If it looks hard to make money, it probably is.

If you’re looking at charts but aren’t seeing much to trade, or you see trades setting up but they aren’t working out, IT’S OK NOT TO TRADE!

I used to think that if we have a strategy we should take every setup we see. That belief didn’t last very long. What I found was that most strategies were just missing a key component: “When NOT to trade”.

When To Trade and When Not To should be a heading written down for every strategy we trade. It’s a key element, just like where to enter, where to get out, and position sizing.

When Not To Trade

I have rules for when I can trade, and when I can’t.

When I Can and Can’t Swing Trade Stocks

When I am swing trading stocks, I have a couple of overarching criteria that tell me whether I can trade or not:

• Are setups occurring based on my strategies? Which strategies?
• Are those setups producing profitable trades overall?

I then have a series of Market Health Indicators that also help me assess whether I even need to bother looking for trading opportunities. If market health is weak, I don’t look for long trades because I know my strategies are not built for profiting in declining markets. They are built for making money in uptrends (you could take shorts with some of the strategies in downtrends). If I am taking short trades, I want to see weak market conditions.

So how does that all work? Well, if market health is weak or is going from good to weak, then I stop taking long trades. Market health has to improve for me to consider buying stocks again. And even if market health improves, I want some assurance that my strategies are working. That’s where the two bullet points above come in. Until I see some quality setups that are actually working—the price is moving to targets I would have set (or at least hitting a 3:1 reward/risk)—then I will be mostly on the sidelines waiting until that happens.

Each week I post a Market Health Outlook. It says whether I’m trading, or not, and why.

Here’s an example from July 11, 2022, basically saying I need to see more things working (as discussed above) because some things are starting to look better, but we don’t have confirmation yet.

Some weeks I say I’m in full-on “buy mode” if things are working and market health is good. Other weeks I don’t even bother scanning because market health is so poor. Other weeks I’m doing some buying but only deploying a portion of my capital because trades aren’t working, there aren’t many setups, or market health is poor/mediocre.

It’s a balancing act. And these guidelines all help me decide how much capital I want deployed (or not deployed).

Also check out my Forex Swing Trading Course, which delves into high-reward forex patterns to trade on different time frames and how to monitor and improve your results.

When I Can and Can’t Day Trade Forex

When I’m day trading the EURUSD, the same two rules I mentioned above supersede everything in my strategies:

• Are setups occurring based on my strategies?
• Are those setups producing profitable trades overall?

Since nearly all my EURUSD day trading strategies use a similar entry (just in different contexts/patterns) if one or some of the patterns are occurring, and working, I feel comfortable trading. Since I trade in the early US hours, European markets have already been trading the EURUSD all night, so I get to see how my patterns were performing in the hours leading up to when I trade.

In addition:

• I like to see at least 15 pips of movement in the last 2 hours. Ideally at least 10 pips of movement in the last hour.

Less movement than that and I generally find it harder to make money. The first two bullet points supersede this rule. If the price is only moving 10 or 15 pips in the last two hours but one of my strategies is producing consistent money, then I will trade. The 15-pip rule is just a general guide that tells me to “tread cautiously” because there isn’t much movement.

I consider these things EVERY DAY I trade, but I don’t always note them on my chart because if conditions look ok I just start trading. Other days look like this chart:

When I opened the chart and sat down to trade I looked at the prior price action and asked myself “Do I have an edge?” While there was an overall uptrend, I could see it would have been hard for me to make money based on the patterns and price bars that occurred.

That continued after I started watching the chart. Setups that I would usually trade weren’t working…or maybe I just wasn’t “seeing” the market correctly. Either way, if I don’t see a way to make money then I DON’T TRADE.

I checked in every so often and there was a period where I could have made some money…but if I had been trading up to that point, then I probably would have been down and possibly even stopped out for the day (maybe not in this exact case, but in general, if you trade in not great conditions you often won’t be around long enough to participate in the winners).

As the day progressed, there was some strong movement and a trade I liked, so I took it. Several trades had already worked by this point. Then my time was almost done, so I stopped trading again because I still didn’t fully trust the price action.

