Walter and Darren dig into a trader’s question about confidence issues with support and resistance trading. They talk about trading beliefs, the dangers of tweaking your system to fit what other traders do, and using your emotions — such as fear — as a tool in trading.
They also share some tips for keeping your confidence up and how some successful traders use support and resistance in this episode.
Download (Duration: 19:27 /22.2 MB)
In this episode:
00:55 – what is your gut reaction?
02:53 – belief, faith and confidence
03:35 – tweak the system
05:20 – need to incorporate
07:21 – tweak and experiment
09:31 – What can you do to use your emotions in trading?
11:08 – accountability
13:27 – good parameter
15:15 – why don’t I just do the opposite?
16:52 – embrace the change
18:26 – your ticket to long term consistency
Darren: We basically break each other’s rules completely. We come at trading from that completely different perspective and we both seemed to get a certain amount of success doing it. Anything is possible, be open- minded and try some new things…
Announcer: Two traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.
Walter: Welcome back to the Two Traders Podcast. Walter here and I’ve got Darren. Hello, Darren.
Darren: Hello, Walter.
Walter: We’ve got a question here, Darren, about confidence in support and resistance. Let me read it for you. This trader says:
“I have a question about getting confidence in my system and drawing support and resistance minds without doubting them.”
There are a lot of things that pop out her but I’m just curious what is your gut reaction to this, Darren?
Darren: I think it’s right to doubt them because they’re not a guaranteed thing. There’s uncertainty with support and resistance. You can get the right level of support and resistance but price just push it a bit farther that it’ll normally would and miss a trade. Sometimes, it’ll go down and stop you out then reverse and go in your direction.
It’s right to have some doubt in them, it’s right to expect that they’re not always going to work out because then you can focus a bit more on the things that do matter. If you focus in drawing support and resistance lines that are always going to be right then you’ll miss the big picture.
Walter: It’s clear to me that this trader probably doesn’t believe in support and resistance. I would say that this trader is probably has a belief that somewhere around related to the way that you see the charts, Darren. I am not saying this is right or wrong. I just think that this is probably the wrong thing for this trader.
It clearly sounds like the trader feels like it’s important to use support and resistance but the trader doesn’t really believe in support and resistance. I always say this but it’s so true, we always come back to our beliefs and that’s how we trade.
Whether you’re trading of support and resistance because you think that’s the best spot — the support and resistance are the best spots to find trade — or whether you believe that, really, it’s all about concentrating on the exit.
As Darren is really, really focusing on the exits on his trades, the entries aren’t that interesting, they’re not that important. They’re almost just mechanical throw away “Let’s do it, it’s another signal” and Darren makes his money on the exits.
I would say to this trader that clearly it sounds like to me, support and resistance is not something you believe in. You don’t have faith in it, you don’t have confidence in it so you need to switch to something else.
There’s got to be something else that is going to work for you. We don’t really know what it is because this is all the information we have but that would be my guess.
Darren: Yeah, possibly. Maybe he needs to use support and resistance for his exits and not for, you say, price action for his entry. Sometimes, if something is not working for you it might be that it’s just like fighting against what you really believe and it’s quite hard to pin that down initially without trying lots of things. Maybe he just needs to tweak his system a little bit and try something a bit different.
Walter: Exactly, that’s a great point. If you’re listening to this and you think “Okay, I’ve had a situation where I was trading a MACD system”. If you hear yourself saying something like, “I’ve noticed that everytime it does this, it’s likely to do that.”
What you’re doing here is you’re pulling in a belief or an observation. Something that you think that you’ve seen in the market and when you say that, that’s a tweak. That’s what Darren is talking about.
You’re tweaking the system or thinking about tweaking a system that you’ve been trading out of the box because someone so trades it or whatever. That’s a good sign, usually, if it comes up for the right reason.
In other words, it’s not a good thing if that happens because you’ve had five listening trades in a row and you feel like it’s time to tweak your system when the market has changed.
I don’t think that’s necessarily a good reason to change your system. I think the old excuse that the market has changed that’s used way too often and it’s often not true.
What I mean by that is, yes, the market goes to different phases and that’s true. Your system may not survive as well, may not do as well when it goes to different phases, but that doesn’t mean that you need to break down your system and throw it away or completely overhaul it.
What I would say is really think about the way that you’re approaching your trading. If you start to say things like “yeah, but I’ve noticed that it always does this” or, “but when this happens, it usually means that” or, “I really think that when I see this, I need to adjust my stop”.
If these sort of things are coming into your thinking, that’s good. It means that your beliefs are sipping into the system and you need to incorporate those in your system, that’s the only way that you’re going to trade it long term.
You will not trade the system long term if it doesn’t map onto your beliefs system. I know that sounds crazy to some people because you think “I can just follow what someone so is doing because he is making money with it. Why wouldn’t I just do what he does?”
