With all the uncertainty surrounding the EU referendum this week, I’ve decided to repost an oldie but goodie article. Should you take the risk or sit on the sidelines?
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 on 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 decided to 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. There’s just too much uncertainty involved.
This goes out to catalyst-hunters who trade news events. Just because your tried-and-tested economic calendars have marked a particular report as a potential market-mover doesn’t mean that you absolutely have to trade it.
In order to trade the event, you must first have enough research and observation about it. Have you considered different scenarios? How will you manage your trade in case any of these potential scenarios played out? Has a similar event taken place in the past and if so, how did price react?
If you can’t answer these questions yet or if you’re uncomfortable subjecting your positions to insanely volatile conditions, then you might be better off watching by the sidelines while noting its impact on the markets, on the trade setup that you were thinking of taking, and how you could’ve played it better. 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 ratio or low probability. 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.
While taking advantage of market opportunities is a huge part in becoming a consistently profitable trader, it doesn’t mean that you should have to 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!