At first glance, this may seem inefficacious. As a trader, you engage with the market to profit and the only way to achieve this is to trade! We get that.
However, there are times that remaining on the side lines may be the more fitting pathway to take. So, what are the signs we look for to indicate that it could be time to step back?
Personal life CAN affect your trading ability:
- Trading when under emotional strain can seriously affect the way traders interpret the market. A recent death in the family, for example, can unlock a wide and confusing range of emotions. Denial, disbelief, anger and depressed moods, to name but a few. Interacting with the market under these settings frequently lead to disastrous consequences. For that reason, during times of emotional stress it is commonly advised to try and avoid trading with live funds.
- Distractions. Every profession requires focus to some degree or another. Some jobs are inherently tougher than others and need greater focus. No matter what the profession, though, battling distractions and focusing on the task at hand is an implicit requirement.
Limiting distractions during trading is crucial. As an example, let’s imagine Harry the trader is watching the 1.2050 support level on the EUR/USD, and has been for the past hour. The telephone rings, which is conveniently located downstairs, and he leaves his desk to answer it. In those five minutes he was on the phone, price tested and bounced from 1.2050. He’s now faced with a dilemma: chase price which is currently trading at 1.2057, or pass on the setup knowing he’s missed a perfectly good opportunity.
Another incontrovertible distraction is social media. Not only does it divert your focus from what’s important, it can also alter your decisions based on other opinions.
The good news, however, is these are aspects you have some degree of control over and can rectify with discipline. Market-related reasons, on the other hand, are more of a challenge. These tend to be external in which you have little to no control.
Market-related reasons for possibly staying on the side lines:
- Economic news. In most cases, executing technical trades immediately before or after high-impacting news events is a recipe for disaster. In periods of extreme volatility price can jump (gap) in either direction in response to an economic event. Unless you’ve accepted this risk, steer clear of trading before or directly after news. Let the dust settle and then reassess the situation. The majority of economic calendars highlight important events to be aware of: Forex News and Calendar
- Central bank movement. Central banks are tasked with the mission of overseeing the monetary system of a nation, or a group of nations. Members of the banks often interact with media and attend events. Frequently, the banks script their speeches, but there are also plenty of times when they may say something unexpected, consequently jolting markets across the board. These can develop into huge currency movers, easily clearing out several technical levels in the process. Luckily, central bank interactions are generally scheduled on one’s economic calendar.
- Bank holidays. Commercial banks are major players in the currency market. They facilitate the majority of the trading volume. When these banks close in observance of bank holidays the market is less liquid. This can lead to both abnormally low and high volatility. It is advisable to avoid currencies associated with banks that are closed, as price action will typically not follow its normal pattern, thus likely offering unfavourable trading conditions.
- Weekend trading. Unless a long-term strategy is employed, which tends to involve holding trades for weeks, months and sometimes even years, leaving trades open over the weekend can potentially be extremely damaging, in the shape of an aggressive opening weekend gap in price.
A lot can happen over the weekend! All it takes is one disaster to strike and an account could be wiped out. Intraday traders should not have this concern given most of the trades are liquidated by the day’s close. However, concerning a swing trading approach, it’s down to the individual trader to decide whether it is really worth leaving active positions open over the weekend. Remember, always, always trade in your OWN best interests.
If you are not feeling on top of your game, never feel bad about taking a seat on the side line. It is far better to miss a setup than to risk an emotional meltdown.