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Learn To Trade The Market.
T0 TRADE OR NOT TO
TRADE, THAT IS THE
QUESTION? By Nial Fuller and Jody Martens
It sure is! You and I are all too familiar with that all-important
decision of when you should take a trade or decide to pass. But the
question is, how do you choose between these two alternatives
when in doubt and under immense time pressure in a highly
ambiguous trading call? The reality is, it is better to NOT be in the
market wishing you were in rather than being in the market and
wishing you were out.
In life, timing is everything and in forex trading it is no different.
Knowing when not to trade is just as important as knowing when
to trade. The primary rule above ALL others is capital
preservation. Do not let your greed exceed your need. I know how
you feel. You are a trader and you want to trade, you YEARN to
trade SO badly, you want to make pips so badly..... You may drag
yourself out of bed to trade the London open so you feel you
deserve to trade. You sit and wait hours for the perfect set-up so
you think the market owes you a trade......so, what happens? You
enter the market even when an optimal set-up is NOT there,
'hoping' for the best. Jesse Livermore, considered the best trader
of all time, said that the best trade is the one whereby you sit on
your hands. However, if you know his story, even he did not
manage to follow his rule, eventually shooting himself after he lost
everything yet again. This is how difficult it is to not enter the
market even in cases when you know all your trading principles
and rules that guide you would prohibit you going in.
If you were to sit down and document all the mediocre trades you
have taken in the past that were placed on whim, impulsivity,
impatience, uncertainty or greed, how much money would be now
on your trading account? And if you were also to document all
those A1 trades that you did not take out of fear? You would
probably now have a small fortune and would not have had to top
up your empty account over and over again.
The most difficult emotion you will have to deal with is PATIENCE.
It is about curtailing the urge to go in UNLESS when a set-up
meets all your criteria and is in-line with your trader's
Constitution. If selling just above a strong level of resistance,
however tempting for a few pips that trade might be, is not part of
your trader's Constitution, then you cannot allow yourself to take
it. If you do, and the trade comes off, all you are doing is
reinforcing a bad habit. And bad habits will kill you in the end. It is
not about being in the market at all costs, entertaining the mindset
that you cannot make money unless you are in a trade. The truth
is, you can't lose it either.
Your job as a trader is not to place trades. Placing trades is not
difficult, you can do that all day. What is difficult, and some never
manage it, is to sit patiently and calmly and wait until that high
probability trade appears. And then you pounce - without
hesitation or fear. You must allow your logic to stay in play and
not be ruled by your emotions. Successful people do not react
emotionally to events. You should never say 'I should have..I
would have' . It will drive you insane. In retrospect all trades are
easy but when faced with a live chart, no one knows where the
next pip will go.
Deciding to trade or not to trade provides the foundation to all
your trading decisions. You have your rules and your trading plan
and they are the basis of your trader's Constitution. Within those
parameters of discipline however, there should also be space for a
flexible mindset. This is a critical skill that all traders must learn.
While this may seem elementary, consider how often you hear the
terms "bear" or "bull". If you think about it, these terms make
almost no sense and are empty definitions. Let's say that you
consider yourself to be a "bull" on the dollar, ie it will rise in the
future. Does that mean you think the dollar will go up forever?
Will it go up for the next week? Only today or in the next half
hour? Will it only go up if the pair first drops one hundred pips to
bounce on a line of support? Without more details and context,
stating that someone is "bullish" doesn't give us much
information. Without it, there is a problem and it is usually due to
an opinion being formed before the facts have been fully analyzed.
For instance, I support a particular soccer team. Because I want
this team to win so badly (similar to someone holding a long
position wanting the pair to rise), I find myself irrationally
thinking that my team is better than they are. I possess
expectations, ones that cloud my ability to see reality. This means
that I chose, almost subconsciously, to pay attention to
information that supports my expectations and ignore that which
does not. So even though I know on one level that my bias changes
my opinion, I simply can't help myself. In sport, that is just a form
of entertainment, and an opportunity for my friends who support
a different team to joke with me. However, in trading, there is a
lot more at stake than the mere winner or loser of a soccer match.
If you have a general opinion before you actually analyze the
current situation, then you are viewing the information without
the benefit of a rational mindset. This can and does lead to
confusion, disappointment, anger and disaster.
It is ok to hold a current opinion that a certain currency pair is
likely to behave in a certain way due to your analysis. But many
traders form open-ended opinions on pairs and then try to find
information that is congruent with that opinion. This is like so
much of the so-called 'objective' research that is carried out in the
scientific community - a certain conclusion is already expected
and thus relevant information is found to support it. And this does
not even have to be intentional. Taking the nature of the often
unpredictable movement on the forex, if you are completely
honest with yourself, you could argue a case for both directions,
bull and bear. Holding expectations are dangerous and can cost
you money. Always try to keep a flexible mindset.
Deciding when to trade or not is also a matter of understanding
the market you intend to interact with and understanding how
much it can realistically pay you. One of the greatest benefits of
the forex market is that it is open 24 hours a day, 5 days a week.
The ability to trade whenever you want can be a great advantage
as it gives you a great deal of flexibility but it can also work
against you if you feel 'guilty' that you are not taking all the
opportunities on offer. No one, not even the world's most
champion trader, can take all of these. He will miss most of them.
But he knows, and is quite satisfied with this knowledge, that all
he needs is a slice of the pie to be lucratively successful. He does
not let his greed exceed his need. He does not torture or chastise
himself when he sees all the ones he missed. What he does see
however is the slow but steady rise of his equity curve. He moved
on a long time ago from the wild swings of 100 pips up to 200
down.
Finally, to utilize their time and money in the most optimal way,
traders have to realize that certain times of day are more suitable
for trading than others. In order to devise an effective and time-
efficient trading strategy, it is important to be aware of how much
market activity occurs during different times in order to maximize
the number of trading opportunities and entry signals during
those market hours.
Some days are quieter than others, such as when one important
market is on holiday or during the summer months when volume
is low. Markets trend 30% of the time so waiting for that beautiful
trend that honours key horizontal levels and trend-lines provides
the safest trading. Unless you are skilled in trading consolidation,
keep out of it. Not without reason is it referred to as the 'barbed
wire'. You don't unwarily sprint across the street in between fast-
moving traffic unless you see a favourable opening. So curb any
impetuosity in your mindset, that all-pernicious emotion affecting
trader s ability to make optimal trading decisions, and wait for a
market environment that will amplify your wealth, not mow you
down and flatten your capital.
Article By Nial Fuller and Jody Martens
Copyright 2010 www.LearnToTradeTheMarket.com
Do not share, copy or reproduce this article.