In trading, one of the greatest things that you can do for yourself, in my humble opinion, outside of having good solid risk management is having a methodology or a set of rules that you non-negotiably obey.
Now, what are these set of rules? These set of rules, realistically, should be designed to force you into finding success.
Doing what you feel?
Oftentimes we will analyze the market and we kind of just do what we feel and, realistically, doing what you feel and following your gut inside the investment markets can only take you so far. Normally when you can follow your gut in business or you follow your intuition in your life, it can take you to the next level. We realistically haven’t seen anybody get taken to the next level when all they do is follow their guts because there is emotion involved when it comes to trading. So having a good solid methodology, having a foundation, having a set of rules that you obey, non-negotiably like a constitution, some people call them trader’s constitutions is designed. My four rules are very basic. I get made fun of all the time about them, but they work really well. The high level, the market can only go up, the market can only go down. So you can only buy and you can only sell in the futures market which really means if you were to close your eyes, put a blindfold on and flip a coin, you have a 50% chance of being right or wrong if we just simply guess.
I follow four rules that can help me be right more than half the time and help me avoid drawdown. (Drawdown: The market goes against you before it goes for you) . So rule number one, buy low in the buy zone. How do you buy low in the buy zone? Well, you got to first find buy zones, sell zones. How do you find buy zones, sell zones? You can do it through a trend line.
This trend line is designed to help us do three things.
- Divides the market into buy zone, sell zone.
- Gives us speed. How fast or how slow is the market waving?
- Gives us the opportunity and helps us find the U-turns.
Rule #1 – Buy low in the buy zone
You can see here since June of 2020, the market has U-turned one, two, three, four, five, now six times on this uptrend angle. So therefore this is a very, very rock solid hand-drawn trend line. So anything above the blue line is considered the buy zone. And naturally, if we just buy low prices in the buy zone, we will be able to stack the odds in our favor because why? If you would’ve bought anywhere, realistically, until most recent, if you would’ve bought anywhere above the blue line, more than likely you’re making money over time.
So if this bullish trend continues, it’s not unreasonable to say, hey, we should continue to go up. The only way that this market can realistically go down is if the market breaks the overall up trend line. And if the market does break the over up trend line, this means the overall structure is no longer valid and rightfully so if a trader is to buy, they should lose the trade then, right? So what I mean by that is if you have been buying above this blue line and you are losing trades, essentially you are controlling risk, which is a good thing, but you’re also losing when you’re trading in the right direction, which can be very challenging. So we want to follow the rule number one, buy low in the buy zone, right? So buy low in the buy zone.
Rule #2 – Sell high in the sell zone
Rule number two, sell high in the sell zone. If by chance the market were to break the up trend line, enter below it, we enter into the sell zone. So, therefore, we no longer look to buy. We will then look to sell. Right now, we haven’t been selling for a very, very long time, essentially because the market has been very bullish across the board.
Rule #3 – Do not buy high prices
Number three, do not buy high prices. So as the market is making higher highs and higher lows in the buy zone, whenever we see a high price in the buy zone it normally means the overall extension has ended and the market’s going to retrace because the natural wave movement, ebb and flow, is the market’s going to make higher highs and higher lows as it’s pushing the buy zone. And that doesn’t really just push in a straight line as much as we like to. So when we look at this and we kind of see what’s happening right now, most recently, this will be a high price that you would want to avoid buying. This will be a low price you’d want to look to buy.
Rule #4 – Do not sell at low prices
Number four, do not sell low prices. Whenever the market is at a low price, you, realistically, do not want to sell that because the move is already over. So once again, number one, buy low in the buy zone. Number two, sell high in the sell zone. Number three, do not buy high prices. Number four, do not sell low prices. You can find high prices, low prices through trend lines, Fibonacci, support resistance, and so on and so forth. Now, people say, “Oh, duh, Josh, buy low and sell high. That’s how you make money.” Agreed. It is. So you should listen to it because it’s very easy. So what does that mean? Sometimes we have these rules and what can happen is we have our timeline but then there’s the market timeline. And what that means is we can see how the market is making higher highs and higher lows at this blue level. And according to the rules, looking to buy a low price in the buy zone is a very optimal, high winning percent opportunity.
