Why Certainty Could Be A Very Harmful Trait for a Trader to Hold
Article Summary:Trading is a game of assumptions based on collected data. However, the future is often going to play out much different than in the past. Because of this truism playing out in rising and falling markets, a trader is often better served with a firm belief that anything can happen at any time to any currency pair. This flexible mindset will allow you to focus on set ups that align best with your system as well as a keen eye on the exit door of every trade when facts begin to change.
"When the facts change, I change my mind. What do you do, sir?"
-John Maynard Keynes
To embark on any new field of study, most students would hope to gain a sense of certainty when faced at a cross road or a decision point of their task. A cardiac surgeon strives to know with certainty the best decision to make when a surgery is met with an unexpected variable to bring the patient to full health. However, the trader, when holding onto a trade with full certainty is often at the highest risk of account ruin.
Learn Forex: An Assumption of a Falling NZDUSD Shouldn’t Exclude Bullish Reasons to Exit
Why Is Certainty In A Trading Idea A Bad Thing?
Certainty in the outcome of an executed trading idea is often a guise for greed and fear. As a trader, it is important to have a plan which focuses on entry triggers, trade size, and risk to reward ratios. However, if you’re unwilling to exit the trade or accept the facts that moving forces in the markets can change quickly then you will have the painful experience of holding on to and closing out larger losses than winning trades.
The opportunities in the Forex market are almost infinite. Any trader around the world can trade on any time frame using nearly any strategy. In the end though, the market will either rise or fall and regardless of your strategy for identifying an entry, you need to know when to eject from the trade idea so that you’re not holding a long position in a bear move or a short position in a bullish rip higher.
Anything Can Happen At Any Time
Over the last few months, the selling of the Australian Dollar has been the main play. Prior to that, the headline trade was the selling of the Japanese Yen on the unprecedented intervention from the Bank of Japan. The key to note is that trends shift like the seasons and you should be aware of when one cycle ends and new one begins so that you’re not holding a trade against the new big move.
3 Ways to Find a Changing Environment before Your Very Eyes
One of the key components to every trade idea is knowing what criteria will have to be present for you to exit the trade. Because every trader is different, there are multiple criteria for making this decision. The three that we will look at today is the economic calendar for a shift in fundamental data, Ichimoku Cloud for trend reversals and Pivot Resistance & Support for an important price level breaking and adjusting our bias.
The Economic Calendar can help you see in near real-time how an economy is behaving. Traders can clear away a lot of the news noise by only filtering for a ‘High-Importance’ events. Once you’ve filtered for the big news events you can look for trends showing you strength or weakness.
Courtesy of DailyFX.com/Calendar
An advanced method for recognizing a trend reversal is the Ichimoku Cloud. Many traders who use this tool will switch the bias when price moves through the cloud and they’ll use other lines on the chart to time their entries in the direction of the trend. In the example below, you’ll see that traders switch to a selling bias when price moved below the cloud because the ‘facts changed’.
Learn Forex: Ichimoku Is a Dynamic Display of the Current Trend in Play
Lastly, trailing pivots are a price action tool that can be used in all market environments to help you frame price action. The most important part of the price action is the upper or lower bounds that would adjust the trend’s path. Another benefit of using pivots is that if you’re a trader who would like to extract profits as opposed to riding out a trend, you can use pivot levels in the direction of the trend as a price target. To learn more about price action trading, you can register for our free course here.
Learn Forex: Trailing Pivots Give You Objective Levels to Gauge the Current Trend
An important concept that would help traders early on in their career is that while we may not know what the future may hold, we do know through our trading plan how we will react when that future unfolds. We have looked at multiple ways to see when the season of a trend is ending so you can act accordingly to protect as much of your profits as possible. Trading through the lens of uncertainty will surprisingly take some of the pressure off while allowing you to be a more objective trader.
---Written by Tyler Yell, Trading Instructor
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