If You Only Have $50, Do This Every Morning (The 3R Rule)

You know over the last two decades I've been consistently making winning trades that look like this. Right from the opening bell using only one trading setup. But long before I was ever able to get close to those types of gains, I traded this very setup every single day of the week risking no more than 20 to $50 per trade. You see, one of the hardest lessons I ever had to learn as a trader is that the more I chased money over method, the more I got smoked. And eventually after getting smoked for what felt like a few hundred gazillion times, I would come to the realization that if you can't make $50 consistently, you can't make $50,000. And the only way that you can ever become consistent as a trader at any level is you have to have a definitive edge, you have to learn to execute that edge to perfection, you have to keep your risk small at all times, and you have to focus on becoming consistent first before you ever think about scaling up. Because here's something that's weird about trading. The same repeatable process that you master as a one-figure trader will be the exact same process you'll be using if you ever become a six-figure trader. The numbers may change, but the process never does. Now, my name is Doug and I've been day trading now for 26 years. And in today's video, I'm going to take all of that experience and show you exactly what I would do if I had to start all over again from scratch. From the type of strategy I would use, the risk I would use, the assets I would trade, exactly how I would scale up from a one-figure trader to a six-figure trader. Let's go ahead and get started with today's video. All right, my friends. The goal of today's video is to teach you the following. Number one, how you're going to start trading from here on out with the lowest risk possible, regardless of whatever your account size is. Number two, how you're going to start targeting larger gains using something we call the probability factor. Number three, how you're going to start scaling up methodically and effectively by using something we call the Wall Street Raze. And number four, what assets offer you the best opportunity to start trading on with just $50 worth of risk. And of course, as this video goes on, I will continue to show you a series of live examples backing up all of these theories. Now, right before we jump into that, I want to show you a huge mistake that most traders make when it comes to effectively using risk versus reward. Because I'm sure you've seen your fair share of YouTube videos and other types of educational material that tell you at all times you must trade with a two to one or a three to one risk versus reward, also known as RR. Now, they're not wrong, that is important, but it's also incomplete. So incomplete, it's probably costing you a ton of money right now, or it's certainly going to give you a huge headache and cost you a ton of money in the future, and that's what we need to deal with. Because here's the problem. One of those is controllable and the other is not. And the one that is uncontrollable, that's the only one that matters. That's the one that will either keep you in this business or kick you out of it, and that's the one we need to focus on. Let me show you what I'm talking about right here on a chart. So let's first talk about the controllable part, which is the risk part. And here's the thing, anybody anywhere in the world trading any asset at any given time of the day at any market can make a trade with just $50 risk. I can look at an asset like this and go, "Wow, this is a really bold blue candle. Looks like an opening range breakout. Looks like it's a rip to the moon. I want to buy this thing." And I can just smack the button, market buy, and just drag my stop loss down until I see 50 bucks, right? Just like that, pretty simple. I can control that part. Obviously, the part I cannot control is I can't make the market I'm trading give me the three to one, which in this case would be like 150 bucks, Up, up there, right? That's the part I don't know, but the risk I do. Now, there are two problems with both of these. Let me give you those with risk first. The problem a lot of us suffer with when it comes to using risk is we do what I just did here. We base it on a monetary number, like 50 bucks, 100 bucks. I used to do this all the time. Like, I only want to give up $100, and I'd use $100 of risk. But, here's the thing. It can't be just monetary. It has to be structurally located. Your stop loss must be in the right place. If it's not, this is what happens, and you know what it is. If you don't put it in the right place, you become vulnerable to that right there. Instant stop outs, only to see the asset start to trend in the direction you thought it was going in the first place, and now it's running without you, and that is frustrating. So, rule number one here is your stop must be located in the proper area. Number two becomes the reward. So, let's go back and let's take a look at this trade. When you make a trade, not only do you have to make sure you accidentally don't get stopped out, you have to make sure that the reward you're looking for and the risk that you're taking is worth it, and the market that you're trading actually has the ability to deliver this to you. And this, again, is what I feel most traders struggle with the most and don't really pay enough attention to it. you don't believe me, let me just ask you this question straight up front. How many times have you been in a trade and you said this? I wish I would have held. How come you didn't hold? And I'm not casting judgment. I did it, too. How come we don't hold? Now, there could be a lot of different psychological reasons as to why, but most of the time it's either we don't trust the process or we're just not sure that the reward itself exists because sometimes it's unrealistic. So, in a case like this, getting a 3:1 is kind of unrealistic here. It tries to move itself up, but after spending several hours just failing to reach