And according to the research, there’s the Fibonacci on here, but according to research, the market is expected to go to 13954 which is nearly 4,000 ticks away. And the challenge is actually listening to that because in our minds, we can say, we want to enter in today and we want all 4,000 ticks today. Probably not going to happen today because it takes economic events, fundamental announcements, a crisis, something to really move the market 4,000 ticks right away. So realistically, what’s going to happen here is it’s going to take a couple weeks, right, for the market to drift up. And the job here, we want to follow these four rules is number one, recognize we’re in the buy zone. Number two, recognize we’re in a low price in the buy zone. Number three, recognize that we are near a known level of U-turn. So if the buyers are going to take control, the market should go up relatively quickly. What we really want to do is we want to go to a one-hour time frame, and we just want to wait for the market to get into the buy zone.
So this is the one-hour time frame, which means every candlestick represents one hour of trading. And what happens is you’re going to have more candlesticks. So when we were just looking at a daily time frame, every candlestick represents one day, and a little bit more of an easier view of the market. But once you look at a one-hour time frame, you get these more candles. So in the futures market, it’s about a 23 hour a day market from Sunday, opens up at 6:00 PM Eastern time, then it closes on Friday. It closes at 5:00 PM Eastern time, but throughout the day, it’s open from 6:00 PM to 5:00 PM, so 23 hours a day. So we literally have 23 times the candlesticks off of the one-hour time frame as opposed to the daily time frame on average per day. And so what we see here is we see the market is still in the angle that’s falling. And one of the things that we want to do is want to make sure that we’re not falling in.
The curse of knowledge.
The curse of knowledge just means that you’re so smart with forward predicting what the market could do, you do not wait for the entry. I’m going to go ahead and draw this out. I like drawing this concept out because it does make a lot of sense. So this is going to be an example of the daily. And let’s just imagine that on the daily time frame, the market is making higher highs and higher lows. And what we’re going to do is we’re going to draw an up trend line, like so, okay? And so traditionally what we want to do is we want to look to buy the market near the bottom level, that’s a very smart idea. But the thing is we don’t want to just buy the market just because it’s low because, like it or not, the market has been going down and sometimes, now this is daily time frame, it could be like three days, four days, five days, 10 days, the market is retracing 12 days, the market’s retracing, and that means the sellers are still in control.
And you’re smart enough to know, hey, when or if the market comes near the up trend line, the market normally U-turns on the way up. And if you buy the market before the U-turn, you do subject yourself to drawdown. Oftentimes what happens is if somebody buys this, the market will go against them a little bit more. And then they either invested too much money and so they will close out with a loss because they can’t stomach the drawdown, which means the market’s going against them, or two, they second-guess themselves and they close out, or three, structure actually reverses and they lose. So what we want to do is we want to buy the market as it’s going up. Let me go ahead and put this in a different color. So as the market is going up, we want to be able to buy this. So how do we do that? Well, one of the things that we can do is if we were to focus in on this bearish retracement, and if we were to go to, let’s just say, if we were to go to, over here left-hand side is daily, we focus in on this, we go to a one-hour time frame, because there’s 23 times the candlesticks off a one-hour time frame, more than likely we’re going to have a bearish trend off the one-hour.
And if we can stay focused and just say, hey, whenever the daily retracement, which is now a one-hour downtrend because there’s more candlesticks, whenever the daily retracement is over and the market begins to U-turn, it’s going to have no choice but to break the down trend line on the one-hour. So if we can just say, hey, let’s buy the low prices in the one-hour time frame when the daily is at a low price hitting an up trend line, those are usually your best trading opportunities. And that’s kind of what we have going on here with NASDAQ. So with NASDAQ, we do have the market on the daily time frame at an uptrend angle that’s been U-turning the market since, realistically, June of 2020. And we’re pretty much right here. And we’re expecting the market to go up nearly 4,000 ticks. And so what we’ve got to do is we have to go to the one-hour time frame and if the one-hour time frame can break into the buy zone, then we can look to buy the market.
