Traders want to trade. That’s what we feel is our job and that’s when we feel that we’re actually really doing something. And I think that’s why it can be so tough to go through periods of low trade frequency. It just somehow doesn’t feel right. Might be missing out on something. For sure the markets keep on moving and others are trading, right?
But feelings are often misleading, especially when it comes to trading. The fact is that to know when to not take a trade is as important as to know when to put on a trade and be active in the markets.
Mechanics of a Valid Trading Edge
Whatever approach you’re using to trade in the markets, there is always a time when that approach will actually not give you an advantage in the markets.
That’s why most trading systems have some kind of a market regime filter that defines when to actually follow a signal or not. That filter might measure volatility, check if there’s an up- or downtrend going on or look for periods where the market is not trending at all. Other kinds of filters are limiting trading to certain trading hours or specific weekdays or certain regular news events.
Without these filters, without these periods of standing on the sideline and not trading, it’s very hard to make money in the long run. As whatever money you’ve made during the time when the market was in sync with your trading style, you’ll probably give most of it back if you stubbornly keep on trading when the market is not. One exception that comes to my mind is long term trend following where you simply cannot afford to ever miss a trade and where filtering trades can be very expensive.
But in general, knowing when not to trade and then do exactly that is actually an edge. If you keep on trading all the time, you will on average lose money during these periods where you should not trade. And to avoid a losing trade is at the end of the day as good as having a winning trade. The only difference is that it just doesn’t feel that way. Taking a trade and making $1000 feels like you did something, you see that trade on your daily account statement. If you skip a losing trade, you might not even notice that you just saved yourself from a $1000 loss, and it actually doesn’t even show up in your trade history. Still, you now have $1000 more than you would have otherwise. So remember that and be patient during times of low trade frequency.
Happy Trading!
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
Editors’ Picks
EUR/USD trims gains, hovers around 1.1900 post-US data
EUR/USD trades slightly on the back foot around the 1.1900 region in a context dominated by the resurgence of some buying interest around the US Dollar on turnaround Tuesday. Looking at the US docket, Retail Sales disappointed expectations in December, while the ADP 4-Week Average came in at 6.5K.
GBP/USD comes under pressure near 1.3680
The better tone in the Greenback hurts the risk-linked complex on Tuesday, prompting GBP/USD to set aside two consecutive days of gains and trade slightly on the defensive below the 1.3700 mark. Investors, in the meantime, keep their attention on key UK data due later in the week.
USD/JPY drops toward 155.00 as focus shifts to US data
USD/JPY meets fresh supply and inches closer toward 155.00 in the Asian session on Tuesday. The Japanese Yen holds the upper hand over the US Dollar after Japanese Prime Minister Sanae Takaichi led the ruling Liberal Democratic Party to a historic landslide win and on intervention talks. Traders brace for key US economic data that could offer more clues on the Federal Reserve's monetary policy.
Editors’ Picks
EUR/USD trims gains, hovers around 1.1900 post-US data
EUR/USD trades slightly on the back foot around the 1.1900 region in a context dominated by the resurgence of some buying interest around the US Dollar on turnaround Tuesday. Looking at the US docket, Retail Sales disappointed expectations in December, while the ADP 4-Week Average came in at 6.5K.
GBP/USD comes under pressure near 1.3680
The better tone in the Greenback hurts the risk-linked complex on Tuesday, prompting GBP/USD to set aside two consecutive days of gains and trade slightly on the defensive below the 1.3700 mark. Investors, in the meantime, keep their attention on key UK data due later in the week.
Gold loses some traction, still above $5,000
Gold faces some selling pressure on Tuesday, surrendering part of its recent two-day advance although managing to keep the trade above the $5,000 mark per troy ounce. The daily pullback in the precious metal comes in response to the modest rebound in the US Dollar, while declining US Treasury yields across the curve seem to limit the downside.
XRP holds $1.40 amid ETF inflows and stable derivatives market
Ripple trades under pressure, with immediate support at $1.40 holding at the time of writing on Tuesday. A recovery attempt from last week’s sell-off to $1.12 stalled at $1.54 on Friday, leading to limited price action between the current support and the resistance.
Dollar drops and stocks rally: The week of reckoning for US economic data
Following a sizeable move lower in US technology Stocks last week, we have witnessed a meaningful recovery unfold. The USD Index is in a concerning position; the monthly price continues to hold the south channel support.
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