Everyone wants to get the most possible money for their time spent at work, and trading is no different; we want to make the most money possible given the finite amount of time we have to interact with the market each day. Sadly, most traders lose money because they don’t understand how to properly use their time in the market. How can you get the most out of your time analyzing and trading the market?
For many traders, it seems natural to assume that being in the market as often as possible is what gives them the best chance of making money. However, today I am going to challenge this widespread belief and I’m going to show you that you don’t need to react to every little bar or pattern that “might” be an entry signal. Instead, you need to get “in-tune” with the overall market structure and dynamics and learn to anticipate high-probability trading scenarios…this is how you get the most money out of your time in the market.
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
― Abraham Lincoln
I recently wrote an article on developing a daily trading routine which discussed the importance of performing weekly and daily market analysis in a structured and methodical manner. Many traders just wake up each day and go looking for an entry signal in a very random and haphazard manner. Instead, when you sit down at your computer to analyze the market, you should already have a good idea of where you are looking for signals and what markets are “hot” right now…you should be anticipating signals in confluent areas and levels in the market based on previous analysis you’ve already done.
For example, in the chart below, we have analyzed the market and found the most confluent area to look for a signal, now we just need to wait in ambush; patiently waiting for a signal to form in the area or level we are watching. We have anticipated a trade scenario by analyzing the chart dynamics, determining market bias and finding the key areas in the market, as well as recent price action events….
In this USDJPY chart below, we would have been anticipating a price action buy signal to form after a pullback to support given that the trend was up. Note that we may have had to wait for one or two weeks for this signal, but it led to a large move higher and a continuation of the trend, so it was well worth the wait. Many traders were probably getting chopped up on the low time frame charts instead of waiting for this signal to form, and lost money as a result, instead they could have just been preserving risk capital and observing the market each day, patiently waiting for a buy signal from support…
It’s critical to understand the roles that anticipation and reaction play in trading the market. Anticipation can generally be thought of as a higher-level brain function, for it’s the ability to anticipate future events that truly does separate us from other species. Reactions are much more primitive and common amongst all animals; a monkey will react to its environment, but most of us know that it doesn’t really anticipate some event one week out into the future.
In my experience, most struggling traders are too busy reacting to the market to have enough time to catch their breath and make a plan to anticipate what it might do next. It may sound harsh or cruel, but being the frank person that I am, I am going to give it to you straight; traders who only react to the market are behaving more animalistic, and hence they lose money. Professional traders anticipate, they control themselves rather than allowing the market to control them.
Recent examples of how to anticipate trades
For a more recent example of how to anticipate trade signals, we can look at the daily S&P 500 (USA) Index chart. As we discussed in our recent commentary on the S&P 500, the 1660 – 1670 resistance area was clearly a high-probability resistance area to watch for price action sell signals. We can draw this conclusion based on the fact that two recent price action events have occurred at that level and led to large moves lower. Therefore, we know there’s a lot of selling interest up at that resistance and if the market retraces back up to it and forms an obvious price action sell signal, it would clearly be a very high-probability trade…
Note on anticipating trades: The market will not ALWAYS do what you want it to or what you anticipate it might do. It won’t always move into the high-probability / confluent zones that you highlight on your charts…but sometimes it will, and when it does you’ll be ready and confident, and that is the point. The point of anticipating trades is that you have a plan of action for how you will react if XYZ happens…this is a much more professional way to conduct yourself in the market than simply “running and gunning” with no logic or method behind your trades.
In the next example, we are looking at the current view of the GBPUSD weekly chart. By analyzing the weekly time frame and keeping in-tune with what it’s doing, we can use it as a guide to anticipate trades on the daily, 4 hour or 1 hour chart. In the chart below, we can see that the huge down move which occurred the first three months of this year was preceded by two bearish pin bars rejecting a key level of resistance. Traders who were following this market and analyzing its price action would have been aware that the longer-term weekly bias was changing from bullish to bearish and could have begun anticipating sell signals on the daily, 4 hour or 1 hour time frame as a result. After the down move occurred, we can see that bullish price action on the weekly chart gave us the ability to anticipate the current move higher that this market is experiencing.
Here’s an example of determining the weekly chart bias and using it to anticipate trade signals on the daily, 4 hour or 1 hour charts:
Another example of anticipating trade signals is when an obvious pin bar reversal signal forms and we anticipate a 50% retrace entry. This pin bar entry technique is something I teach in more in-depth in my courses, but for the purposes of this lesson, we can see that’s an anticipatory entry technique. Knowing when to anticipate a 50% entry on a pin bar signal is something that takes some “gut feel” to get good at it, but you will get better at it through training and practice.
Here’s an example of how we can anticipate a sell entry at the 50% retrace level of a bearish pin bar sell signal. This is a good example of using anticipation and patience to enter the market, instead of just “reacting” to the initial signal:
Identifying the near-term daily chart trend and then looking for price action signals as price rotates back to “value” (support or resistance) within that trend, is one of the most powerful uses for patience and anticipation.
In the chart below, we can see an example of first establishing that the daily chart trend was down in the AUDUSD (note the 8 and 21 day EMAs were falling) and then as price retraced back up to the 8 / 21 day EMA resistance layer (value) we could anticipate price action sell signals on the 1 hour, 4 hour or daily chart time frame to trade back in-line with the downtrend:
WHY you NEED to learn to anticipate trades
Think about your iPhone or iPad for a minute. It’s common knowledge that Apple has become the most valuable company in the United States, but what you might not know is that Apple’s founder, Steve Jobs, was a very anticipatory person. Mr. Jobs anticipated what people would want and like, and the Apple electronics that so many of us love and now seem to “need”, are the result of this anticipation. In reality, all good ideas are not just “instant”…ideas require time, planning, thinking and anticipation. As traders, we can take the fact that anticipation is a key ingredient in almost every big business or personal success story and apply it to our trading. To put it simply, we need to plan, anticipate and then pull the trigger once market conditions meet our anticipated criteria. To learn more about how to anticipate high-probability trade signals, checkout my trading course and members area for more.