The reality is that eventually you won’t be doing what someone-so-does. In the end, you’ll be doing what you do and that’s a good thing. I would definitely try and figure out why it is that the support and resistance system isn’t working for you.
Is it because you don’t believe in it? Maybe you could use it as an exit as you say, Darren. Maybe there’s something going on and you feel like it’s so critical that you must use it for whatever reason which is obviously not true, maybe moving average is what you can use or maybe just pure price action.
There’s so many different choices but, certainly, it sounds like support and resistance is not really the thing that you would want to build your system around. It’s like building your house on a sand dune, it’s just not a good foundation given you’re already questioning it at this level.
Darren: Yeah and the tweaking thing, it’s got a negative thing around it, isn’t it? We’re told that we’re not allowed to tweak and that’s kind of box traders in. They feel maybe his style of learning support and resistance feels that he has to stay within like certain notion and rules about what’s right for it’s support and resistance. You can tweak it, like you say.
We’re told we can’t use our emotion as well. I think you’ve got to see what emotions — if you’re not feeling confident for an emotional reason — and you need to discover why that is. Find somewhere you’re comfortable trading.
To get there you have to tweak things and experiment, try things, come up with your own rules and your own ways to do that.
Walter: I have a couple questions for you, Darren. Have you, like looking back, are there certain major tweaks that you’ve made to your systems over the years that you can point to and go “yeah, then I started doing that”.
For example, “… and then I give up on their trailing exit and I started using…” you know, whatever. What can you point to?
Darren: With reference to support and resistance, when I first started trading support and resistance, I used the marker swing points like we do. We look for the weather markets turn around.
Then I thought “well, hang on a minute, you have a swing point on every bar so surely the high of the last bar and the low of the last bar are support resistance as well”.
I went on from there and said “well okay, so there’s support and resistance on every high and low, if you go up a timeframe then that high and low should be more significant support and resistance than the ones contained within it.”
For instance, the low of a H4 bar, if H1 has trended down to the bottom of it and turned around then that stopped a H1 trend, if you like. So I start grading highs and lows of individual bars rather than swing points.
If you look at swing on your charts, — if you look at swing high and low where price turn around — I’d say, on a sixty-minute chart, and then go and look at daily chart of the same period then you’ll see it’s just one bar with the resistance at the high of the day and a support at the low of the day.
That’s just something that I made up in my head, really. That’s how I traded support and resistance for a long time.
Walter: Yeah, that makes sense. My other question is do you use your emotions in your trading? I guess, for the listener, what would be something that you could do in order to use your emotions in your trading? What would be something that you might suggest? I’ve got some ideas but I’m just curious what yours might be.
Darren: The one that jumps to mind is now I can read myself when I’m feeling — this week, for example, when I was having a tough week — I could sense those feelings in me where I wanted to go off plan.
I wanted to change my management rules on the fly, if you like. So, I’m in a trade and I’m thinking — I know, I don’t normally move to breakeven — but I think it’s a good idea. Now, I just recognize the feeling and it’s like “okay, I’m getting that feeling.”
Pretty much anything I decide to do, those outside my usual plan, is probably going to be a bad idea and so it’s just kind of you get to the point where I recognize this feeling and I know that it’s going to lead me to make mistakes. Any decisions I make, just be extra careful thin, them through, see if you’re doing what you plan to do and kind of reading yourself in effect.
Walter: Absolutely. And that seems to come up a lot in trading.
Darren: Something else that helps me is that I share my trades with other traders. I put stuff on twitter. I put stuff on the nakedforex forum so I get that extra level of accountability. When I’m getting those feeling as well, know how much I want to do, I’m thinking “well, someone is going to pull you up on this and you’ve got to explain yourself later.”
I’m not wanting to look bad because I’m sharing stuff with other people so it goes back to that thing of: I have a trading buddy, or being a part of a forum, or I see some trader who keep detailed journals.
Everyday they post the charts with their entries and exits marked on and they’re putting themselves out there, laying themselves bare and saying “look, this is what I do when I’m trading in this day.” That helps dealing with the emotions, as well.
Walter: That sounds good. You talk about how you’ve had issues when you were on the fear, when you were on the drawdown. When you’ve had a few losers in a row, does the opposite happen when you have a streak of winners?
Is that something that you find yourself dealing with your emotions there? You’re trying to want to go off peace as you said when you had the losing streak last week, you kind of felt yourself being drawn to a new direction which is off your plan. Does the same thing happen when you’re on a happy spot or in a greedy spot?
Darren: Yeah, and I’m actually much worse in dealing with that one. I’m much more likely to make a mistake on a winner than I am on a loser. Say for instance, if I’m having a losing spell I’m much more likely to be able to read the emotions, deal with it and stick to my plan. That, over the long term, seems sees me alright.
If I’ve just started the week and I’ve got some really big winners and I’m much more likely to pull out of the trade early and kick myself for it. I still do that a lot and it’s one side of my trading I need to work on still.
