KEEP CALM AND SAY NO
Trading the markets is much more than simply following statistics. Trading is driven by emotions. Traders around the world make decisions every day on whether the price of something is high or low. If trading were only about data then every programmer from Mumbai would be a billionaire. If you look at statistics alone the stats will say that the highest returns can be made if you hold your trades almost forever, never taking profits and not closing trades for loss; prices always return to the mean.
In real life, however, you cannot trade this way. Traders need to protect their capital at all times, yet still receive gratification. Take profits, make money, and spend money to continue using the system.
This is why the best approach to trade the markets is Human + Machine. Traders can look at DATA that the machines collected. With the help of this data traders can make an informed decision about history repeating itself and whether the current trade fits their objectives.
Whether to respond “YES” or “NO” to the trade signals you’ve really got to understand not only the trading strategy but also how these statistics are collected. What does the information in the signal message actually mean?
“Hi trader. I detected a potential trading opportunity on EURCAD H12 chart. Expectancy for this Bullish Engulfing bar is 0.30 (hit rate 43.59%, R/R 1.98, confidence 70%). Do you want to take it with 0.60% risk?”
I detected a potential trading opportunity on EURCAD H12 chart - this line tells you the instrument name and the chart time frame where the potential trade was found.
Expectancy for this Bullish Engulfing bar is 0.30 – tells you the pattern name and direction (bullish or bearish) as well as the pattern’s expectancy
Hit rate 43.59% – refers to how often these types of patterns reach their profit targets (historical rate).
R/R 1.98 – is the reward-to-risk ratio for this pattern. (an R/R ratio of more than 1 means that your reward is bigger than your risk).
Confidence 70% – is a statistical measure for how many times the algorithms have seen this pattern before. The confidence level rises the more frequent the pattern is.
In this trade example the algorithms looked at historical data and found that these types of patterns are hitting profit targets 43.59% of the time. Then it is upto you to look at this data and decide if you think it will this time.
To better understand when to say YES to the trades it is best to turn the question around and ask “Is there any reason I should say NO to this trade?” This simple change in perspective will allow you to become more skeptical, and only take the trades that both Human and Machine agree on.
REASONS TO SAY NO:
Hit rate is very low. If the signal hit rate is 30%, this means that 7 times out of 10 times the target will not be reached and trade will hit Stop Loss. Very few traders can trade a system that has less than 50% win rate.
Expectancy is low – Low-expectancy trades give small returns. Save your bullets only for the most profitable trades.
Confidence is low – meaning that the algorithm has not collected a lot of data about these types of trades so the statistical results can’t be very reliable.
Exposure – you already have trades on the same instrument or a correlated instrument, which means you might not want to take on extra risk.
News events – is the trade to occur right before some important market news? Price spikes on market news can mean your trade close for loss even if the overall direction was correct.
Time of the day – Taking trades just a few hours before the market closes on Friday afternoon might not be the smartest move as weekend spreads can bomb out an otherwise perfectly normal trade.
Market Holiday – If markets close for holidays it might not be a good idea to keep the trades open.
Some additional objective analysis include Round number, Support/resistance, or additional technical analysis (which always has to be objective).
These are a few reasons to say NO to trades offered, but remember that the most important thing is that the trade has to make sense to YOU. If it makes no sense to you, keep calm and just say NO. There is no shortage of trading opportunities. Even if you miss a trade, or say no to a winning trade, new trading opportunities will be just around the corner. A single trade should not make or break a system. Each trade is just a small part of the positive expectancy trading system.