When not to trade: applying the beginner strategy
There is no system that is 100% automated or mechanical that will yield extraordinary results — there will always be some decisions that you will have to make, like deciding when not to trade.
The beginner strategy helps you learn trading, but you should not think of the beginner strategy as a way of getting rich quickly. Nor is it the holy grail of systems where you can simply trade and never have to make a discretionary trading decision again.
Trading carries a risk and each time you place a trade, you should understand that you can either lose the trade or win the trade. As long as you stick to only risking 2% on an single trade, you are able to protect your account from draw down effects.
Any strategy that has a set of rules can be more profitable in one set of hands than another. The difference is down to the trader and the way the strategy is applied to the markets. For this reason, there is always a certain amount of discretion that needs to be involved. In our additional articles, we help you develop your decision-making abilities in order to apply this strategy to the markets.
Most traders that have become successful will tell you that their best decisions do not revolve around when to trade, but rather when not to trade. In this lesson, we address some of these situations that will help you understand when it is best not to trade.
We address the following situations:
- Price going beyond R3 and S3
- Using different currency pairs
- Currency correlation
- Entry is close to a pivot point
- Leaving trades on over the weekend
- Trading with the news
What happens when the price goes above the R3 or the S3?
The R3 and the S3 are the last pivot points to the top and the bottom. The price sometimes trades above the R3 or below the S3. When the price is trading outside of these ranges, they are trading above or below a normal daily range. This means that there has been some substantial buying pressure or selling pressure that has pushed the price beyond these levels. When this happens, the price is likely to stall as traders are likely to start taking their positions off.
In these cases it is best to stay out of the markets and wait until the next day to resume trading.
Can I learn to trade with this strategy on any currency pair?
The answer is, technically, yes – price will generally move in the same way no matter what the currency pair. However, there are some considerations that you must take into account, because there are some currency pairs that will impact your profitability.
The spread on the GBP/JPY, for instance, is significantly higher than on the EUR/USD. This means that if you are targeting a pivot point a certain amount of pips away, then you have to account for a much higher spread on the GBP/JPY and the strategy is likely to be less profitable than on the EUR/USD.
For this reason, currency pairs that have a high spread would not essentially be ideal to learn with the beginner strategy. The EUR/USD and other major currency pairs are better because they generally have low cost spreads by a broker.
Also, currency pairs with low liquidity would also not be good idea, because you need enough liquidity to make sure you get your order filled at the correct time and price. This becomes more crucial when trading on a lower time frame such as the 5 minute chart.
Currency pairs can move with each other
You must also be aware that trading different currency pairs that are correlated can add to your risk. Currencies are generally traded in pairs, however pairs cannot be thought of in isolation, because if one currency in the pair increases in value, then it is likely to increase against other currencies in different pairs as well.
For example, if the value of, say, the US dollar rises in value against the euro, it is not likely to just increase against the euro, but rather it will increase against all other currencies. So if the value of the EUR/USD rises, then it is likely that the AUD/USD will also rise.
If you then open up a buy trade on both currency pairs at the same time and you have risked 2% on each trade, then you have effectively risked 4% on a single trade. This is because if the EUR/USD falls, then the AUD/USD is likely to fall as well – you could lose both trades because they are strongly correlated with each other.
Not paying attention to the correlation effect between currency pairs is likely to have a negative draw down effect on your trading account, because you are likely to be increasing the risk when trading.
Your entry may be too close to the profit target
Sometimes when you go to enter into a trade, you will notice that your entry is very close to your profit target. This leaves a question open about whether you should enter into a trade or not. It is a little difficult to judge because most of the time you do not know how close is too close either.
As a general rule of thumb, if your profit target is over 5 pips away from your entry, then you can go ahead and enter your trade as normal. If the profit target is less than five pips away from your entry point, then you can choose to target the next pivot point beyond your profit target.
Should I close my trades before the weekend?
Yes. If trading the beginner strategy, always close your positions on Friday. It is essential in the beginning to avoid leaving trades open over the weekend. Even though the markets are closed, speeches, catastrophes and political events — for example — can happen that will move the price.
However, because the markets are closed, market gaps are likely to occur as traders cannot react to these events until the markets open on Monday. Market gaps can be large and may even go past your stop loss, which can lead to a large loss on your open trade.
Trading with the news
Throughout the day, economic news are released that give indications as to the strength of an economy of a particular country. When these economic reports indicate that an economy is doing well, generally as a rule of thumb the currency will rise. There are many different reports that are released and each one generally reports on a specific segment of the economy. However, at the time of publication, this economic news can create a lot of market volatility. If you are in a trade set-up or your trade has already been triggered, then the market can quite literally whipsaw you out of the market before continuing on.
So what do you do when these economic reports are being released? If you have not yet entered into a trade, then it is generally best to stay out of the market until the news has been released. This may mean waiting for a new trade set-up, but it is a much safer option than entering during a news release.