
Now, let's consider volumes.
What potential loss are we "comfortable" with?

For the sake of example let's say 120 USD, so a 0.1 volume.
Now let’s see where we can take profit.
0.97 zone is the falling channel's support, so there.
Looking at such a trade we have 120 pips or 120 USD potential loss with 330 pips or 330 potential profit. This gives us a close to 1:3 risk-reward ratio, a very good one.
And now, maintaining the analogy from the title is the market’s “move” turn
And the market can do only 2 things at this point: fill our pending order or not.
Considering that I don't hold pending orders after NY's close, if the market doesn't reach my level by then, I will remove the order, and tomorrow I will start over again by analyzing the market.
The second is to trigger our limit order as is also the case for my trade, and we are in a running trade now.

Now, with a trade running is again the market's move.
So, what are the possible scenarios?
1. The market rises and hits our SL. Although an undesirable scenario, we knew from the start that it’s a possibility and like every trade, this also carries a risk. We considered it and assumed it from the start and didn't trade more than we could afford to lose in a trade.
So, we take it like a stoic and move on to the next trade and market analysis
2. The lovely scenario in which EurUsd breaks 0.99 support and falls to our target.
So, our reasoning was correct and we now have a trade that brought 330usd in our pocket, but more importantly we traded disciplined with a good R: R

3. The market falls below 0.99 but reverses. Now we can also consider some action
- Move SL in BE and let the trade run
- Close half to get some money off the table and move SL into BE
- Close all trade

In conclusion:

As you can see, you don't need to be Gary Kasparov to be a good trader, the market's "moves” being in fact just a few. All you need to do is to be aware of these moves and have a plan for each of them.
This way you will not end up wondering every minute "where will EurUsd go, it will rise, it will fall", you will not trade emotionally or recklessly.
As Benjamin Franklin once said: "Those who failed to plan, plan to fail", but it is not your case, because, as a good trader you always trade with a plan and know from the beginning all that the market can do.

Best regards!

Mihai Iacob