There are many things to avoid as a trader, however, we’re going talk about three things here that catch traders out and hopefully it will help you with your trading. This subject came about because it happened at the morning’s Live Trading Room. We went on to make over a £1,000, so it’s a good piece to read.
So, we started Monday morning in our Live Trading Room, and everything was a little quiet. We like to trade the Morning Move to capture the European session momentum. But this Monday was slow. We tend to trade the DAX, FTSE and GBPUSD as these markets provide us with enough points to make a good day’s income before 9am. If it’s slow, we certainly need to be patient and wait for a good setup in the markets. Let’s look at the 3 points you want to avoid; one of these points relates to why it was so slow on Monday.
Point 1. – Cut your losing trades
This is pretty obvious, but a lot of people still don’t do this. Let’s say you shorted the market and then it suddenly started to go against you, and you didn’t get out the trade. You stayed in the trade and it became a loss that is bigger than you expected it to be. It continued higher, and you dug yourself a hole and then it gets worse and worse. You can’t handle the pain any longer and you’re now digging yourself a big hole as you could blow your account if the trade doesn’t turn.
You’re now trading on hope. Hoping this trade will come back. If you had only got out of this trade earlier, you could have recovered the profits on the next few trades.
I blew three trading accounts back to back 17 years ago doing exactly this. I did not respect risk. You’re not right all the time, you’ve got to be able to accept loses. If it goes against you, stop yourself out of the trade. It doesn’t make you a bad trader if you get stopped out. Most new traders think losing a trade is bad. It’s not. You’re doing your job as a trader by managing risk.
I didn’t do that, and I soon learned. But I soon realized that I was starting to become a better trader when I started to cut my losses without any emotion. I would have a losing trade, and a day later I would completely forget that losing trade and I would then make some winning trades, and at the end of the week I was profitable.
You don’t remember losing trades, but you remember the losing trade that blows your account.
Get out of the trade, guys. It doesn’t matter if you’re wrong, you always need to protect capital.
Point 2 – 80% of the time trade with the trend and 20% counter trend. Not the other way around.
It’s obvious that you should be going long when the markets are going up and trending higher, and you should be going short when the markets are trending lower. But what about sideways markets?
What is happening on a chart when the price is really slow and going sideways?
This happened this morning. We were looking at the EURUSD on the 60-minute chart. The Pro-Trading System had turned white which automatically tells us that the price is not trending.
When price gets stuck inside moving averages, it becomes choppy. If you’re a trend trader, you must watch this because your trend trading strategy might start to fail because the price is stuck. When you have moving averages coming down on price and moving averages coming up on price at the same time, you’re range bound. Price is stuck in crocodile jaws and you get eaten alive. Price is going to bounce around inside until we can break free.
This type of price action will frustrate trend traders.
What we want to see and wait for, unless you have a range bound trading strategy, is for price to break free from the averages. The Pro-Trading System will change colour, either green or red, and now we have a trend. Let the market, let the price get outside moving averages. Let the moving averages line up in order. Have you ever made easy money in a trend and gone on to give it all back? It may be this reason. The price may have got stuck inside moving averages and no longer trending. Time to look elsewhere and be patient.
And so that’s what we did on Monday morning. Price action was slow, and the markets had got caught up inside moving averages. We waited for them to break and then had three winning trades back to back for double our days money. This stuff works if you can see what to look for.
Point 3 – Avoid buying the highs.
How do you know when it’s the high you may ask?
Look at the current price and see if it’s making a new high compared to the last swing high.
You can see the chart above with the circle. If at the time you were trading the price, this is where it would be at a new high. Looking left you can see that the previous swing had made a high. This is a classic breakout area for breakout traders. I want to avoid this area because the majority of time the price will be rejected, and the move will get faded back down. Resulting in a stop out trade. I call it a pain and pleasure area because breakout traders feel both those emotions when they take the trade here.
In my experience, especially in the FX market, you tend to get the pull back and then the push higher, so what’s the point taking the breakout? Be patient and wait for the pullback. If you short the lows, you’re going to sit through that pull back before it continues in your direction. If you’re trading stocks, then it’s a different animal. Stocks can breakout and run hard so buying breakout is fine, but you still need to know how to spot high probability setups.
So, if your trading Forex avoid buying the high tick. Avoid, avoid, avoid! … Like anything it will work sometimes, but it will put you in a false sense of security and will soon end badly. We don’t like bad, we like good.
Hope it helps, and I’ll speak to you soon.
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