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E-mailTodd Gordon shares his journey.
Imagine you’re stalking a particular market you believe is set for a major breakout. Watching every tick like a cougar stalking its prey, you wait for the ideal second to pounce. Suddenly the market ticks higher and away from your grasp – you freeze with fear of missing out. By the time you realize what’s happening, frustration sets in as you watch the train leaving the station – without you on board! In a panic, you pull the trigger on the trade. “Can’t believe I almost missed it”. As the trade is live, the unthinkable happens…. the market begins to move against you. “How can this be?!” Your frustration quickly turns to fear. Your heart rate speeds up, your palms are clammy- you’re in a panic. When you can no longer stand the pain of losing your valuable trading capital, you close the trade. While licking your wounds, the unimaginable happens …again…the market moves in your original direction! It has happened to all of us.
I experienced too many of these unfortunate trading experiences in my early trading days as an amateur. I knew that if I was ever going to make a career out of this, I needed a much more methodical, disciplined, and analytical approach to market analysis and trade selection. I knew I had a decent feel for the market and the burning desire to succeed, but I just kept making too many emotional and costly mistakes. I did a lot of soul searching in my early 20’s to answer this very question when it finally dawned on me – I already possessed the skills to be a better trader all along – I just hadn’t realized it yet. Growing up as a kid in upstate New York, my preferred sport was downhill ski racing. I raced all through school, was ranked 2nd in all of New York State, and raced at a top university alongside a future Olympian (well off his pace). Well, if you have ever seen ski racing on TV, you have watched some fool hurling himself down a 40 degree slope at 80km per hour. What you don’t see on TV, is the hours of prep time that goes into tuning your equipment, preparing your body, and most importantly getting to know the course you are about to attack.
Before race time comes, everyone will have done a thorough course “inspection”. That involves the ski racer actually side slipping down the race course at a snail’s pace examining all variables and factors that could influence your speed and line, and ultimately your placement at the end of race. The skier is actually memorizing all key turns, adverse course snow conditions, parts of the course shaded from the sun or in direct light, and then committing them to memory. When race time comes, and he is tearing down the course at 80km/hour, there will be a lot of adrenaline flowing and little time to react. Those key parts of the course need to be fully committed to memory and into his game plan. At that speed, there is very little time to react to the inevitable variables.
So years later in my early 20’s it finally dawned on me and I realized my mistake. Trading is no different than ski racing. I was throwing myself into trades (down the race course) with little, if any prep time and without a game plan. So my search began. After countless hours of research, I read a book that hit me like a Swiss avalanche; Elliott Wave Principle by Robert Prechter. Never before had I found a methodology that so thoroughly quantifies the many technical patterns and quickly identifies the current phase of a market trend or correction. Elliott wave Theory then pinpoints exact entry and exit prices based on which wave position you view the market to be in. From there, all of this data is compiled into a tight game plan that if are you disciplined, will be tough to deviate from once you are in the trade. Take my game plan for an AUD/USD trade this evening. For several weeks I have anticipated a significant top in AUDUSD at the 0.9100 level. Well last night the markets came within 40 pips of that level before quickly reversing. Could that be the top? Looking at the 30 min chart I see a 5-wave market selloff. Armed with the knowledge that corrections according to Elliott are never just 5-wave affairs, I know that this must be either part of a larger correction with lower prices still to come before the uptrend resumes, or 0.9060 was the top and we’re in a downtrend. In either case according to Elliott we should see a 3-wave reaction higher into the highlighted Fibonacci resistance zone at around 0.9000, followed by a 2nd, 5-wave push below the 0.8900 lows. I have offers to get short into the 0.9000 level with a stop at 0.9075 as I type. Knowing this is possibly still a correction, I plan to scale out of the short position on this next 5 wave decline below the 0.8905 lows. I will keep a piece of the position working in the event that this is not just a correction, but a new downtrend!
Figure 1: AUD/USD – 30 Min
Elliott wave provides the framework for me to establish a game plan complete with all trade parameters hours before the trade goes live. It is not a perfect study (nothing is), but I have supreme confidence that it will force me to stick to my game plan, thus minimizing emotion and preventing a costly reaction to market movements. Plan your trade, trade your plan.
Todd Gordon is the Senior Technical Strategist for FOREX.com, a division of Gain Capital Group, Sr Trader for GAIN Capital Asset Management, and a regular on CNBC’s popular show, Fast Money. Todd’s research piece, “Strategy of the Day”. clearly details the analysis and strategy used by Todd for the trades he places in GCAM.
Todd will be speaking on Elliott Wave in Sydney in October for more information please visit: www.aspentrading.com/seminar
