Following up a question we had in our group on how to time the entries and exits, here’s some thoughts on this topic. There’s no guaranteed rule unfortunately, it’s all about the moment and your vision of the market. Let’s begin with saying that everyday there are various news and lots of activity in the market that could be unrelated to any meaningful fundamental picture or real move, there can be just algos activity, flows, profit taking and basically just noise. For these reasons you should know what is the ADR (Average Daily Range) of a particular instrument, because that tells you roughly how much that instrument moves on average on a given day and helps you with stop loss placement.

I always see people getting excited when for example EUR/USD pair moves like 30 pips, well EUR/USD can move more or less 70 pips in a day on average, so those 30 pips is not even half of that. There’s also the risk to reward fallacy problem, this is when traders place minuscule stop losses just because they want to have a high risk to reward ratio. That’s an illusion. You can place a tighter stop loss when you have a strong catalyst that moves the asset in a certain direction in a sustained way, that’s when you can risk it and use a tighter stop loss, otherwise you are risking even more than you think having a tight stop loss, because you increase the chances of getting stopped out even if your idea is right. Your risk to reward ratio should be based on your idea of how much the fundamentals can push your trade in a certain direction and let it ride as long as those reasons are valid or your conviction remains strong, because remember that when you enter a trade you can only quantify your loss, while the reward is just an expectation and in the end it can be lower or higher than you predicted it to be.

There are basically two ways you can use to time the market: executing on a catalyst or on a technical basis in line with the prevailing fundamentals. The first way I’d say is easier, while the second trickier. As an example for the first option, the other day we had the Fed Chair Powell interview with the WSJ (Wall Street Journal) and the market was waiting for him to touch on the rising long term yields, which is viewed basically as the market expectation of future monetary policy due to growth and inflation. As you can see in the screenshot below the playbook was if Powell sounded concerned about the rising yields, then the US Dollar would have been sold off as the market would have expected an intervention to stop that, weakening the Dollar, on the other hand if he sounded unconcerned, then it was kind of a green light for yields to climb further, because the Fed is not planning to intervene and this would lift the US Dollar as the market sees an earlier than expected policy tightening.

 

When I signalled that Powell was unconcerned in our group the EUR/USD started to fall as expected, that was the catalyst and the time to enter short with a stop loss above a previous swing level, giving you a good low risk high reward trade.

 

Another way can be based on technical analysis, that is when you have your fundamental bias in mind and you wait for the price to fulfil a certain technical setup before entering the market, be it waiting for a retracement to a certain level or waiting for a breakout. This is trickier because you don’t have a catalyst, but you merely enter in line with the fundamentals expecting a follow through from the market as the wave keeps going. Unfortunately, as I mentioned earlier, you can have a lot of noise meanwhile and even if you’re right, you can have the price not respecting your technical setup making it harder to time an entry.

Another way you can limit this is by entering at sessions open after a catalyst that you may have missed out, but it should be a meaningful one and not on any random news. For example, after the good news from the OPEC meeting for the oil market you could enter at the European session open the day after and place a stop loss behind a swing level. As it turned out you could have made a good profitable trade with oil rallying more than 3.5%.

 

As I touched on previously, timing the exits is always tricky, that’s kind of an art and what you have to remember is that you always have to let the winners run, if the trade is a good one and it turns out that it may have much more room to ride due to developments in the markets, then cutting it would be a mistake. You can take bits of profits along the way to lessen the psychological pressure you may get looking at the unrealised profits going up. As an example, we had a long USD/JPY trade idea in our trading ideas channel and the main reason was the expected interest rates differential that we may get between the Fed and the BoJ. The target was 107, but when it was even more obvious that the reasons were playing out well and the expectations were correct, it was signalled to remove the target and let it ride further. USD/JPY rallied another 150 pips to 108.50 and it may still have further room ahead. A 3.5 risk to reward ratio trade turned into a 5.5 if a trader decided to close it at 108.50.

 

So, as you can see trading is not an easy mechanical activity, it requires foresight, planning, discipline and sometimes improvisation. Don’t get discouraged by mistakes you make or losing trades, that’s part of the process and it’s perfectly normal, remember that every master was once a noob. Wish you success and for any question our community is always there to help out.

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