I want to share a story with you that really shows why you need to trade what you see not what you think. It all really started when a friend of mine wanted to know more about trading Forex so I set aside time to go over some things that would help him.
He approached me with a trading idea and he had marked up the chart to show what he was looking at. There were a few variables to look at and there was a confluence of turning points as well. He really enjoys using Fibonacci ratios in his trading so he had a few lines from those on the chart as well.
“Trade What You See” Is A Vital Part Of Trading
The interesting thing was that he was looking at the same area I was looking at. We had some different thoughts because he was certain that a move that he described would take place.
Now, even in the Market Wizards books you’ll read some traders will mention to have an open mind about what may happen but this guy was certain.
You can probably guess what I was thinking……I was expecting a move but what the move would be I did not know but if I ignored the range aspect:
- Price would bounce
- Price would break the zone
- Price would consolidate against resistance
The exciting thing for me was that the trader was watching the same zone so I knew they’ve picked up something during our our chats. That was where it ended because he banked a losing trade and I potted a winner.
This chart shows what the zone we were looking at for a trading decision.
- Saw price break down from and also had other variables not included on this chart
- Price rallies back up into the zone for a trading opportunity
My friend shorted in the zone and was quickly taken out of the trade. His reasoning was sound as he explained what he was “certain” was going to happen…until it wasn’t.
He saw smaller candles forming which generally can indicate a loss of momentum. When the bigger candlesticks appeared, his thoughts were it was suckering in longs to stop them out once price reached the area.
You think that is a common move? It is actually.
My reasoning for not shorting was based on the saying: Trade What You See Not What You Think
- High profile trading zone would have interest for other traders
- I didn’t presume to know what the larger candles were doing…except buying…a lot
- Waited for market to show its hand
Everything changed when the small candles were erased by the thrusting price action. For me, when price is rallying with strength into a zone of interest, it raises a red flag. We can assume, because it’s common trading tactics, there would be orders at the top end if this zone broke. If I moved the market, I would use this strength to take all of these traders out.
That is what happened.
I think I am a disciplined trader so I say on my hands because there was no trade for me yet.
I watched price drill the area and then waited to see if I would get a retest.
The retest was pretty tame in strength compared to the breakout of the move. If it broke hard on the test, I’d be concerned because I would be seeing strength and on a pullback, I want to see some type of weakness. I anticipated a bounce because of that and the bottoming tail into the zone was an entry trigger.
On the flip side, I was open to a failed break out and a short but that all hinged on the break out itself including how price retraced back into the area.
- Retrace with strength = No long play
- Retrace with weakness = Long play
I Didn’t Trade What I Think May Happen But What I Saw Happen
The difference between us two traders was I was tuned into watching the show play without a preconceived idea as to why. While I didn’t know the exact reason for the buying, I did know that zones, especially higher time frame zones, have price interest on both sides of the extremes. The momentum to the upside was simply a red flag that buyers may be heading to trigger what lies around that zone.
So I wait and you can see the bear were trampled on when the bulls started to run.
If you are wondering where the quote “Trade What You See Not What You Think” comes from, his name is Larry Pesavento.
It makes sense! Our brains are wired to find patterns and even more so when we think we must take a trade. It gets hard to be disciplined sometimes and I highly recommend the book “Trading In The Zone”. You need a good mindset to make it in this game.