In today’s episode, you’ll discover when you shouldn’t put on a trade and why.
So tune in right now…
Hey, hey, what’s up my friend? In today’s episode, I want to share with you when you should not put on a trade.
Here are a few things I look for before I put on a trade…
1. The price must not be far from an area of value
If the price is far away from the area of value, I usually will not want to put on the trade.
Imagine that the market in an uptrend, and it respects the 50-period moving average. So whenever it pulls back towards the 50MA, it bounces up higher before it pulls back to the 50MA again to bounce up higher.
So you can see that this market tends to find potential buying pressure at the 50-period moving average. Thus, the 50-period moving average serves as an area of value.
Clearly, if you want to be buying in this uptrend, you don’t want to be buying when the price is far away from the 50-period moving average. Because when it makes a pullback, you will likely get stopped out of your trade.
Whenever I look at a chart, I’ll ask myself where the area of value is. Once I’ve identified that, I want the price to be trading near the area of value and not far from it because if it’s far away from it, chances are, I’ll get stopped out on the pullback.
So that’s the first thing – the price must not be far away from an area of value.
2. Don’t chase breakouts
Chasing breakouts is a big no-no. The reason why many traders love to chase breakouts is because it’s exciting, it’s bullish with 4 or 5 green candles in a row.
And usually, when you see such price action, it’s a warning sign or a red flag that it’s a bad time to enter this market because when you chase the market after it has made such a big move within a short period, it needs to take a breather.
Imagine you’ve sprinted 50 meters and gave it your all. Let me ask you, what are the odds of you sprinting the next 50 meters at the same capacity as you had earlier? The odds are likely low.
You need to rest and pause, and it’s the same for the market. If it moves too fast and too soon, chances are, it needs to pause and it will make a pullback or even a reversal. So don’t chase the markets.
I know you might feel conflicted, especially when you’re sitting in front of your monitor and feeling afraid that you might miss the next big wave while also knowing that it’s the wrong thing to do based on the many times that you got caught chasing the market.
And that also brings us to another problem which I will explain shortly.
3. Don’t put on a trade when there’s no logical place to set your stop loss
If let’s say you had chased the market earlier because it had closed bullishly for the past 5 days in a row with huge bullish candles and you think that the market is going up again today for sure.
But when you chase the market and go long on the 6th day, you’ll realize that after it has made a huge move and there is no logical place for you to set your stop loss.
Because if you’re bullish and you want to go long, you want to set your stop loss at a logical area where the market will have difficulty breaking below it. For example, it could be an area of support, a respected moving average, or an upward trendline.
But when you chase the market, there is no such price structure that you can reference from to place your stop loss. It’s different from a slow and steady uptrend where you have a series of higher highs, higher lows, where you can reference the previous swing low to set your stop loss.
So when the reversal comes, it will usually be swift towards the downside as well. And that’s how you get stopped out if you don’t have a logical place to set your stop loss.
If the nearest price structure for you to place a logical stop loss is very far away, then you should forego the trade.
4. Your risk is too large
This is especially for those of you who have a small trading account.
Because even when you follow your trading plan, trade with the trend from an area of value, and you set a proper stop loss, but because your account size is too small, and the stock you’re trading has a very high dollar value, you’ll realize that even with a proper stop loss, your small account size is not able to withstand the downside.
Instead of risking the usual let’s say 1% of your trading account, you realized that if that trade goes south, you might lose 30% of your account even though you are trading according to your plan.
Then my suggestion is again don’t take the trade even though it meets your requirements because your account size is too small to handle that trade. So just forego that trade altogether.
Maybe you want to trade a stock that doesn’t have such a huge dollar value to it or you can trade other markets like FX where you can trade nano-lots and stuff like that.
5. Don’t put on a trade when you want to get even with the market
This is especially after a few losing trades, you follow your plan religiously, you buy in uptrends, you short in downtrends yet you still suffer losses so you feel angry at the market and you want to get even with the market.
And usually, when you want to get even with the market, you’ll find all sorts of lame excuses to get back into a trade.
For example, let’s say you buy in an uptrend, but you get stopped out on a pullback. And when the market breaks above the previous swing high, you might be thinking, “Oh I’m still trading with the trend and the price is about to break higher.”
Or you might just find some lame reason to hit the buy button. That’s getting even with the market because when you get even with the market, your emotions take control and your actions will become inconsistent which leads to inconsistent results.
You might even suffer blowing up another trading account. So don’t put on a trade when you’re trying to get even with the market or when you want to revenge trade. That’s usually a big red flag as well.
As a quick recap, you should not put on a trade when:
- The price is far away from an area of value
- The price has broken out or has made a parabolic move – it needs to take a break as it has moved too fast too soon
- There’s no logical place for you to set your stop loss as the nearest price structure is far away
- Your risk on the trade is too large
- You want to get even with the markets
With that said, I wish you good luck and good trading. I’ll talk to you soon.