Foundations of Trading Part 1: Preserving Your Capital

This is the first in a series of foundational lessons on the principles of trading. These foundational lessons are relevant to any instrument, time frame or methods that you use.

  • Preservation of Capital
  • Market Structure
  • Andrews Median Line Tools
  • Trade planning
  • Self-Management

We start with money management. Because if you blow through your money you won’t last long as a trader. Money management starts with self-discipline, which is the first thing every trader should begin to foster. Preservation of capital is paramount. If you’re not currently profitable, cut your trading size down; you have to earn the right to size. Always use hard stops, which means, put in a stop order at the same time that you place your entry order. Know your maximum risk per trade, and stick to it. My risk management is 1.6% of my account per trade.

We will talk about Market Structure in the next part of this series.

 

Understanding the Median Line Setup

A Median Line Setup is a a set of conditions that come together in such a way as to allow you to realize your objective. The thing to remember is that the set-up always serves the objective, not the other way around.

As traders, we tend to lean on setups and turn them into something dead and mechanical. It won’t work, plain and simple; there are too many moving parts. The set will use you, without an understanding of price flow and the attendant conditions.  It’s about using your tools, not the other way around.

What Is a Median Line?

In order to trade more effectively we need to have a thorough understanding of our tools. This brings me to the Median Line Set which is a widely misunderstood tool.

A Median Line is the relationship between 3 alternating points. It cannot not, not work. It’s this relationship, between the alternating pivots, that defines the median line. Understanding this relationship yields a deeper understanding of price movement. When you draw a Median Line, follow the movement, not the line. 

What a Median Line does, is take the A to B pivot which are extremes and then project price back to the center from the C pivot.

The Process of a Median Line

Median Lines teach us about price flow and price flow teaches us about median lines. You don’t have one without the other. So we deconstruct a Median Line in order to understand its process.  We then use the process of a median line to  look at the 3 basic types of trade options. The more we understand the process, the more effective our trade decisions. These are some of the underlying principles upon which all trade setups and techniques are founded. When we understand them we are free to create and it really doesn’t matter which technique or method we use.

Market Structure and Mapping Markets

In order to map a market, we need to be able to define and isolate distinctions within price flow. This is market structure and it relates to Median Lines and trading. We are structuring price flow and mapping markets.

These are some of the elements that we learn at Language of Markets and that i go over in the video. We incorporate them into our training and into our trade practice so that they become second nature and in order to learn to read real-time price flow.

  • Swings
  • Components
  • Process
  • Relative structure – major, minor, and bar level

We structure a market by making distinctions within price flow and the process it follows. In this way we can see what is being communicated via the language of price.

Trading a Valley in the CAD

Real trading has to do with simple observation and seizing opportunities, however they might present. I use the CAD to illustrate this by looking at the structure and process of a valley structure and its components, like gaps and coils, which express the principle of contraction and expansion.  I then take you through possible trade opportunities along this process. This is what I do when I trade.

 

 

Learning From One Line

If we want to learn about price flow and trading, it’s best to go directly to price flow itself. By using a simple line we can make observations about how price interacts with that line and allow price to teach us. 

This is one of several One Line practices. It’s meant to enable personal insight and real learning. From this learning you will start to see many ways in which this line can be made functional for your trading. It also teaches you about the dynamics of Median Lines and Action/Reaction.

The instructions are simple: Follow the last 2 relative confirmed swings with a line and make observations as to how price interacts with that line. By isolating the last 2 relative swings, you identify organized behavior in the seemingly chaotic flow of price. It’s an established rhythm. Now you have a way to see if price continues that behavior or if it changes that behavior. In this video I explain this further and practice with a few different markets.

 

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