Profitable trading is not only about generating profits, it’s also about playing good defense. Defend your trading capital.
One of the best ways to do this is to stay out of the market.
Here are 4 tips on how exactly you can achieve this.
Avoid trading if you are feeling emotional.
There is a difference between moods and emotions.
Moods tend to last longer, and are more general, for example, you’re in a positive mood, sing along to songs on the radio and greeting at all the neighbours even if you don’t like them.
Emotions are short-lived, and very specific, for instance anger and disgust.
If you’re in a negative mood, it doesn’t mean you can’t trade, just be aware that you don’t cast your negative mood into the markets and give your analysis a dour view.
Emotions are more easily handled, simply leave your computer and go for a walk or a meal then come back and continue trading once you feel better to focus on trading again.
The main reason for maintaining emotional stability is simple.
You need the heart to continue taking trades and putting on risk even after a series of losses.
Tip: if you experience traumatic emotional events, such as death of a loved one or break-ups, avoid trading for a period of time until you are emotionally more stable.
If you are not feeling well, down with a fever or caught a flu bug, anything which clouds your judgement or affects your mood.
Take a break for a day or two until you are better.
You need a clear head when trading.
Tip: Exercise regularly to keep in good health and maintain a clear state of mind.
Know your trading methodology.
Is your edge in trending markets? Ranging markets? Volatile markets? Slow markets?
Look for markets which suit your edge.
For example, if you lean towards swing strategy, it will help to look for nicely moving charts on the time frame of your choice. ie. the swings are clean without too many overlapping candles.
Or if your strategy leans towards short term trading on volatile markets, look for messy charts with a high percentage of overlapping candles.
If you don’t see a market behaving the way your methodology expects, stay out of that market.
There will be other opportunities to trade.
if you don’t know when your methodology works and when it doesn’t work, it’s time to do some real homework!
Tip: Don’t force a trade opportunity.
Avoid trading into major economic news releases, especially if you are a day trader.
If you are a swing trader, be aware of the major news releases such as NFP or interest rate decisions.
Also avoid trading during speeches, such as FOMC or BOJ meeting announcements or any by key persons such as the FED chairman or BOE chairman for example.
Speeches are particularly difficult to trade in because you’ll never know what the person will say that could cause knee-jerk reactions in the market.
Usually, there is significant lack of liquidity, allowing price to swing wildly both directions, or just very quickly in one direction.
Special events, such as the Brexit vote, are very rare. It is difficult to determine if you have an edge trading into such an event, so my advice to new traders would be to simply stay out.
Tip: Your morning routine should always be to check the economic news calendar and the headline news on your favourite news source like Bloomberg.
There you go folks! I hope these help you learn to identify when you should stay out of the markets.
Play for profit, but guard your downside.
Trade safe folks!