Knowing When Not to Trade is Important

In my experience, one of the toughest challenges you may face as a trader grapple with is knowing when to keep your powder dry, a Wall Street maxim for staying out of the market. Essentially, keeping your powder dry means saving one’s resources, and being prepared for when they will be used in the most effective manner. In trading, this translates into only putting capital at risk when the opportunity offers the lowest risk and highest probability. That’s only half of the equation though; the other half is the profit margin. In other words, every trader should ask themselves what the potential reward is for the risk being assumed. The projected profit should be a good margin so that it pays for the inevitable small losses that are a natural consequence of trading. Logic would dictate that unless all these factors are in place, there is no trading opportunity, and if no opportunity, why would you want to place a trade? Yet so many traders can’t help themselves. Not keeping in check the natural impulse to want to trade, I can report to you, is one of the major causes of traders losing money.

Free Trading WorkshopThe lesson here is that traders need to know when not to trade just as much as when to engage the markets. There are certain types of market environments that are not conducive to giving a trader the types of opportunities that I mentioned earlier. A choppy, range-bound market is one such environment in which you should keep your powder dry. The reason that’s the case is that when the markets are choppy the equation of supply and demand is in equilibrium, or in other words, all of the orders being placed in the market can be evenly matched. The chart of the EC (Euro Currency futures) shows this type of pattern. This type of price action should be avoided as it does not produce quality opportunities. So what is a trader that needs to generate short-term income to do? Well, that’s the beauty of the futures markets. It is one of the few non-correlated markets in the world. This means that there are other markets that will generate quality opportunities.

As a trader, the edge is not finding “filled orders” (which is what the choppy price action represents), but actually locating where the unfilled orders are found. This looks like expanded price movement. Two examples of this are shown below. Notice the strong movement in both the ES (E-mini S&P) and the TF (E-mini Russell).

The retracement, or return back to these pockets of unfilled orders indicates the lowest risk trading situations. It is here that a trader should be exposing their capital, as this is where they would have the highest probability of being profitable. Spotting these zones, however, requires a high degree of skill and discipline, and it’s not easy. The good news is help is available for those that want it. Contact your local Online trading Academy to find out more. Because, what’s the alternative if you decide to speculate in financial markets? Of course, you know the answer.

Until next time, I hope everyone has a great week.

Learn to Trade Now