Originally posted on: February 10, 2012
It is said that patience is a virtue, but does this adage also apply to the fast-paced world of forex trading? Aren’t good traders supposed to be on their toes at all times, ready to pounce on the opportunity to make profits?
Contrary to what some might think, staying on the sidelines doesn’t necessarily mean that you’re a lazy trader. There are even cases in which sitting tight and refraining from taking any setups is a trading decision in itself. Here are the top four scenarios wherein it might be better to patiently wait on the sidelines instead of jumping in a trade:
1. You’re feeling out of sync with the markets.
Admit it. There are days when you’re not exactly on top of your game and it seems as though the market is intent on proving that your analysis and biases are completely off. During these times, it can be tempting to just think that traders are behaving irrationally and that the market is wrong.
The truth is that you have to acknowledge that there’s probably something that you’re missing and that you need to take a step back to reassess your analysis and trading decisions. Don’t let your pride get in the way of exercising patience. It might be better for you to sit out for a while and refrain from taking trades during those off days until you get back in sync with the market’s behavior.
2. You’re having a losing streak.
More often than not, this is a result of the first case wherein you’re having a tough time understanding market behavior. If you insist that your analysis is correct and that the market is wrong, the odds are that you could wind up in a slump. This can also be a product of poor risk management or a series of bad trade decisions.
In both cases, you need to take some time to evaluate your recent trades to find out if you’re doing something wrong. Having a detailed trading journal should help you identify the trading mistakes you’re making and how you can correct these.
3. You’re unfamiliar with the report that you’re planning to trade.
This goes out to those who trade economic reports. Just because your tried-and-tested economic calendar has marked a particular report as a potential market-mover doesn’t mean that you absolutely have to trade it.
In order to trade a report, you must first do your research. Observe how the markets reacted to past releases so you can identify any exploitable tendencies. Also, read up on what analysts have to say so you can get a feel of market expectations. Ask yourself the following questions in forming your battle plan:
- Have you considered different scenarios?
- How will you manage your trade in case any of these potential scenarios played out?
If you can’t answer these questions yet, then you might be better off sitting the report out. Use the time to note its impact on the markets, assess the trade setup that you were thinking of taking, and evaluate how you could’ve traded the report. This is part of deliberate practice, remember?
4. The odds are stacked against you.
A lot of traders (especially those with unyielding directional bias) still trade setups with poor reward-to-risk ratios or low probabilities. But remember that the point of trading is to make profits off those high-probability setups. After all, why would you risk your hard-earned money on a setup that isn’t likely to result in a win? That’s counterintuitive and basically just gambling.
If there are enough technical or fundamental signals that suggest that the odds aren’t that good, it could be better to sit tight and wait for a better one.
While taking advantage of market opportunities is a huge part of becoming a consistently profitable trader, it doesn’t mean that you should take trades for the sake of being in a trade. Sometimes it’s better for your account and trading confidence to just sit on the sidelines and cherry-pick the best setups. Don’t worry, the markets will offer plenty more opportunities for you to grow your account!