Few weeks earlier, I posted picture below and asked visitors about trading. There are some comments from my kakis, close group, and a comment on this blog. Firstly, one thing is sure, this is a reversal chart and price is moving upward. So, wherever your answer is, whether it is A, B, C or D. They are all correct. However, I will be giving my own explanation below as to why traders choose each entry.
Entry D
This entry D is usually executed by the most traders. They find comfort putting in the buy order because they refer to the break out at C to determine thier entry buy. They did it with confidence and the entry is somewhat less stressful. Market gurus taught entry like this to followers and many times it worked. However, the truth is this entries can fail just as many times. It would fail when stop loss is triggered. How so, position D traders would put stop loss either below the support line C or below B or A. Market forces make sure stop loss get triggered or price could just drop further down from D. Do you experience it before? I bet you did.
It is always about risk vs reward and lets say price move up after D. The reward ratio is in fact the least if you should set a sell/ profit taking target at the next resistance level. Your risk vs reward ratio is stop loss vs profit taking. The ratio is 1:1 most of the time. D traders are the most exposed to risk in my opinion. Why? because more than 60% of the traders would execute buy orders there and market forces earn the most from this larger percentages of D traders.
Entry C
Position C traders are called the 'Break Out' traders. There are equally large percentage of C traders as D traders. C traders would execute buy order the moment the price break above resistance line or zone. Position C traders are confident of their entries because they are taught that such entry is almost ideal. Why? Entry C usually has high volume, which indicates good buying support from market or other traders. Entry C has a good upward momentum and indicates that price will appreciate more. Many C traders chased in because they fear of missing out the trade. Just like D traders, market gurus also advocate buying at such 'break out' and of cause it worked many times as well. However, the truth is these entries often failed as well. There are so many false break out examples. As soon as C traders chased in at C, the price appreciate a little more and then start to falter. It went back down even below the resistance turned support line C and triggered stop loss. Sounds familiar?
So what risk vs reward ratio for C traders? The answer is also low. Imagine you put your stop loss below C, A or B, vs setting a sell/ profit taking target at the next resistance zone. The ratio is still 1:1 or less most of the time. C traders are also exposed to high risk of losing. This is because more than 60% of traders would execute buy orders there and market forces would make a killing, earning from C traders by stopping them out or trigger thier stop loss levels. C traders lost money usually becuase they chase, fearing of missing out the trade.
Entry B
From the response I received, most of you would choose entry C or D. This exactly how general market traders would do. This is why most traders lose money and only earned by a few. Entry B traders are the few that could make money from the market if they are consistent and they have discipline.
It was done by a study I read that 80 - 90% of traders lose money trading markets. Only a handful, less than 5% can win the market consistently. So what is so special about these traders from the crowd? They are different because they know something we do not know, they understand the ideal buy execution conditions should have the following characteristics.
1. Buy execution should be the least comfortable ones.
2. Buy execution should have the least trades by others
3. Buy execution should have some similar features or patterns.
4. Buy execution would have to be patience and wait for right time to strike.
Back to B traders. There are fewer B traders in the market because they would rather not take the trades. They looked at location A from the chart and assumed that price will continue its downtrend and go below A. Market gurus also often warned about these trades, hinting that it could lead to downtrend and price could go lower. And yes indeed, many times these gurus are right, price did break below A, so called support level, and go lower. The truth is entry B is a comfirmation of a new reverse up trend. So who is right ?
Right or wrong is subjective but traders should pay more attention to risk vs reward ratio. Look at the chart, compared trader B vs trader C and D. Who has the higher reward ratio and who has the lower risk ratio. Trader B has a lot of upside potential gain compared to trader C and D. Isnt that right? Imagine B trader execute buy order, price go higher and higher.. eventually break resistance C and go higher.
What is the downside risk, trader B would only need to place its stop loss at below entry A, a small distance away from his entry B, very tight stop loss.
If trader B could do these trades many times, small losses vs big gain ratio, comsistently with discipline, trader B is a winner in a long run. Many people do understand this principles but they do not have the discipline or patience to put into action. True?
Entry A
Traders A are trade masters. Why do I give traders A such a good name? If they are able to execute buy order at A, as shown in the chart, could they have lost money? Many may argue that it is not possible to perform such trades and hope to win, they argue that how to know if price would stop moving downwards, there is lack of support, lack of data, lack of evidences that price will stop moving downwards. Market gurus will never tell students to execute buy orders at A because they are also thinking the same way. No one would trade at A in conclusion. They are right most of the time but guess what, the real winners are A traders because they know something which we do not know. Look at this chart, isnt it clear enought.
Earlier, I discribe that ideal trades should have certain characteristics. I repeat
1. Buy order should be the least comfortable ones
2. Buy orders should have the least trades by others
3. Buy orders should have some unique features and patterns
4. Buy order need to be patience and wait for the right time to strike.
Entry A traders are different from the crowd. They wait for right opportunity and execute for the kill. They knew the drop had ran over its course and they would strike at the right entry almost when no one dare to trade. After that, they just let price reverse and run up to thier target sell.
Trader A put stop loss below A, marginal risk.. trader A rewards go from lowest of the chart to the highest point. In other words, trader A has the least risk compared to trader B,C or D. You see why only 5% winners in the market now?
Earlier I describe to you, all execution contain risks.. wherever it may be, no matter how confident you are, reality is you face the same risks whether you execute your trade at A, or B, or C or D. So, why trade at C or D when you have a better rewards at A or B.
