To receive new articles instantly Subscribe to updates.
When You Should Cease Trading
Written by: PaxForex analytics dept - Friday, 27 June 2014 1 comments
While the search for the ideal Forex trading method or system takes up a large portion of a trader's research time, it may be worth noting that, while these are important elements of trading, there is one element which is arguably even more important - knowing when not to trade.
During certain market conditions even the best systems can break down, and very few strategies will work in all trading environments. Thus preservation of capital during times of low profit probability is paramount in achieving excellent returns. Profiting handsomely on one, several or a string of trades matters little if the trader continues to trade when conditions do not warrant such action, and the profits are ultimately lost.
Experienced traders know when to "sit on their hands." They realize that trading during times that do not suit their trading style can cut deeply into profits, or create a sizable deficit that will need to be regained.
New traders, often in their enthusiasm, begin to trade more as losses mount. Instead of stepping back, they step into the market trying to make back losses. Trading when conditions warrant it is prudent, but it becomes a problem when a trader begins to try to find more trades to make up for losses. Often these trades are outside of the trading plan and are low-probability trades, based on hope and not on solid analysis.
Different systems perform well in different types of market environments. Some will experience peak profitability in choppy markets, others will perform well in trending markets and others
in long-term ranging markets. For each system that performs well in a respective market, other systems may perform very poorly.
Thus, it is up to the trader to know and understand a system, and what type of market caters to the system being profitable. Volatile markets may hurt a "scalper" who generally scalps the markets for small profits but the increased volatility exposes them to a larger risk. A choppy or ranging market will hurt a strategy that attempts to isolate only long-term trends – the environment is likely to trigger multiple false signals.
It becomes imperative that traders are able to decipher when it is a high probability time to trade, and when it is not. High probability times include times when the overall market is exhibiting characteristics that compliment the strategy. Low probability times are when the market is showing behaviors which are not congruent with the system that is to be implemented.
Your experience, trading plan and discipline will certainly show you how to create high and low profit probabilities using different strategies.
So, it is important to be aware of what is occurring now, but also to be able to transition our strategies to accommodate changing market conditions. This can be done by changing strategies to suit the current environment, or a longer or shorter time frame can be looked at to help us gauge whether we should be trading or not.
Traders must know their trading plan and trading systems, and know under what type of conditions they perform well and perform poorly. When conditions arise where they are likely to perform poorly, traders must exercise discipline and cease trading.