that level, it finally pukes towards the end of the day. And here's the thing we're going to talk about now. There's a way to figure that out right there in a simple manner. There's a way to figure out that that was never going to hit that threshold, and that's what we're going to talk about is something called the probability factor. It will help you enhance your risk reward formulas. And the probability factor revolves around three important things. Number one, understanding the trend bias of the instrument that you are trading. Number two, understanding where the premium, hence premium liquidity zones are located on the chart that you're trading. And range. Does the asset have enough value for you to actually make money? Now, let me show you exactly how you're going to use this three-step process. So, the first thing that we're going to talk about is the trend bias. Now, we need this for two reasons. Number one, we need to know who is in control of the chart on a midterm basis because that's most likely who's going to win out. When I say who's in control, I'm talking about buyers versus sellers. That's the side that we want to be on. The second, which is the most important thing, which is what this video is about, is the reward. That's the side we want to be on because that's where the big rewards come from. The three, four, five, six to one type of rewards come from being on that side. So, here's how we set this up. The first thing you want to do is take whatever asset you're trading, I don't care what it is. Just for reference, I'm going to start this video out with T S L L. This is an ETF that mirrors the movements of the stock Tesla. We're going to talk about ETFs here in a little while. But what we want to do is take whatever we're trading and move it to a daily chart. And now you'll have a series of daily bars. Once you've done that, all you have to do is simply come up into your indicator menu and find the indicator simple moving average. Click on that and it'll lay a line over top of that chart. Let's kind of open that up where everybody can get a good look at it. And then from there we just want to make sure that that is set to a 50-day period. So there in the length type in the 50. Maybe it automatically sets it for you, I don't know. No other filters need to be done and click it. And now the line will be adjusted. So here's what we need to understand at least at this point in the video. Why do we need the 50-day moving average? What does it tell us? If the price of the asset we are trading is above the 50-day simple moving average, it normally means that buyers are in control of that chart. So what we should do as traders are the following. 80 to 90% of the trades that we're thinking about making for that day should be to the buy side or the long side. If we take our long positions, they should be at full risk because that's the side of the trend regardless of what the intraday structure may look like. We want to be aggressive with the targets on the long side. This is where we're getting those three, four, five, and six to one types of targets. Now if we choose to go the other direction and we short an instrument that's trading above the 50-day moving average, in theory, we are contrarian trading. And when you contrarian trade, the general rule is to begin with smaller position sizes and focus on taking scalps only. So if you're new to trading, the term scalp means a very, very short-term trade, like 30 seconds, 1 minute, 2 minutes. Everybody has a different definition, but it's a very fast in and out trade. The best strategies that work in this situation are breakout trading and dip reversals. They are the best types, and those are the strategies we're going to look for. We'll talk about that in a minute. Now, on the flip side of this, if the asset is below the 50-day moving average, we're taking that same process and just flipping it around. So, 80 to 90% of the trades that we are looking at should be sell-side oriented, meaning short sell positions. Our short positions should be using full risk because that's the side of the trend. We should be very aggressive on our targets if we're short selling. And if we decide to go long on an asset below the 50-day moving average, that's a contrarian trade. So, we want to be smaller with our size, focus on short-term scalps only. Strategies that work best in this are breakdown selling and top-side reversals. Now, let's move on to the next part, liquidity zones. On every chart, there are four major areas that hold all the keys to what you need to know to capture the biggest trades. And they are the range high, range low, swing high, and swing low. I'm going to show you here real quickly how you're going to set those, too. So, what we're going to do is come back to the intraday 5-minute chart here on TSLL. If you can look up here, I now have the 5-minute chart selected. And what I want to do is first define something called the range high or the range low. Now, it goes by different names, but that's what we're going to call it today. The range high and the range low is the previous day's high and low price of the asset you're trading. So, if I kind of move over to the left and I see this black shaded area, this is the previous day's trading activity for TSLL. All I want to do is just lay a line on the highest price I see and a line on the lowest price that I see. And those two represent the range high and the range low. Next, we need need set two additional lines, the swing high and the swing low. The swing high is the next high above the range high. So, here's our range high, we just scoot over to the left until we bump into the next level. Now, this doesn't matter where it is, it could be the previous day, two days, five, 10, 12, 25, go far back as you need to go until you find that level. Inverse relationship to the bottom, we want to go from the swing low, the range low, excuse me, and find the swing low. We're going to keep on moving back and in this case we do have to go back a few days and we want to lay another line right