Hunting for signals, chasing the next big win, looking for a cross on your moving averages, trying out new indicators, jumping around timeframes, waiting for the pinbar to finally print, hoping that the gap will close and hedging your way through the week – this is trading. Wrong!
The reason so many traders fail is that they are always trying to be in a trade because they believe that this is the only way to make money.
The truth is, though, that the less you trade, the better your results will be. It may sound strange at first but I have worked with thousands of traders and I see it constantly, once a trader gets into a mindset of trading less, the results will usually improve immediately.
If you often feel stressed, anxious or overwhelmed, you MUST learn to trade from a calm and relaxed perspective. Tune out the noise, adopt a good approach and trade like a sniper. This is the surest way to see better trading results.
If you don’t believe me, just wait until you arrive at the end of this article and you will understand why trading less and knowing when not to trade is the skill the professional and profitable traders have perfected.
“Money is made by sitting, not trading.” – Jesse Livermore
1. When you have to think about the trade
The best trades are the ones that jump right at you. After looking at a chart for just a moment you know what to do if you are dealing with a good trade.
Trading is often referred to as a business of “pattern recognition” and the trader who has taken hundreds of trades knows the difference between a high probability setup and one that “just doesn’t look right.”
If you have to pause and ponder about a potential setup, it is usually better to pass on that particular trade.
2. When you don’t know where your stop goes
Even if you have spotted a great setup it does not always mean that you have to jump in the market. If you can’t find a reasonable price level for your stop loss, or you have to set your stop too far away and, therefore, have a reward:risk ratio that is too small, don’t take that trade.
Most amateurs fiddle with their stop until they think that the potential profit is large enough. I can’t stress the importance of identifying a reasonable stop loss level first before you search for a take profit area.
3. If the market does not favor your system
This is something 99% of all trading books miss and it shows a lack of self-awareness in trading. Ask yourself “what is it that my trading system does?” Do you have a trend following system and look for high momentum plays? Do you trade ranges and wait for clearly defined range boundaries without momentum? Or do you fade trends and look for trend exhaustion and losing momentum? Do you need a market with low volatility where price action respects support and resistance levels and gives clear patterns?
If the current market environment does not support the premise of your system, you stay out.
4. When you want to “catch up”
Did you just close a losing trade and your fingers are already itching to get the next trade? Do you want to increase your position size to make up for that past loss? If you find yourself in such a scenario, take your finger off the mouse and walk away.
Even if you think the setup looks alright, your thinking is probably clouded and you are about to make emotional trading decisions. Move away from your trading platform, get some perspective and after a short break, things usually look very different.
5. When you think that markets are “too high” or “too low”
Do you sometimes use the terms “too high” or “too low” and you believe that just because the price has risen for a long time, it must reverse eventually?
Especially traders who use oscillators and then make trading decisions based on “overbought” or “oversold” conditions often run into such problems. An overbought signal, for example, does not mean that a market will fall. Overbought means that the market is very strong and is likely to continue. We discussed this in our previous article: read about the Stochastic and overbought
6. If price has already moved away from the best entry – don’t chase!
Sometimes, we miss trades or don’t see the setup when it forms on our charts. The worst thing you can do is try to chase price and enter the trade late.
When you chase a trade, your entry will be at a bad spot and your stop and target will be off as well.
You can’t catch all setups and that’s ok. Don’t chase trades. You can always find a new setup, but you can’t get your money back after making a mistake.
7. When you haven’t done your analysis – when a trade is not in your plan
Every trade or scenario should be in your trading plan before it occurs. If it is not in your trading plan, it’s probably better to skip the trade.
Amateur traders don’t write trading plans and endlessly flip through timeframes and markets, trying to hunt signals. We all know where this ends.
Having a trading plan before you sit down at your trading desk should be mandatory for every trader. In our advanced courses, we provide weekly trading plans for our students.
8. When you asked someone else for their opinion
As a trader you have to make trading decisions autonomously because you have to live with the consequences.
When a trader asks for outside confirmation or needs to be spoonfed signals, he/she will not be able to grow as a trader because such traders usually give away all the responsibility. Learning from your own mistakes is critical for success. Furthermore, you must understand the reasoning behind a trade entry or any decision if you want to become a trader.
9. When you focus on a performance goal
We have all been there where we just needed one small winner to break even or hit our arbitrarily set performance goal. But then things usually don’t go as planned, we end up forcing trades and experience a larger setback.
Do not judge your performance on a weekly, or even monthly, basis. You cannot control how many trades you will get and how the price will move. Be open and take the trades as they come without forcing something.
10. When you have personal, job or health-related issues
Trading is a high-performance activity and professional trading requires your full attention. If you can’t focus 100% on your charts and if you are still thinking about the argument with your colleague, or the fight with your spouse, your trading will suffer.
You can always find a new trade, but you can’t get your money back for making mistakes that could have been avoided.
Only trade when you run out of reasons not to trade
This is the only time you should really trade.
When you find a setup that meets all your criteria, when it feels good internally, if you feel good emotionally and mentally, if you are not frustrated about your past loss, when you outlined the trade in your trading plan and when the chart gives you good levels for your stop and profit order, then you can pull the trigger.
Imagine you were only allowed to make 3 trades per week, how would you approach your trading? The “3 trades per week” concept is powerful and cherry-picking trades will transform your equity graph.
Just think about all those trades you took, but you knew somehow that it would have been better to stay out. It is very safe to assume that the majority of traders would have a much better performance if they started trading less.
There is always a next great setup. But you can’t get a refund for a trade you know you should have avoided.