To Trade or Not to Trade – Situations Where It’s Best to Stay on The Sidelines

There is a time to go long, a time to go short, and a time to go fishing.– Jesse Livermore, legendary American trader

The quote above is from one of the best traders of all time, Jesse Livermore, who made his fortune short-selling the US stock market during the market crash of 1929, as all the other investors lost most of their money. It’s a great quote because it summarizes all of the mistakes that people tend to do in the markets in one sentence.

It is a fact that many traders struggle with a feeling of always having to do something as they sit hour after hour in front of their screens. Perhaps the feeling comes from the idea that trading is their job, and in a job you certainly have to do something in order to make money. However, trading is a very different kind of job. In fact, it is a job where the best thing you can do sometimes is to do nothing at all.

So, without further ado, here are some of the situations where your best option may be “to go fishing”:

1.    During Big News Events

People often make the mistake of solely trusting their trading strategy based on technical analysis, without taking into consideration that technicals in the market become irrelevant whenever major news are announced.

For example, don’t count on support and resistance levels in the US dollar market to hold when the chairman of the Federal Reserve announces changes to the interest rate. The market will always react in a big way, and previous price levels may not necessarily be respected!

2.    When Market Conditions Aren’t in Your Favour

It’s important to understand that markets always change. Some strategies work very well in certain market environments, but then seemingly out of the blue they become unprofitable. This is because the markets move between different phases, from ranging, to choppy, to trending.

It’s easy to find a trading strategy that performs well in one of those environments, but very difficult to find one that performs well in all of them. Know which conditions favor your trading strategy, and try to stay away from trading when those conditions are not present.

3.    When You Want Revenge

Revenge-trading trading typically happens when someone has just lost a fair share of money in a trade, and then decides to trade aggressively in the hopes of earning it back. Knowing that emotional stability is one of the most important traits for a trader, it is no surprise that this rarely works out well.

If you feel emotionally upset after a bad trade, take a step back, go out for a walk, and get back to trading again once you feel better.

4.   When You Need to Think Hard About a Trade

If you don’t know whether you should take the trade or not when you see the set-up on the charts, it’s probably because it doesn’t meet all your entry criteria for taking a trade. And if a trade doesn’t meet your entry criteria, you shouldn’t take it – even if it’s just what seems like a minor detail. Don’t think too much – the rules are there to be followed!

5.   When You Absolutely Must Make Money

If you are in a difficult situation financially, trading may not be the first thing you should try. First of all, having to make money in order to put food on the table creates lots of additional stress that will harm your abilities to make rational trading decisions. Secondly, the only way to truly become a good trader is to be fully focused on executionand process, not on your profit & loss (P&L).

In fact, some professional traders even cover over the part of their screen that shows their P&L because they know that being overly focused on short-term dollar gains is a hopeless strategy for attaining long-term success as a trader.

6.   When You Don’t Have a Trading Plan

Before getting into a trade, ask yourself if you know what your target price is, what your stop-loss is, and what your reason for taking the trade is. If you cannot answer these questions, DO NOT enter into the trade. Without a plan, trading becomes gambling.