When I Can and Can’t Day Trade Stocks

I have found that I day trade stocks the best when there is lots of movement and price is moving quickly. Lots of movement creates a sort of safety net, because if we have a decent strategy, then quick and large movements means the price will move away from our entry and stop loss area quickly. Our targets are likely to be hit quickly.

I have read articles telling people to stay away from day trading during the first 15-30 minutes of the day. Based on my experience in my own trading and seeing hundreds of people trade at the prop firm I traded for, this is when most of the money for the entire day is made.

The first 30 minutes after the open is when the most action is: large movement and quickness of movement. That’s what I want to trade in.

To help me stick with this, I have a rule (which also applies to all other markets and trading styles):

• The wave prior to the pullback I am entering on must be bigger than the target I am going for.

Let’s say the price just dropped $0.50 in two or three candles setting a downtrend. The price pulls back and I am awaiting my short trigger. I get it and it only requires a stop loss of $0.10. I typically use a 2:1 target with stocks so my target goes $0.20 below my entry. My target plus my stop loss is only $0.30. The price recently dropped $0.50 very quickly, so it is reasonable it can move $0.30 in a relatively short period of time as well ($0.30 because it has already dropped $0.10 to create the stop loss, now it still needs to go another $0.20 to hit the target).

On this short trade, there is a very large and swift drop at 9:38. This is followed by a pullback, which triggers a short trade at 9:42 when the price drops below a prior candle low (first time it happened in the pullback). The trade is entered near the bottom of the green candle (9:41) with a stop loss above the green or red candle (9:41 or 9:42 – ideally 9:42). The price has already exhausted some of its move by dropping a bit to trigger my trade. But based on recent movement, if even a portion of that movement continues into the future it should be enough to hit my target.

Visually you can see that my entire trade (stop loss and target) fit within the prior drop at 9:38.

The guideline is: trade within the typical movements the price is offering.

If trading a rounded bottom/top pattern or contraction, or some other pattern. The waves that compose the pattern are often small. This guideline about movement still applies. We just look to the price wave coming into the pattern. Ideally, it is a sizable move that moved relatively quickly. What comes into a pattern often comes out. Big waves leading into a pattern often lead to big waves coming out. Choppiness leading into a pattern means choppiness will often come out.

The size of the wave coming into the pattern should be large enough to easily hit/reach your target coming out. If your target is bigger than the price wave, don’t trade.

Mental Preparedness

It doesn’t matter if we look at a chart in hindsight and see we could have made a million dollars. What matters is what we see in the moment. Based on what I see and think in the moment, determines whether I trade or not.

Maybe I do look at a chart from a prior day (where I didn’t trade much) and decide I should have traded because of reasons X, Y, and Z. And I can learn from that and maybe I trade those types of days better in the future. But if we’re unsure, or feel mentally unprepared to trade what is in front of us, then it is better to step aside. The market will always be there. I call this trading YOUR OWN mental game.

To help prepare for the day, I usually go through a pre-trade routine. The main goal is to eliminate any biases and to focus in on the trading. If I can’t seem to focus on my trading, I don’t trade. If I am feeling strongly biased that the market will do a certain thing, I don’t trade. Biases and lack of focus are profit killers.

When Not to Trade – Final Word

If your strategies aren’t working, stop wasting money. Stop trading until they are working.

If you miss a trade or two when they start working again, that is ok too. When conditions are good, whether day trading or swing trading, there will be plenty of opportunities to capitalize usually.

And when conditions are good, make sure you do capitalize. We waited for those conditions, now it is time to make some money. As conditions turn unfavorable, keep the money you made, and don’t give it back trying to make a few bucks in lousy conditions.

Cory Mitchell, CMT

My method for day trading stocks is covered in the Price Action Stock Day Trading Course.
My method of swing trading stocks is covered in the Complete Method Stock Swing Trading Course. 
My method for day trading forex is covered in the EURUSD Day Trading Course.