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4 Critical Factors To Avoid Weaker Trade Setups

December 02, 2017 05:30

Dear traders,

You will probably recognise the scenario where a trade setup appears, but you are not quite sure whether to enter.

Avoiding weaker trade setups could be more important than finding good ones.

Today's article provides a sneak peak into some of the key factors that can help traders filter out their weakest links.

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Tip #4: Don't Lose Focus of the Trend

Let's kick off with the most obvious one: trend and momentum. Trading against the trend is not impossible, but it does require more experience. You could compare trading with swimming: fighting against the current of a river (trend) is much more difficult than swimming (trading) with it.

Usually, I am focussed on catching with trend setups, but as an exception, I was trying to look for a bearish reversal trade on the GBP/AUD (the purple arrow). Eventually, I skipped the entry, but my focus on the reversal opportunity made me miss the upside potential. Yes, the GBP/AUD made a 150 pip pullback, but it made an even more dramatic 400 pip rise after that.

There are multiple advantages of trading with the trend:

  • Traders can give trades a little bit more time.
  • The entries and exits do not have to be as precise.
  • The price sometimes extends its momentum much further.

Source: GBP/AUD 4-hour chart, from 2 November to 30 November 2017

Tip #3: Focus on Patterns

Not everyone is a wave analyst like myself, but using patterns for understanding the chart in a more dynamic and deeper way certainly boosted my ability to filter bad setups.

Let's first take a look at the GBP/AUD example again. Although a bearish retracement was possible within the context of wave 4 (purple), the more interesting perspective was looking for a bounce at the shallow Fibonacci levels of wave 3 at 23.6%, 38.2%, or 50%.

This is especially true when we consider that the price was in a choppy and sideways chart pattern which is typical for wave 4. Reviewing my wave analysis more thoroughly would have helped me keep the best focus, but instead, the reversal trade idea distracted me.

The NZD/USD chart, however, was a good example of where I filtered out a poor with the trend setup (purple arrow). Price had completed 5 waves up and was ready for bearish 3 waves in my vision.

Once again, wave patterns are certainly not the only useful patterns. Chart and candlestick patterns are well-known and very useful for understanding the chart with a more advanced view.

Source: NZD/USD 1-hour chart, from 20 November to 30 November 2017

Tip #2: Be Aware of S&R

Personally, I use a mixture of Fibonacci levels, trend lines, moving averages, Admiral Pivot Points, and Admiral Keltner Channel to assess whether a setup is ready or not. Besides using these sturdy Support and Resistance (S&R) tools, I also evaluate how price action, candlesticks, and candlestick patterns are interacting with these S&R levels to understand whether the price is bouncing or breaking.

The S&R levels are in a way my blue print. I use the levels to assess where the key decision zones are on the chart. Then, I review the trend and patterns to understand whether the price is most likely to break out or bounce, and in which direction.

For more information about trading channels, including the Admiral Keltner Channel, please watch the video below.

Tip #1: Don't Chase Trades

Chasing trades often leads to regretful situations because traders are often reacting on emotions rather than careful and conscious planning. The best approach is to always prepare the trade, wait for the market to trigger your plan, and then execute the setup as planned.

There are major advantages of following these setups closely because traders feel comfortable with their outlook, less worried about price action temporarily going against them, and more confident about their trade management approach.

The key aspect of not chasing trades is simple: analysis. By doing your "homework" first, also known as technical, wave, and/or fundamental analysis, traders prepare themselves mentally for a trade setup at a decision zone of interest.

Once the price reaches the decision zone, the next step is to make sure the trading plan is implemented accordingly. This is valid for entry, trade management, and exit.

Wishing you happy trading,

Chris Svorcik

Follow @ChrisSvorcik on Twitter for the latest market updates!
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