The Financial Market is a Random and unpredictable place filled up with lots of surprises. Some are good surprises and some are less great. Yet, many Novice Traders constantly like to “Think” that they know the market and they trade it with high expectations that it’ll head in their direction.
Ha… Guess what happens to them? They often get slap by the market.
It is often quoted that we should “Trade What you See and Not What you Think”. In English, that just means, that you should trade your edge – and your edge is defined by your trading rules. If you see a set up and that set up meets all your Entry Rules, you take the trade accordingly. Period…
However, what you cannot predict is the outcome of the trade.
Today’s article is about acknowledging randomness in the market and I’m going to focus on the random outcome after you take the trade. As traders, you have no crystal ball and, hence, need to stop predicting the market.
Let me try to help you demystify this concept a little bit.
Embrace Randomness
(Click on image for Larger View)
The chart above shows a currency pair (let’s call this XY) that is approaching a Resistance level. The level was tested in the past but bounced away – as shown at Green arrow. So where do you think price is going to go next?
To illustrate my point further, I drew 6 potential outcomes within minutes and added brief descriptions to it. Make sure to Click on image for Larger view.
Chart 2 – price bounces off the Resistance level before price breaks above the level to continue north
Chart 3 – price breaks above the Resistance level before it pulls back to re-test the level. Hence, turn into a Support level instead
Chart 4 – price breaks above the Resistance level but it fails to hold above it. Hence, comes back below the Resistance level, creating a False Breakout price pattern
Chart 5 – price bounces off the Resistance level and makes a full reversal
Chart 6 – price bounces off the Resistance level but fails to make a New Low. Instead, it made a Higher Low which turned out to be an Ascending Triangle price pattern
Chart 7 – price bounces off the Resistance level. Although it made a Higher Low, it failed to break above the Resistance level. Hence, forming a double top pattern.
As you can see, the outcomes are random, price either bounces or breaks the Resistance level. Nonetheless, a bounce does not mean a Reversal, although it could. And a break does not mean a Continuation, again, although it could. Some times, you’ll even get a False Break.
The above is only for illustration, there are a lot more possible outcomes but I think you get the point.
If you’re not familiar with the idea of Support and Resistance, please read my previous article on it.
Exit Management
So, what do you do? Stay out? Well, exactly that if this is not part of your trading plan. However, if this is part of your trading plan and the set up meets you rules, then trade it without thinking about the outcome.
Above and beyond that, build a solid Exit Management. Trade Exits play an equally important role compared to Trade Entries. If your Exit Management is good, you’ll have Small Losses, Small Winners and Big Winners only. You very rarely have Big Losses.
And that’s really my point here, being profitable is to have Winners that are Bigger than your Losses irrespective of any market outcome or randomness. Also, you don’t need to win all the time to be Profitable.
Conclusion
Like it or not, trading the Financial Market is not about being Right. As a Price Action trader, stop trying to predict the future. In fact, from my personal experience, as soon as I acknowledged and accepted market randomness, my trading started to improve. Believe it or not, you can do it too.
As you can see, Market Randomness is part and parcel of trading. The objective of a Pro Trader is not to avoid market randomness. Instead, a Pro Trader always Embraces randomness with excellent Management.
Hope this article make sense. Thank you for reading and feel free to send me any feedbacks on my articles.
Happy Trading!!
Leave A Response
You must be logged in to post a comment.