When not to trade: applying the beginner strategy

This content is provided for educational purposes only. If you decide to apply what you have learned, you do so at your own risk. Please read our disclaimer.

There is no system that is 100% automated or mechanical that will yield extraordinary results — there will always be some decisions that you will have to make, like deciding when not to trade.

The beginner strategy helps you learn trading, but you should not think of the beginner strategy as a way of getting rich quickly. Nor is it the holy grail of systems where you can simply trade and never have to make a discretionary trading decision again.

Trading carries a risk and each time you place a trade, you should understand that you can either lose the trade or win the trade. As long as you stick to only risking 2% on an single trade, you are able to protect your account from draw down effects.

No system 100% automated or mechanical is likely to produce extraordinary results — there will always be some decisions that you will have to make to make a strategy really profitable.

Any strategy that has a set of rules can be more profitable in one set of hands than another. The difference is down to the trader and the way the strategy is applied to the markets. For this reason, there is always a certain amount of discretion that needs to be involved. In our additional articles, we help you develop your decision-making abilities in order to apply this strategy to the markets.

Most traders that have become successful will tell you that their best decisions do not revolve around when to trade, but rather when not to trade. In this lesson, we address some of these situations that will help you understand when it is best not to trade.

We address the following situations:

If you have any questions after reading this article, then you can visit our forum here:

What happens when the price goes above the R3 or the S3?

The R3 and the S3 are the last pivot points to the top and the bottom. The price sometimes trades above the R3 or below the S3. When the price is trading outside of these ranges, they are trading above or below a normal daily range. This means that there has been some substantial buying pressure or selling pressure that has pushed the price beyond these levels. When this happens, the price is likely to stall as traders are likely to start taking their positions off.

In these cases it is best to stay out of the markets and wait until the next day to resume trading.

Can I learn to trade with this strategy on any currency pair?

The answer is, technically, yes – price will generally move in the same way no matter what the currency pair. However, there are some considerations that you must take into account, because there are some currency pairs that will impact your profitability.

Trading currencies on lower time frames with currency pairs that have high spreads is not necessarily ideal. The EUR/USD and other major currency pairs are better for the beginner strategy, because they generally have low spreads.

The spread on the GBP/JPY, for instance, is significantly higher than on the EUR/USD. This means that if you are targeting a pivot point a certain amount of pips away, then you have to account for a much higher spread on the GBP/JPY and the strategy is likely to be less profitable than on the EUR/USD.

For this reason, currency pairs that have a high spread would not essentially be ideal to learn with the beginner strategy. The EUR/USD and other major currency pairs are better because they generally have low cost spreads by a broker.

Also, currency pairs with low liquidity would also not be good idea, because you need enough liquidity to make sure you get your order filled at the correct time and price. This becomes more crucial when trading on a lower time frame such as the 5 minute chart.

Currency pairs can move with each other

You must also be aware that trading different currency pairs that are correlated can add to your risk. Currencies are generally traded in pairs, however pairs cannot be thought of in isolation, because if one currency in the pair increases in value, then it is likely to increase against other currencies in different pairs as well.

For example, if the value of, say, the US dollar rises in value against the euro, it is not likely to just increase against the euro, but rather it will increase against all other currencies. So if the value of the EUR/USD rises, then it is likely that the AUD/USD will also rise.

If you then open up a buy trade on both currency pairs at the same time and you have risked 2% on each trade, then you have effectively risked 4% on a single trade. This is because if the EUR/USD falls, then the AUD/USD is likely to fall as well – you could lose both trades because they are strongly correlated with each other.

Not paying attention to the correlation effect between currency pairs is likely to have a negative draw down effect on your trading account, because you are likely to be increasing the risk when trading.

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Your entry may be too close to the profit target

Sometimes when you go to enter into a trade, you will notice that your entry is very close to your profit target. This leaves a question open about whether you should enter into a trade or not. It is a little difficult to judge because most of the time you do not know how close is too close either.

If your profit target is less than 5 pips away from your entry, you can target the next pivot point, or wait for a new trade set-up.

As a general rule of thumb, if your profit target is over 5 pips away from your entry, then you can go ahead and enter your trade as normal. If the profit target is less than five pips away from your entry point, then you can choose to target the next pivot point beyond your profit target.

Should I close my trades before the weekend?

Yes. If trading the beginner strategy, always close your positions on Friday. It is essential in the beginning to avoid leaving trades open over the weekend. Even though the markets are closed, speeches, catastrophes and political events — for example — can happen that will move the price.

However, because the markets are closed, market gaps are likely to occur as traders cannot react to these events until the markets open on Monday. Market gaps can be large and may even go past your stop loss, which can lead to a large loss on your open trade.

Trading with the news

Economic news reports give indications as to the strength of a particular country. However, it is generally best to stay out of the market until the news has been released due to volatility.

Throughout the day, economic news are released that give indications as to the strength of an economy of a particular country. When these economic reports indicate that an economy is doing well, generally as a rule of thumb the currency will rise. There are many different reports that are released and each one generally reports on a specific segment of the economy. However, at the time of publication, this economic news can create a lot of market volatility. If you are in a trade set-up or your trade has already been triggered, then the market can quite literally whipsaw you out of the market before continuing on.

