In the world of trading, every trader spends the majority of his time is searching for a good opportunity to enter the market and trade in order to make money out of the market. But for a trader keeping distance from the market to avoid any losses is as important as finding a great trade and entering in the market. Knowing when not to enter the market is as important as doing technical research in order to find a perfect breakout to make money out of the market. In certain market conditions where the market moves in an unexpected direction, even the best systems and techniques can fail and avoid any losses due to these market condition a trader should always know when he should not trade in order to protect the profits and invested capital.
Experienced traders and investors know exactly when not to trade and only watch the market in order to learn from the market movement as they know that trading at times where the market movement do not suit their trading style can result in a huge loss which can offset the previous profits, or even erode the entire invested capital due to an unexpected huge loss-making position opened in a negative market condition which can create an overall negative portfolio sizable.
On the other hand new traders, often because of their excitement, begin to trade more frequently as losses mount. Instead of taking a step back and analyze the situation and market movement, they make frequent entries into the market to recover the previous losses. Trading when conditions and market movement is supportive is very important, but over trading at bad times can only make the situation worst when a trader try to find more and more trades to recover the losses
Know your game plan and stick to it.
A successful trader always has a trading plan and a trading system for every market conditions. As we all know trading systems tend to perform differently in different types of market environments, some trading system performs well in a bullish market and some perform well in a bearish market condition while some give constant profits in sideways or choppy market conditions. Thus it is very important for the trader to know and understand when to use a trading system which is in line with the current market environment. A highly volatile market condition may affect a scalping system negatively because of a huge movement created by the elevated volatility which is totally against the basic working of a scalping system which tends to target small steady profits out of the market. A scalping system is suitable for a choppy market where the movement is relatively slow and range bound.
Just like this, there is a bull market where a buy on dips trading strategy works well as in this kind of market situation the movements of the market tends to support the bullish movement which will increase the probability of profits in an inline position. On the other hand, there are bear markets which the system which focuses on the overbought securities tends to perform the best as these securities or trading instrument tends to give the most suitable short trades to make money out of the market.
From the above-mentioned examples we can clearly see that it is very important for a trader to analyze the current market environment and movement and select the most suitable trading strategy according to the market movement in order to make profits out of the market. And staying away from the market where the situation and movement do not support is as important as finding and entering a profitable trade.
Finding trading strategies that work in line with the changing market conditions and changing strategies according to the current market environment along with technical analysis can help a trader to identify when to trade and when not to trade in the market. Every trader must know their trading strategy and plan, and they must have a different set of tools for every type of market conditions in order to make money in every situation. Also, they must know when to keep a distance from the market to protect the invested capital and earned profits.