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 to trade and When Not To”.
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 Trade/Not 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).
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 Update in the Stocks Analysis section of the site. 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.
When I Can Trade/Not 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.
- I like to see at least 15 pips of movement in the last 2 hours.
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 going on.
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 fully trust the price action.
It doesn’t matter if I look at that chart above tomorrow and see I could have made a million dollars. What matters is what we see in the moment. For whatever reason (valid or not), I felt I didn’t have an edge through much of the chart shown above.
Maybe I do look at that chart later 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.
To help prepare for the day, I usually go through a pre-trade routine. The main goal is to eliminate any biases. Admittedly, on the forex day above, I was happy to sit aside because I had some other things to do…and thought it was a great opportunity to write this article. Such beliefs/biases/thoughts affect our trading. I probably missed out on a bit of money because of it. But since I couldn’t focus and get down to the business of trading on this particular day, it was better that I stayed out. An unfocused mind that is trading can do a lot of damage. The one trade I did take, I was watching the chart and that was my only focus. When it was finished, I decided to quit because my focus was waning again.
Working on my focus is something I can do outside of trading hours if it continues to be an issue.
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.
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 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.