When to trade and when not to trade

There are a number of scenarios where it’s inadvisable to trade. These can be separated into personal/environmental reasons and market reasons.

Personal reasons not to trade

Get rid of all distractions

You need to be able to concentrate on the charts and not get caught up with other things going on. For instance you might be waiting for a trade and then you get distracted and when you come back to your chart you have missed the trade or you buy instead of selling etc. Distractions can be costly. However, life is full of distractions so put the cat in the hall and shut the door. Put the baby in the playpen where you can see/hear her but at least you won’t have to worry that she has wandered off again. Whatever your potential distractions are, deal with them before you start to trade. Even a Ninja can lose a fight if distracted

What do you do when you have even the slightest distraction when trading?

  • As long as the distraction is miner, you can continue to trade
  • Whatever your potential distractions are, deal with them before you start to trade
  • put more hours into your strategy and trade more

Emotional times

If something emotional has happened, and you can’t be subjective, then do not trade! This could be any number of things that had a negative impact on your day. It could be that you broke up with your partner to a death in the family etc… You need to be able to assess what’s happening in a very short period of time, and if you are mentally elsewhere then this can have a negative impact on your trading account. The personal times that you shouldn’t trade can really be summed up as times when you are out of synch with your normal body rhythm. These are times where your emotions or environment can negatively affect the way you trade, and can seriously hamper the likelihood of a successful trade. The good news is these tend to be things that you can control or have some degree of control over. The market reasons for not taking a trade are a bit different. These tend to be external where you have very little or no control over them. These can really kick you in the butt and leave you limping for a while.

When you are not in a good state of emotions, is it wise to trade?

  • As long as the trading strategy is good, emotions do not matter at all
  • If any emotional imbalance has happened, and you can’t be subjective, then do not trade
  • You need to be able to assess what’s happening in a very short period of time, and if you are mentally elsewhere, it is best you stop trading until you are in a healthy state to take trades.
  • If ever you woke up early and you ate and exercised, yes it is wise to trade

Market Reasons

Bank Holidays

These are scheduled and there is nothing you can do about it. If there is a USA or UK Bank Holiday we don’t bother trading. This is because the Banks are the biggest participants in the Forex market. If they are on holiday then the volume of transactions being carried out is greatly reduced. This can lead to either really static markets or on occasion erratic markets. Either way it does not follow the normal pattern, so we stay clear. If however, it’s a Bank Holiday in another country such as Japan or Australia then we wouldn’t trade currencies that belong to those countries, e.g. jpy or aud pairs, but would still trade the gbp/usd/chf etc pairs

News

There are scheduled news releases, and economic news, that is due to be released throughout the day. These can be found, in advance, in a number of places but the most popular one seems to be the Forex Calendar, provided by Forex Factory.

There are 3 types of news; yellow, orange and red. Each has a different impact and is all explained in the calendar. There tend to be folders that generally are not a good idea for a new trader to try and trade. High impact, red folders, can really move the market, sometimes spiking in both directions, before settling done. These are high risk times where a lot of people get stopped out.

The one’s we specifically avoid would be the ISM Manufacturing data, interest rate announcements and NFP related news announcements. However, it’s not just the announcements themselves that can affect the market. The rumours surrounding what the potential numbers will be can cause the markets to move in anticipation. Therefore, it’s not a good idea to trade an hour before or after the news. With NFP, it’s a good idea not to trade that day at all. Now that may seem extreme, but these can be the biggest account killers and can wipe out a new account in a few seconds.

Speeches

These tend to generally be on the calendar as well. If specific people are talking then please do not trade. These people include the ECB President Mario Draghi, Fed Chairman Jerome Powell and BOE Governor Mark Carney . It’s important that when the BOJ Governor Haruhiko Kuroda speaks to pay attention. These tend to happen when people are asleep so less of a worry. But if you are trading the Japanese session then be wary!!

These people are notorious for dropping hints about economic policy changes that are likely to happen with the currency they are responsible for. These hints cause a lot of speculation in the market and therefore a lot of price movement. These can be big currency movers as they are generally responsible for setting Interest rates in those countries, and as mentioned above interest rate announcements can cause large movements.

Erratic Periods

There will be times where a currency is moving differently from normal. Perhaps it’s spiking and you don’t know why. This is a good time to stay out of the market. If you don’t understand why it’s moving like this then it’s generally because there is unscheduled news that has been released or leaked. This is generally bad news and the market is still unsure as to how to react to it.

Compared with the first image, this picture of the chart shows a more smooth downtrend with a clear direction, without big erratic spikes. Therefore it is much better to trade in these conditions where entries and stops and targets are much clearer. 

Friday afternoon/ evenings and Weekends

 It’s unadvisable to hold trades over the weekend or trade during the late afternoon or friday evenings as many traders close their positions and the market movements may not be normal, unless your method is a long term strategy which specifically involves holding trades for longer time frames, such as weeks or months.

A lot can happen over the weekend. All it would take is for 1 Bank to go bust over the weekend for your position to go completely different from how you expected.  A terrorist attack could happen over the weekend, which would also move the markets crazily. Now these might seem out of the norm but if you look these have happened recently on more than 1 occasion. These types of events will generally lead to the market opening again will a large gap and generally with a large change in your position. A lot of times this can cause serious harm to your trading account balance.