Hunting signals, looking for a cross on your Stochastic, waiting for the pinbar to finally print, hoping that the gap will close and anticipating that support will hold – this is trading. Wrong. The reason so many traders fail is because they are always trying to get in the next trade whereas all they should do is find reasons to trade less.
If you don’t believe us, just wait until you arrive at the end of this article and you will understand why trading less and knowing when not to trade is the skill the professional and profitable traders have perfected.
“Money is made by sitting, not trading.” – Jesse Livermore
When you have to think about the trade
The best trades are the ones that jump at you; after looking at a chart for just a moment you know what to do. Trading is often referred to as a business of “pattern recognition” and the trader who has taken hundreds of trades knows the difference between a high probability setup and one that “just doesn’t look right.”
If you have to pause and ponder about a potential setup, it is usually better to pass on that particular trade.
When you don’t know where your stop goes
Even if you have spotted a great setup it does not always mean that you have to jump in the market. If you can’t find a reasonable price level for your stop loss, or have to set your stop too far away and, therefore, have a reward:risk ratio that is too small, don’t take that trade.
Most amateurs fiddle with their stop until they think that the potential profit is large enough. We can’t stress the importance of identifying a reasonable stop loss level first, before you search for a take profit area.
If the market does not favor your system
This is something 99% of all trading books miss and it shows a lack of self-awareness in trading. Ask yourself “what is it that my trading system does?” Do you have a trend following system and look for high momentum plays? Do you trade ranges and wait for clearly defined range boundaries without momentum? Or do you fade trends and look for trend exhaustion and losing momentum?
If you can answer those questions, you know the market environment your trading system should be applied to. Thus, if the current market environment does not support the premise of your system, you stay out.
When you want to increase your size
Did you just close a losing trade and already see a new setup? Do you want to increase your position size to make up for that past loss? If you find yourself in such a scenario, take your finger off the mouse and walk away.
Even if you think the setup looks alright, your thinking is clouded and you are about to make emotional trading decisions. Trying to recover from a loss by increasing position size does not work and you are more likely to end up in a much larger drawdown.
When you think that markets are “too high” or “too low”
Do you sometimes use the terms “too high” or “too low”? Those terms are relative because they are purely based on hindsight analysis; even a long uptrend could go on for much longer.
Especially traders who use oscillators and then make trading decisions based on “overbought” or “oversold” conditions often run into such problems. More often than not, overbought just signals a very strong trend and not a reversal that is about to happen.
If price has already moved away from the best entry
Sometimes, we miss trades or don’t see the setup when it forms on our charts. The worst thing you can do is try to chase price and enter the trade late. Chasing a trade means that you place your stop too far away or at an unreasonable level. Additionally, your take profit will be too close or you have to use a wider take profit target that doesn’t make sense.
You can’t catch all setups and that’s ok. Don’t chase trades. You can always find a new setup, but you can’t get your money back after making a mistake.
When you haven’t done your analysis – when a trade is not in your plan
Every trade or scenario should be in your trading plan before it occurs. If it is not in your trading plan, it’s probably better to skip the trade.
Reactionary traders don’t write a trading plan and endlessly flip through timeframes and markets, trying to hunt signals. We all know where this ends. Having a trading plan before you sit down at your trading desk should be mandatory for the trader who is serious about this.
When you asked someone else for their opinion
Traders have to make their trading decisions autonomously; they need self-esteem and confidence in their abilities; and they have to take responsibility for their losses.
You have to make your own decisions and stand behind them. It’s the only way to grow and evolve as a trader.
When you only need one winner to end the week green
We have all been there where we just needed one small winner to break even for the week and end up green. But then things went south as we tried to force a trade and ended up with an even bigger loss.
Do not judge your performance on a weekly, or even monthly, basis. Market conditions change all the time and your system won’t be able to perform equally well under all conditions.
Trading is a high performance activity and professional trading requires your full attention. If you can’t focus 100% on your charts and if you are still thinking about the argument with your colleague, or the fight with your spouse, your trading will suffer.
Again, you can always find a new trade, but you can’t get your money back for making mistakes that could have been avoided.
When you run out of reasons not to trade
This is the only time you should really trade. When you find a setup that meets all your criteria, when it feels good internally, if you feel good emotionally and mentally, if you are not frustrated about your past loss, when you outlined the trade in your trading plan and when the chart gives you good levels for your stop and profit order, then you can pull the trigger.
Imagine you were only allowed to make 1 trade per week, how would you approach your trading? The “1 trade per week” concept is powerful and cherry-picking trades will transform your equity graph.
Just think about all those trades you took, but you knew somehow that it would have been better to stay out. It is very safe to assume that the majority of traders would have a much better performance if they started trading less.
There is always a next great setup. But you can’t get a refund for a trade you know you should have avoided.
Credit to: Rolf