Forex Trading Insights (Week of Feb. 27th – Mar. 2nd)
I am starting a new weekly article / blog whereby every Friday I will share my insights into what I learned from the week, both in trading, and in working with my traders from the courses. Trading being such a rich environment will constantly yield new insights. Also, working with traders on a daily basis continuously reflects back information about the development and learning process for traders as they move from being unsuccessful to break even to profitable. This weekly piece will be dedicated to the two, synthesizing the insights extracted from my personal trading, as well as working with people from all over the world and sharing what insights come.
If Your Going to Exit – Apply the STOP Technique and Wait for the Close of the Candle
Tell me if this sounds familiar – your in a trade, it meanders around break-even, maybe going a little negative, perhaps a little longer than you expected (meaning, a few minutes since of course, you expected it to go straight into profit once you entered – right?). Then, after a coming back from being negative a little bit, it moves into positive, say a few pips.
After being frustrated with the pair not moving, neither confirming nor denying your signal, you exit out for a small profit. You think, ‘some profit is better than a loss so might as well get out of this one in case it goes against me‘. Then, about 30mins to an hour or so later, the pair takes off in the direction of your trade, and hits your original limit. Had you stayed in, you would have netted 40+ pips of profit, and instead, you walked away with 3. Has this ever happened to you?
Anytime I catch myself doing this (about to exit a trade before its hit my stop or limit, and given me no official exit signal), I use the STOP technique, meaning S = Stop, T = Take a Breath, O = Observe My Experience (Body, Emotions, Thoughts), P = Proceed by asking myself what system am I using and do I have an official exit signal.
Usually the temptation to get out of a trade early is just that, a temptation that is arising from experiencing that friction we all go through as traders – the uncertainty of the future and where the market will go. None of us really know. We have ideas and can be well informed about the process and current state of the market by reading the price action, but we really do not know.
In essence, trading is learning to deal with uncertainty, but also facing emptiness – that there is no certain ground of what will happen next, that the market may tank and kill our trade, it may run towards our target, or it may meander for an unspecified period of time.
It is this experience that causes a friction in our minds, and can play on our thoughts and emotions, causing us to make an irrational decision, possibly exiting early from a trade when in fact we have no exit signal. It is in moments like these that you either re-enforce healthy or unhealthy habits which eventually, through enough repetition, crystallize into behaviors that either help or hurt your growth as a trader.
So if you find yourself in this situation, first employ the STOP technique which will give you that pause and moment of awareness, which can help snap you out of the stream of thinking to exit the trade early.
Close of The Candle
Secondly, I suggest waiting for the close of the candle. For the most part, if you have a rule-based system, you should not be tinkering with the trade to begin with. But as a way to also circumvent your mind from making an irrational decision, wait till the close of the candle. This will give you a lot of information whether the price action is in your favor or against you. At least then, you will be making a decision on data that cannot be changed, whereas exiting mid candle and you could be reacting to something that is just playing itself out, yet you are really in a good trade. The close of the candle is permanent and cannot be changed, and this can communicate a lot of information which may be critical to you staying in the trade, such as;
-whether the bulls/bears took control of the candle
-who was in control before on the prior candle and is it the same?
-was there a strong rejection in price, perhaps signaling it ran into a 20ema on a lower or higher time frame?
-were the bulls or bears taking profit into the close of the candle, or did they keep their foot on the gas?
These are just some of the things a candle close will reveal, and your ability to get this information will be critical. Yet, this same information will be completely unavailable unless you wait till the close, so if your really thinking about exiting early, wait till the close of the candle before you make a decision.
Case in point, I was short the NZDUSD on the 29th of Feb. using my new Volatility Striker System which has been performing exceptionally well lately. I was short at .8396 which was one pip above the close of the last candle you see on this chart below.
My stop was at .8421, around the 20ema, and my target was .8339 giving me a 2:1 reward to risk play.
Look what price did on the next candle.
It formed an inverted pinbar, and at a prior level that acted as both support and resistance. For the entire hour, price was either at my entry, barely profitable, or slightly negative – not my favorite situation but nothing I haven’t seen before. Needless to say, I was considering exiting early and just calling it a scratch.
But then I remembered my STOP technique which gives me that moment of awareness to make sure im not just acting out of emotion. I also remembered about waiting till the close of the candle, so considering this was not a major reversal sign, just some pause at a level, I decided I’ll wait till the next candle close before I made any decision. Here was the chart below 1hr later.
Although it was a doji-like candle, it closed bearish which to me said the bears are still in control and fighting through some buyers at this level. Even though the close was above the prior low from two candles back, it still made another low. Either this is a trap about to be sprung, or the bears are just working through the orders here. Since it was another bear close, I stayed in till another candle close which gave me my answer.
Notice how candle 1 used the prior support level as resistance, rejected off of it, broke the prior candles low and closed on the lows? This all told me the bears were just working through the orders there, and had now taken out the stops. You can see in candle 2 as the price action opened, barely went up a pip or two, then sold off the entire candle closing towards the lows, telling us there was no support bids in place, stops were taken out, and the sellers were in control.
As you can also see, price went almost to .8330 and hit my target on the last candle.
So this is a crucial lesson for traders, to make sure you wait till the candle close before making any decision.
Unless you see an exit condition for your system, or a candle which is clearly telling you to get out – stay in the trade. How many times have you exited a position for a scratch or small profit when it would have gone to your full target? Every time you do this, you really hurt not only the statistical edge for your system, but also your bottom line.
Think of how many times you have taken profit pre-maturely, and gave up 50 pips to the market by getting out too early. If you were to do this only 15 times a year, you are talking about 750pips off your bottom line. Now apply this to the next 10 years, and we are talking 7500pips. That could be an entire year or two of profitable trading.
So before you exit early, apply the STOP technique, and at least, wait till the candle closes before making a decision.
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