Buy in the buy zone
So we’re going to wait for the market to get into the buy zone, and then we can apply our favorite entry strategies, up Fibonaccis kind of trend line breaks, support resistance, tunnel trader, destination trader, you name it. We just want to look to buy in the buy zone and that begins to stack the odds in our favor. Now, you may say, “But Josh. I’ve been trying to buy this market and the analysis keeps changing.” Well, yeah, that’s going to happen, not all the time, but it does happen. And the fact of the matter is we have to push the formula through. And that’s why having these rules is so dang important plus with good risk management. What do I mean by that? Well, frankly, we’re going to look to place 10 ideas, okay? And of the 10 ideas, 3 by default are going to lose. So doesn’t matter how good we are. It doesn’t matter how much time and effort we put in here. The expectation is we’re going to lose 30% of the trades no matter what. We place 10 trades, we’re going to lose three no matter what.
Oftentimes we’ll lose three or four. But what we’re trying to achieve is we’re trying to win 6 out of 10 trades, 7 out of 10 trades. And with good risk management, you place 10 trades, you win more trades than you lose. And then when you win you physically keep more money than you risk. And that is a winning formula for success, success over time. And so you may say, “Hey, I lost a couple trades trying to buy the market towards this level.” Well, that’s going to happen. But when the market begins a U-turn, if you can have a focus on here and you can make the lion’s share of these 4,000 ticks, let’s say you make 3,000 ticks, I’m pretty sure those 3,000 ticks will make back any of the losses that were experienced along the way, if you do this right. And so if you’re new to trading, risk management is the most important thing to trading. And what I mean by that, and I don’t think people really explain it well enough. They say, “Well, don’t risk more than you lose.“
Have the mindset that you’re going to lose 30%
Well, I’m referring to saying, have the mindset that you’re going to lose 30% of your trades anyways. So what does that mean? It means if you’re risking 20% of your account every single time you place a trade, right? And you lose three trades in a row, you lost 60% of your account. Game over. It’s not going to work for you. There’s no success long term. If you risk 10% of your account and you lose four trades in a row, okay? You just lost 40% of all your money. And again, emotionally, you’re going to be devastated by that. But if you’re risking, let’s just say half a percent and you lose three trades in a row, you lost 1.5%. And with good risk management, you make that all back plus profits. And you may say, “But Josh, that’s just not enough.” Okay. Well, there’s two types of people in this world, okay, when it comes to trading. There’s the person who’s trained and educated, right? And they know risk management and they decide not to listen.
And there’s the other person who’s trained and educated and they know risk management, but they do listen. I think most people start out being number one. They educate themselves. They fall into the trap of curse of knowledge. They know about risk management but they choose not to listen. And what ends up happening is they always say the same thing. “I was doing really well for a few months and then I lost all my money. Oh, I was doing well a few months then I lost all my money.” And they’re never really getting ahead. There’s moments of hope but because they’re risking 5%, 10%, 20%, 50% of their account, 100% of their account in a single trade, they’re always blowing up their accounts.
But then person number two, they’re actually following risk management. They’re making money over time. Just their biggest complaint is, “Hey, I want to make more. I want to make more.” But the solution is going to be time because if this person can continue and they’re making money over time and they compound and reinvest, maybe even add to their accounts, then they can make all the money in the world as they grow.
Most investors, most traders would agree. You make more money over time versus one time.
All right, this week’s idea is going to be NASDAQ 100. We’re at an uptrend angle of the daily time frame. According to the Fibonaccis, we’re looking for a 4,000 tick rally towards north. We are waiting for the one-hour time frame enter into the buy zone. Once we get into the buy zone, we can start applying the buying techniques. This is Josh Martinez. Have a wonderful day and we’ll see you next week. Hey guys, if you enjoy this video and you want to stay up to date to my weekly content, go ahead and subscribe to this channel, tradersagency.com. If you want to be notified every time I post a video, go ahead and click on that bell down below. If you want even more information, don’t forget to visit my website at tradersagency.com and subscribe to my free weekly newsletter, where I send out my research on market opportunities. Thank you for the opportunity. Have a wonderful day.