Establishing trading zones provides a Forex trader with a sense of peace and calm: only when price reaches lower and/or higher levels is the Forex trader on guard and ready to take a trade.
This removes the endless, vicious circle of doubt whether to take a trade or not when price is stuck in the middle of nowhere. Most often traders just lose patience and discipline during this process and are unable to avoid taking a trade setup, which ultimately ends in a nightmarish entry and often an even worse exit spot.
With a clear plan in mind, the trader can clearly execute the trade. Setting up zones of interest helps deflect our impatience.
The next step is waiting for a confirmation of our levels. The best plans often incorporate a confirmation signal, such as a candle stick pattern or a breakout, to ensure that price indeed is reacting at the zones of interest. For instance, in last week’s blog post (Brilliant Trade Setups around the Corner) I mentioned that the EURCAD long was interesting upon the breakout above the resistance trend lines. The break never happened and no loss occurred despite by bullish bias.
But what happens after this analysis and confirmation? Do we drop this currency pair and move on or do we keep monitoring it? Today’s blog post discusses the follow-up.
AVOIDING REVENGE TRADING
Forex traders have 3 simple options after their analysis and confirmation signals do not lead to a trade setup:
- Skip this currency pair for a while until a new situation is apparent;
- Find trade setup in the same direction as the failed prior analysis (EURCAD long again);
- Find trade setup in the opposite direction as the failed prior analysis (EURCAD short).
All 3 choices are equally valid.
The first one has the advantage of avoiding revenge trading. Traders can have the nasty habit of being annoyed that their setup did not happen as planned and trading either way could be an emotional decision. Be careful!
The second one could be equally valid as Forex traders could get a better entry spot for their anticipated direction. I was planning on taking a long on the EURCAD at a lower level, but in theory a trader could have looked for the next level of support to take a long setup. Be careful that the next level of support and resistance is strong (level of one time frame higher at minimum).
The third alternative turns things upside down and uses the slogan “if you can’t beat them, join them.” Looking for the opposite direction can be good, but be careful of revenge trading and entering too late and too close to support and resistance.
The downside had a potential breakout trade setup for a small bearish gain (red arrow in screenshot above). The upside had a potential bullish trade setup (green arrow) lower at the confluence of the -61.8 Fibonacci target and 50 Fibonacci retracement level for a good bullish gain (green circle).
In my case I decided to wait for more information on the EURCAD before trading it. After the strong bullish weekly candle of last week, the upside looks now to be in a better position to break away from the downtrend.
I am therefore looking for confirmation signals on lower time frames at the half way mark (orange Fib) for more upside with a stop loss below the candle low and a target at the confluence of the -61.8 Fib target (orange) and bigger top (red line).
Of course, this particular spot could be a resistance spot for a small downside but the target (retracement of the candle) does not offer a ton of profit potential (and the trade setup will be gone before you read this post).
The key lessons of the above are that keeping your trading plan free of emotions is important and waiting for a bit more price action and confirmation never hurt any trader before committing to a trade.
Stay flexible and focused, also after the setup fails and does not work out, and do not let your guard down even for a second.
What do you think of the EURCAD? How will you approach this pair?
Thanks and Happy Hunting!
Latest posts by admin (see all)
- Money Management in Forex: More Than Just Trading - February 17, 2018
- Identifying Trends through Synchronization - February 17, 2018
- Using Multiple Trendlines to Identify Better Trades - February 15, 2018
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