there. And that constitutes the range high, the range low, the swing high, and the swing low. Now, what you need to know at this stage of the video game, we're going to tie all this together here in just a second, but the most important thing to understand is that the upper level represents the strongest sell side force. This is where your highest and most influential sellers are located, and the bottom is where the most influential buyers are located. So, for right now I would what I want you to place in your mind is we're going to try to sell here and we're going to try to buy here. So, just kind of add that with step number one. The last is determining something called range. I've done videos about this before, but range is a way for us as day traders to snapshot value. For this I'm going to come back to this daily chart. I'm going to go into my indicator menu and look for the average true range indicator. And I'm just going to click it like that. It's going to give me a line. Again, much like the 50-day moving average, no filters are needed here for this either. So, we're going to come over here and you're going to see it lays a line on the bottom of the chart and over to the right here you're going to see a number. In this case it's about 6970. That means 70 cents per share. So, if I am trading this TSLL, my value in this is either 70 cents to the upside or 70 cents to the downside. That's my expected value or my my expectation when it comes to targets in trading. Now, anything can happen at any given time in the market, but these are our baseline rules that we're going to follow. Let me show you how when you tie all three of these together simultaneously, you create one of the most incredible trading opportunities via risk and reward that you ever will see. So, let's go back to our intraday 5-minute TSLL chart. We're going to tie all three of those together and decide what is the best trade you and I should make. So, first let's say we're just looking at this chart. We're just paying attention to intraday structure only. Correct me if I'm wrong, this looks like a breakout to me, right? You broke the top of the early morning range, got a couple of powerful blue bars moving up. This looks like a buy. But, not so fast. What did we determine from the 50-day moving average? That TSLL is below it. We should be thinking sell, not buy. The second thing we should take a look at here is the range high and swing high. Note that the current price of TSLL is much closer to the range high and the swing high than it is the range low and the swing low. So, what this means is it's probably going to be stuffed or sold or an attempt to be sold is going to take place somewhere in this area. Now, let's say you just can't help yourself. You have to buy it. Let me show you the downfalls of doing this. So, let's just say I panic, man. I'm chasing this bad boy. I got to buy it. Well, the thing about risk that we discussed early is what? Risk can't be just dollar amount. It has to be structured amount. And in order to prevent that we don't accidentally get stopped out like we did in the first example, our stop loss should, technically, if we're using technical analysis, technically be placed below the low of the day, the strongest buyer. That's where technically it should be. Which means in order for us just to get a simple two to one, we need $400 of profit here. That's a big move. So, is it really unrealistic? Well, if we come back here and we take a measuring tool, what's the next piece of the puzzle? Range. Here was the closing price. It's already up 33 cents on the day. Now, that's not extremely overbought, but you've chewed up a pretty sizable amount of the 70 cent range. But, here's the thing. In order for you to get all the way up there to get that target, you've got to be a dollar 10. That's way more than the 70 cents of range. So, you need more than a 100% range move to get your target. So, you guys are probably smart enough to know that doesn't work out mathematically. That's no way to run a trading business. You can't risk that much. So, what you have to do if you're itching is you have to take such a tight stop like this, which causes you to what? Choke your reward because you're most likely going to get tapped out. Now, again, the danger of doing this. You can certainly do this. It works at certain times, but is it really where you want to lay your chips down? Now, let's just go ahead and play it through. Let's go ahead and play the game. You'll see in this case it actually did pay out for you. But, over the course of time, what you're doing is you're condensing your risk versus reward. Now, let me show you something a little bit different, a little bit different way to do this. Notice you move here later, about an hour or so later, the inability of TSLL to dispatch of the upper swing high. Note the seller continues to come back and compress TSLL. So, we know we want to sell. We know we'd like to sell along with the regular sellers. So, if we choose to sell with the sellers up here that are compressing the chart, let me show you something completely different. If I sell here, my stop can be just placed right above there. Look at the amount of risk I'm taking. Now, this is the same 45-50 bucks that we took back here, but the difference is this is structurally correct. This one was not. We almost got stopped out right there on that red bar. But, here's the beauty. The target on a trade like this should come back down to the early liquidity in the morning. So, when you're looking at something like this on a measurement, the risk versus reward in this case is somewhere on an outstanding amount of like 4:1, right? So, if I kind of move this over, this is the beauty. Now, up in this kind of situation, you're going to actually risk more since the risk is so tight. So, if I play it through, what ends up happening is takes a little while, but sometimes they do, but it eventually makes itself all the way down to the base of that range. The only reason that trade was possible was tying those together. You should