So what do you do when these economic reports are being released? If you have not yet entered into a trade, then it is generally best to stay out of the market until the news has been released. This may mean waiting for a new trade set-up, but it is a much safer option than entering during a news release.

You can visit our news section to find the most important news releases of the day that can impact the financial markets:

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  • Really great article! Adds discretion to strategy, which is really important in your path to become good trader.
  • Taking instructions is cheaper than learning from experience.
  • remmyz:
    Taking instructions is cheaper than learning from experience.

    Hi remmyz
    As a general observation I totally agree..However this is why Demo accounts let you trade for as long as you like with no risk until you are confident to risk your own capital biggrin
    Regards
  • Yes, demo account is very useful. Nevertheless, many newbies will still have to learn 'when not to trade' by EXPERIENCE rather than taking these lessons seriously. This happened to me. EXPERIENCE is a cruel teacher. In retrospect, I wish I had these lessons and used them as a guide! Imagine entering a trade on a nice technical setup only to suddenly experience spikes and violent volatility hitting my stop loss due to a news event I forgot to check up. An example of when not to trade.
  • Ouch...yeah just when you have the strategy perfectly set up some central bank governor opens his mouth or a much worse than expected growth or inflation figure hits your position head on (as it were ) biggrin
  • Hello, regarding the topic "trading with the news". I developed an indicator that brings for the chart the news for the current chart currencies, from Forex Factory Calendar. I'm bringing Low, Medium and High impact news. But what kind of news we have to consider for the begginner strategy? Just High or Medium? Just High, or another kind of filter according the news type.
  • Hi Rodorush
    This sounds very interesting. Although I do not agree with every impact rating on that company's calender of economic events I would include Medium as well as High so that Beginners are aware of the risk they take if they run a position over a release of data.
    If you cover more data then , at least , the user is aware of the potential risk..
    regards
  • Thank you very much Tobester for your answer. What do you think about how much time we must wait for re-start the strategy after a news have came?
  • Not long Rodorush. It really depends on the news unfortunately. Medium impact would not have a lasting effect in most circumstances so I would allow 10 minutes for the market to absorb and react to the news. However , as I am sure you've seen, High impact news both in terms of economic stats or senior financial officials comments can move the market for the rest of the day or longer.
    I think the main point here is how close the news is to the market expectations. It's usually when news is unexpected or contrary to expectations that the market makes a large move.
    I hope you can allow for this in your indicator..
    Regards
  • This site is great! I thought fractals very complicated and stayed away from them.But you make it easy and interesting. Thank you.
  • Hi, great points in this article.

    Can i suggest that the answers to question 6 in the quiz to be reviewed? The correct answer does not seem co-relate to what is presented in the article.

    Perhaps a choice of 3 multiple answers would be better?

    For your consideration please.
  • Hi ouyong,

    Thanks for giving us feedback - we always encourage improvement ideas.

    I have had a look at the quiz and am not sure what you mean though.

    Question 6 is a simple yes/no answer and the question is specifically targeted in the content of the lesson.
    Perhaps you mean another question?

    Let us know your thoughts!
    Thanks!
  • Hi Emma, thanks for the prompt response. I was indeed referring to question 6.

    The answer to Question 6 is :
    "No, if the market is not moving much then it would be appropriate to miss this particular trade and wait for a new opportunity. "

    However, that is not exactly what the content of the lesson described.

    In the content it states;
    "This leaves a question open about whether you should enter into a trade or not. It is a little difficult to judge because most of the time you do not know how close is too close either."

    and it goes on to describe a "rule of thumb" which states:
    "If the profit target is less than five pips away from your entry point, then you can choose to target the next pivot point beyond your profit target."

    Likewise, in the orange box next to the content it states:
    "If your profit target is less than 5 pips away from your entry, you can target the next pivot point, or wait for a new trade set-up."

    Therefore I felt that "Yes" should have been the correct answer to Question 6.

    Or perhaps the question could be amended or have the answers amend to better reflect what the content was trying to put across.

    smile Sorry for the long reply to such a small issue.

    Regards.
  • and I like trade with fundamental analysys
  • Hey ouyong,

    No need to apologise, the valuable feedback is and always will be from you guys and so we welcome it and you have my thanks for taking the time to write such a details post smile

    Tim made a special case of pointing this out and asked me to take a look. After reading through your post and looking at the question, I understand where you are coming from and I have modified the question based on this.

    I hope that you find that helpful.

    Hope you are having a great day and your trading is going well! smile
  • Taking instructions is cheaper than learning from experience.
  • Really excellent, very nice article! Results inattention to technique, which is really important or essential in your path to become an excellent investor.
  • "Your entry may be too close to the profit target"

    What if my entry is too FAR AWAY from the profit target? Should i set it with a 1:2 risk to profit ratio (double the distance from stop loss point) or stick to the very distant pivot point?
  • Hi ST3F0
    The idea is to make taking risk worth it. Obviously if you put the TP too close you might lose money on the long run. Also note the further away the target is the less likely it will be hit or if it gets hit you are more likely to be stopped out before it happens because of the back and forth nature of the market. Have you ever attended beginner strategy coachings? It is the right place to ask our experts on matters like this. Regards.
    Hindsighthero

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