In today’s episode, you’ll discover the 4 traps you must avoid when you put on a trade.
So listen to it now…
Hey, hey, what’s up my friend?
In today’s episode, I want to share with you 4 things to avoid when you put on a trade.
1. Avoid buying into resistance or shorting into support
Often when traders click buy, they’re not aware that they actually buy into an obstacle like an area of resistance. If you zoom out your charts a little bit, sometimes you might realize, “Oh man, I’m actually buying into an area of resistance.”
This is where sellers could potentially come in. Beware of this when you click the buy button so that you’re not buying into a resistance area. And usually, if you’re too zoomed in, you might not see this.
So just zoom out your charts a little bit and look at the big picture to see where you’re buying into. You must avoid buy into an area of resistance and avoid shorting into an area of support.
2. Avoid buying when the prices are overextended
You don’t want to be buying when the prices are overextended. Now how do you tell whether the market is overextended?
Let’s say, for example, you overlay the 50-period moving average on a price chart and the price has bounced off the 50 MA a number of times. But imagine right now that the price imagine is very far away from the 50-period moving average. It’s overstretched away from the 50-period moving average.
You don’t want to be buying at this point in time because if the price reverses and pulls back towards the 50 MA again, there’s a good chance you’ll get stopped out. Be aware of this and don’t buy when the market is overstretched.
And you don’t have to only use the 50 MA to define whether the market is overstretched or not. You can use tools like trend channels where you can draw the upper boundary, the lower boundary.
So if the price is near the upper boundary, you don’t want to be buying. When the price is near the lower area of the trend channel, that would make more sense to buy.
3. Avoid chasing the market
I know you’re thinking, “The candles look so bullish and they’re huge! Things look exciting, let me buy.” But the problem with chasing the market is, this is where the market is prone to reversals and pullbacks.
When you chase the market, usually there’s no floor or support you can lean against to set your stop loss. It’s very common for the market to explode up higher, only to reverse back and then you’ll give back all the gains pretty quickly.
It’s because there’s no floor, there’s no swing low, there’s no area of support to hold up these higher prices. And if there’s no structure in the markets to hold up these higher prices, the price could just reverse back in the opposite direction.
And guess what, when you chase breakouts, you get stopped out pretty quickly as well.
4. Avoid trading against the trend
You want to be aware of whether you’re trading with the trend or against the trend. You can take counter-trend trades, but I would say it’s far easier to make money when you’re trading with the trend.
When you’re trading with the trend, your profit potential is greater. Why do I say that? Because if you look at an uptrend, there are two legs in an uptrend:
- The trending move where the price moves in the direction of the trend
- The retracement move or the pullback where the price moves against the trend
If you look at the distance of both legs, the trending move is where the market moves much more compared to the retracement move where the profit potential is lesser.
If you’re trading with the trend, your profit potential is greater. If you trade counter-trend, your profit potential is clearly lower. If you want to find an easier way to make money, trading with the trend would be my suggestion.
These are the four things that you want to pay attention to and also to avoid whenever you put on a trade.
Whenever you trade, you want to be aware of what the higher timeframe is doing.
Let’s say you’re entering on the Daily timeframe. Don’t just look at your Daily timeframe and then make your decisions from there. Look at what a Weekly timeframe is doing to make sure your trading direction is aligned with the higher timeframe as well.
For example, if you’re buying breakout on the Daily timeframe, then look at the Weekly timeframe and make sure the market is in a range or in an uptrend. You don’t want to be buying breakout on the Daily timeframe when the Weekly timeframe’s in a downtrend.
That’s a low probability breakout trade. Be aware of what the higher timeframe is doing. When both timeframes’ trend directions are aligned, that’s where you’ll find a higher probability trading setup.
With that said, I’ve come towards the end of today’s episode. I wish you good luck and good trading. I’ll talk to you soon.