have been thinking sell in the first place. You should have known the range was close to being tapped out. Definitely was as soon as it got to the top of this range range high and swing high. Was definitely much closer to that 70 cent threshold. And when you tie all those together along with the liquidity zones, now you got something that's pretty special. Now, this is exactly what happened here today in something like the YM, for example. This is the trade we were talking about in the squad room. Same kind of principle. This looks like one hell of breakout. Like this thing's just going to the moon. But, look where it is. It's backed up against the previous day's liquidity. And not only that, this thing has gone on a non-stop run all for 981 points, when the current ATR on the daily below is 600. So, this thing is hella overbought on the short term. And one last piece of that puzzle, here's the 50-day moving average. It's below that. So, I'll just point-blank ask you a question. You tell me what I know it looks good. I know it looks like a flag. You tell me what what are you going to do here? What do you think happens to this instrument? It's going to get plowed, right? It's going to get plowed. Not because it's bearish, right? Not because everybody hates the market, because you have those three components. You're trading underneath the 50-day moving average. You gapped up so high into the previous day's liquidity zone, and you're already two times range in a non-stop movement. You tie all those together, the value is not to the upside, the value's to the downside. Let's talk about this, Wall Street Raze. Like I said there in the introduction, the same tactics and strategies that you use as a one-figure trader will be the same you use as a six-figure trader. You just need to scale up. I think you guys know that, too. But here's what else you know, because I went through this, too. We tend to scale up too fast. I remember in the old days, I'd have like two winning days, and I'm like, "I'm a pro, dude." Then I just start leaning into everything. I also don't understand, still don't understand to this day, how come the first time you try to scale up, that trade's always a loser, right? I don't know why. So, we have to kind of prepare for that. So, for today, I just put a quick guide. This is just a hypothetical guide to get you started, because you need to be more aggressive early, I mean, more structured early, more aggressive later. So, on this chart that I have, let's say you're starting out with a $5,000 account balance, and you're trading 50 shares. Again, this is hypothetical, you won't always trade 50 shares. But for every 10% account growth, which would be 500, that would be 55 total account balance, I would add 10% to my share size. So, I'd go from 50 to 55. And I'd work my way on down the line. What I want to say about this is as you grow your account maybe past the 30% threshold, you can be a little more aggressive. This is a very conservative mock-up plan for it. But in the beginning, you need to establish consistency first. Like 3 days out of the five each week you're profitable, then you're slowly scaling up to condition yourself to handle the rigors of trading. That way you just don't just say, "Oh, I'm going to just quadruple my size." And that's a bad trade and you get blown out of the water. Now, obviously a mock-up like this has issues with if you have a huge account. If you're starting out with a $300,000 balance, 10% is a lot. You don't have to wait that much. What you should do in the beginning is trade as small as you can. Small as to where your heart rate stops pounding around. Make sure you're consistent three out of the five days each week. At least put a couple of weeks together of consistency before you size up. This will ensure that you do it the right way and the right way that will make sure that you stay around for the long term. Now, let's suspend a a minute or so on the assets to trade the way I would go about this if I was starting all over again. I truly believe you can make money in any one of these assets I have listed here. And the most popular ones are stocks, futures, foreign currencies, cryptos, options, and commodities. If I were to start over again, I would start with futures. I believe that futures, talking most specifically about E S E mini S & P 500 futures, Nasdaq futures, Dow Jones futures, are the easiest ones for new traders to start with. Not that you can't make money in the other ones, but the other ones come with far more negatives or problems than trading just futures and here's why. Because the futures allow you as a new trader to make the most amount of mistakes and get away with it. The biggest edge that futures has is futures go up about 80% of the time. So for example, I just did this backtesting research that over the last 15 years if you just bought the spy which is the ETF for the S&P 500, you could accomplish the same thing with the ESE mini futures. If you bought at the open just like punched market, no strategy, no candles, no indicators, you just push the button, you sold it an hour later, you'd make 51%, you'd win 51% of the time. 2 hours later, 53%. A full session at the end of the day, 54%. So if if you're not winning at least half of the time, if you just blindly bought and blindly sold based off the clock and not the chart, you would win more than 50% of the time. That has to be one of the dumbest edges that you can be just basically spoon-fed as a trader. So when you're just doing that, everything else you learn like charts and indicators and candlesticks just just enhances that and creates a much better edge. So anyway guys, I want to thank you for watching today's video. I hope you got some value out of it. As always, if you need help with your trading, you can always get a copy of our free watch list we put together every week. It's down there in the description box. As always, I appreciate you giving me your time today. I hope you learned something. As always, take care, trade well, and until the next video. Cheers.