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Looking for the Consistent Setups Rather Than the 'Hero' Trades

Looking for the Consistent Setups Rather Than the 'Hero' Trades

John Kicklighter, Chief Strategist

Talking Points:

  • For many speculators, the allure of placing a 'great' trade that impresses their peers often overrides mundane consistency
  • Jumping into major breakouts, early entry in trends and systemic reversals fuel assumptions of 'hero' traders
  • Such systemic developments are infrequent and carry heavy risk, while practical ranges may register small but regular wins

Many speculators only care about volatility and not the practical implications for trade scenarios. See how retail FX traders are positioned for USDCAD, EURUSD and GBPUSD heading into a theme and event laden final trading session of the week on the DailyFX Sentiment page.

Overcoming Self-Sabotaging Trade Habits

It is an irrational sway most market participants will inevitably experience. Rather than evaluate the market and its opportunities through objective, disconnected analysis; there is an irrational drive among the speculative rank to identify and pursue long-shot setups that could turn into exceptional trades. Seeking out the low probability setups for their inversely extreme market impact tugs at a primal interest: the opportunity to prove ourselves exceptional traders amongst our peers. Often times, this push to impress others overrides the very foundation of practical investing: to seek out higher probability investments which subsequently have a more restrained rate of return. We should ask ourselves as we navigate the markets: are we making wise and high probability decisions to build up an account overtime or are we trying to jump from exceptional trade to exceptional trade in an effort to earn the direct accolades of those in our trade circle or the unspoken admiration of a perceived peer group.

Trading is a Career, Not a Few Lucky Trades

How long do you intend to trade in the markets? If your expectation is to place just a few outsized positions that would in turn leverage enough of a market impact to rapidly increase an account, dubious strategy management is already being engaged. For just a handful of trades to forge enough of a return to earn retirement, we were either close to the goal in the first place or are somehow applying extreme leverage. To make a rapid exceptional return relies on impractical levels of risk that is inherently low probability and therefore not viable for long-term strategy implementation. Yet, the appetite for glory can override the practicality behind a steady pursuit of well-thought out but restricted trade setups. All forays into the markets involves a combination of probability and potential. The more extreme one of these legs is, the less robust the other. An exceptionally likely return will likely be small as it is seemingly carries very little risk. In contrast, the extreme return will be attached to a very low probability scenario which can more readily lead to a loss on investment rather than the windfall our appetites are driving forward for.

Trend, Reversal, Breakout and Range

There are three general types of markets that we will see while trading: trends, breakouts and ranges. For those seeking glory, the status building often follows calls that execute trades at the very early stages of meaningful breakouts. Such patterns usually carry the requisite mix of pace and potential to register exceptional returns. Arguably more rare and remarkable is calling cyclical reversals - turns in the market that transitions from months or years-long trend into the same duration run in the opposite direction. These are particularly unusual events regardless of the market and therefore impractical pursuits. Trends are generally more common in contrast, but the acclaim comes through the impractical means of picking the very beginning of the systemic move. For regularity with more restrained return potential, range or congestion patterns are far more practical.

Current Conditions and Reasonable Pursuits

Historically, ranges are more common for financial markets than trend, breakout or reversal. And, while they may average far more restrained profit potential, setups are generated far more frequently. Our current trading conditions across the financial system is no exception to that general rule. Amid trade wars, Brexit and stagnant risk trends; the frequency of such volatile and exceptional moves is even more restrictive than what we have seen in previous periods of plenty. Yet, with expectations properly calibrated, we can put aside an appetite to impress with impractical trade setups for say a GBPUSD reversal and instead pursue a more consistent EURUSD range. We discuss putting aside our desire to impress in order to make a more meaningful trade career in this Quick Take Video.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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