Walter: I think with emotions, this show up to me in the open position and you can see these in a lot of brokers. They’ll tell you what the open positions are and I think that when you see, for example, ninety four percent of the traders are long the EUR or whatever it is.
To me, that’s a really good parameter of where the market is. Is it in the fear mode, or greed mode? It’s usually not really in either one. It’s usually somewhere in the middle but you can use the same parameter with yourself.
If you’re watching the charts and you’re thinking “there’s no way, this is going to turn around. This is going to keep going up. The GBP is going to keep going up. Look at how strong it is.”
Usually at that moment, I start trying to question “okay, now let’s see. So I’m convinced that it’s going to keep going up forever, does that mean that this is the end?” Because, and usually, this is a good exercise.
You can do this on the lower timeframe charts. You can watch the one-minute chart tick by and when you get to that point where you think “okay, it’s definitely in a downtrend now”, see how often that ends up being the turning point.
When you’re absolutely, one hundred percent convinced that that is where it is going to “that’s it, it’s going to go down, down, down.” It might turn around there and go up.
Now this changes, I think, as you get more experienced. Certainly, in the beginning it’s a really valuable tool that you can use. Your emotions can almost flag what the market is doing because you feel all that fear when the markets… “It’s not going to go down anymore, it’s actually going to turn around here”. You feel all that greed when it’s not going to go up anymore and turn around.
As you get more experienced, it’s muted and you start to lose that because you’re aware of these things but in most cases, if you’re new to trading this is really a valuable thing that you can use.
I remember thinking this — I don’t know about you, Darren — at some point when you first start trading, you think “you know what? This is crazy, why don’t I just do, the opposite of what I want to do?”
I’m losing money so consistently. The next time I say “I’ve got a buy signal on the EUR, why wouldn’t I just sell?” and so forth and these are the sort of thoughts that I’m sure are not unique to my head. Did you ever think that when you were first trading?
Darren: Yes, certainly. That’s why I used a system where the entry doesn’t matter anymore. In my mind, the reason you’re getting wrong is probably not because you’re picking your wrong entry but when you get the right entry, you’re probably making the wrong exit.
That’s the way I see it. That’s why I moved to pretty much any bar being an entry and just teaching myself just to take the entries. Number one rule in my trading system, take all the entries and you’ll be okay.
Obviously, you’ve got to make the right exit decision as well but you can structure that. You can have at the bar close you have to do a, b, or c and then you make your decision. The next bar close you to a, b, or c and you built a structured system. That’s one way of dealing with it.
Walter: That’s right. I guess, the message here is that, we can use our emotions that can be viable for our trading systems. This is something that you can certainly do. You want to make sure that your beliefs match your trading system.
Just because people say “you can’t tweak your system, you’ll gonna stick to your rules, you’ve got to figure out what your system is” and then that’s it. That’s not necessarily true.
I agree with Darren. I think you should embrace the changes that you make to your system. The caveat is if you’re always changing your system, there’s something going on there because you’re not really settling in on something and that maybe part of the problem.
In general, what should happen is you get a seed of an idea from somewhere and then you build on that. You create that system that fits your beliefs and really maps onto your beliefs. That’s the way that you’re going to be able to trade long term.
If you can come to grips with the fact that you’re beliefs are going to dictate how you trade and you can incorporate those into your system, you have a chance at trading a system long term.
If you don’t, if you’re always fighting that, if you feel like you’re doing the wrong thing because you’re not trading exactly as guru trader Tom does or whatever, then it’s probably that’s when your mind start spinning your wheels.
I would definitely encourage everyone here to question what they’re doing, what they’ve been told by anybody. Make sure that you identify what your beliefs are and you incorporate those to your system. So if it’s like Darren where it doesn’t matter, the entry isn’t really that important and all the emphasis is on the exit.
If it’s like me where you say “look, I’m looking for those swing, those support and resistance areas that seem to pop up on the charts”. If you’re looking at price action patterns you think are reliable, whatever it is — MACD, Stochastic, I don’t know, whatever you use — make sure that it makes sense to you and it’s you. You’re the one who’s doing it and not that you’re trying to copy somebody else.
That’s going to be your ticket to long term consistency. Find something that really makes sense to you, those are my closing thoughts. What about you, Darren? Any closing thoughts?
Darren: I think you summed it up perfectly well. The only thing I’ll add is is just look at me and Walter, we basically break each other’s rules completely. We come at trading there in completely different perspective and we both seemed to get a certain amount of success doing it. Anything is possible, be open-minded and try some new things.
Walter: Exactly. Don’t let anyone tell you that you must do this. As soon as they say that “you must do this to find profits in trade”, I would just turn them off. Turn them off and walk away.
Walter: Alright. Thanks, Darren. We’ll see you next time.
Darren: Okay, Walter. Cheers!