I continue the educational articles' series by adding some more tips.
In case you have missed the first part, here it is: useful tips for traders,1'st part
6. Never use: I am sure the market will reverse / retrace / rally / fall / [insert whatever action here]. Same for it has to
Trading is speculative no matter what technique you use to predict the market direction and take trading decisions: technical analysis, fundamental analysis, math, a dice, a crystal ball, stars or anything else - it is all about probability.
Since there is no single known technique to predict the markets by an accuracy of 100%, never use sure. Be prepared to face the opposite direction. While being sure of something, the impact of the contrary action will be a surprise and people usually fail to take the most rational decisions when facing surprises. Always assume risk and think about the different possibility so you won't be surprised when a trade turns bad, you will be ready to take the appropriate decision as you already knew about the risk.
7. Don't trust too much all those technical key levels
Each time I look at a support / resistance level, I try to imagine how violently it may break. The more important a Support /Resistance level is, the more violent and fast a breach could be!
Always keep in mind that Support & Resistance levels are MEANT TO BE BROKEN! That's why they exist! Else, the market would always move into the same range it moved a day ago, a week ago, a month ago and so on.
Sure that support are good buying levels, sure that resistance are good selling levels ... but the opposite is true as well. While the crowd will buy on support, the smart money will go against it and the support level will fail to hold, hence the crowd will lose. Try to balance your view on key levels, i.e.: some day expect it to hold, other day expect it to breach.
8. Don't over-trade!
Concentrate on the best trading setups and don't over-trade. Rather increase position size and go for the smarter trades than getting into the same random trades again and again. Also, when things go bad, don't expect the odds to turn on your favor too soon. After taking a bad trade, you better stay away for a while, analyzing what was wrong with that trade in order to avoid the same mistake if possible. Recharge batteries! Go out or take a nap, enjoy something else and allow your morale to get back up. Remember that tomorrow is a new day and you should leave the bad things behind.
9. A market is never overbought or oversold!
Don't put all your money on betting against strong trends. Be ready to always adapt to new market conditions and new trends and forget about your previous bias. Simply because a currency pair is at oversold (or overbought) readings it does not mean that it cannot fall further, or rise, respectively.
Don't try to catch falling knifes - buying in a strong downtrend just because your technical oscillators tell you that the market is oversold. So what if it is oversold? Follow the market!
My opinion on these two terms is that they are overused and I rather not rely on something that's on everyone's lips. Last time I relied on an overused term I bought an IPhone and that was my worst decision in the last 3 months :-)
Here is an example of what happens when going against trends just because the market is oversold:
Phase 1: the trade setup looks quite decent. We are sure that the market will reverse (related to point 6 discussed earlier on the article)
Phase 2: The market continues its fall, stop is hit. But how about buying again since it is so oversold?!
Phase 3: The market continued its fall for months while it remained oversold.
- speculative failure
©Picture by Blueju38 / Julien Ratel
While oversold/overbought trading strategies could work on ranging markets, they will fail on trending markets. What to do, then? Simply keep a balanced state. Accept the fact that a market may rise or fall for an unknown/unlimited time or distance. Be aware that it is also possible that a market level seen today could never be traded again in the future and that's why stops are needed but that's a different topic to be discussed.
10. Don't use money that you can't afford to lose
Sure it does not feel comfortable losing money but one thing is certain: it feels even more uncomfortable to lose money that is not yours!
So please do not borrow money from anyone else just because you feel that a new trading strategy will earn you a fortune. Trade only your own money and trade only the money you afford to lose.
- speculative risk
©Picture by Over the Top of NY's
A friend once asked me to trade his 50k he got from some real estate investments. I asked him why he decided to invest in currencies? guess what: he HEARD that currency trading is very profitable.
No thanks, mate! I won't trade your money just because you've HEARD it could be very profitable. Trade it yourself! I'm having a hard time being careful with my own money, I'm also having a hard time knowing that some people follow my own trades (and mistakes), so why would it be any easier to be careful with yours, too?
This is all for now. I will continue some other time. Meanwhile, you may ask your questions regarding the tips above by commenting on the article. I'll be glad to answer.
I wish you a great Sunday evening!
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