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In Trading Know When To Say When
As traders, we are always obsessed with the idea of how. How do we structure entries? How do we manage risk? How do we exit positions? All of those are legitimate concerns but I will argue that they all pale in importance relative to the question of when.
For the past month, I have been killing myself trying to design an FX day trading system that worked round the clock. No such luck. The system would work for a bit only to give everything back and then some. Nothing I did to its structure made much of a difference until I realized that it should only trade during the European hours. Why? Because this system is based on a continuation setup and prices have a much higher chance of continuation during the European dealing day than at any other time during the global day. In fact, if you were to run the numbers 70% of all price movement occurs during European hours. In retrospect, this, of course, makes eminent sense. Europe intersects both Asia and North America and therefore has the highest concentration of participants during its business hours leading to greater volume and biggest price moves. Now the system trades only during 0500 -- 1500 GMT and is doing much better.
In retrospect, it seemed obvious that day trading 24 hours per day is like wearing the same set of clothes for Siberia and Sahara. You will inevitably be wrongly dressed on the trip. Yet, as traders, we often get so immersed in our system developments that we forget this one very crucial fact. Indeed, in my opinion, this is the primary reason why almost all trading systems fail miserably -- they only focus on the how and never pay attention to when.
When is really a question that addresses context -- that most subtle yet most important element of trading. We all know that bad news gets bought in bull markets and good news gets bought in bull markets. In bear markets, it’s the exact opposite. The same inputs yet the output is diametrically different. And that dynamic doesn’t just apply to fundamental factors but to technical ones as well. In bull markets 20 period SMA will act as support. In bear markets, it will break and signal lower prices ahead. Context is everything.
Now the question of whether we are in a bull or a bear market is almost existential in nature and often impossible to answer until we are well within the regime. On the day trading horizon, however, the question of when is much easier to answer. One very obvious factor is scheduled news events -- be they economic releases, central bank meetings or political press conferences. Those events are usually known well in advance and can tell the trader when NOT to trade. Two of the best traders in my room, trade with very complex EAs. But they don’t let them run continuously. They are careful to turn them off ahead of the news and let the storm pass before engaging with the market. They both have ridiculously high rates -- and it’s not because of the setup rules (I know, I created those setups) -- it’s because they use those setups judiciously.
The when is much more important than the how.
They say trading is timing. That’s true in more ways than one. Most of us focus only on price action for timing and that may actually be the least important element of success. Choosing the proper time to activate your system is the real secret to profits in the market.