subject: Careful Trading inside of Consolidation [print this page] Consolidation is perhaps one of the most confusing and challenging trading environments.
Most new and novice traders still have not figured out that there is a time to trade and a time to stay out of the markets. Trading is not a sprint to quick profits, it is a marathon to build financial wealth.
It is important that you always keep in mind one of the most important rules of trading which is to preserve capital.
If your trading system begins to break down and you experience failed trades occurring with more frequency, but you are staying true to your trading method and rules, this could be a very strong signal that you should stop trading. What should you do when you stop trading?
When I experience changes in the market due to uncertainty and lack of direction, I still show up to my office trading the same number of hours five days a week during the London and New York session however I watch the market without placing a live trade. I watch to see how traders react to economic data and the comments that are made by distinguished market analysts.
Consolidation often means different things to each trader. Consolidation can occur on a small time frame yet still show a trend in place on the larger time frames such as the four hour or daily charts. However when there is consolidation that appears even on the four hour or daily charts, its time to be careful. Very careful.
A lack of volume and a lack of commitment from traders can cause price to retrace or reverse quickly, often times before the typical profit targets are achieved in most trading systems.
When markets move sideways inside of consolidation, its a good idea to stay out and wait until a clear sense of direction begins to unfold or take shorter profits and prepare to close a trade quickly if necessary.
Realize that by trading in this type of environment you are actually changing your trading strategy and your original plan. This could be argued that it's difficult to maintain discipline to your trading strategy and you could ultimately affect your performance by unnecessarily changing profit targets and stop loss levels.
So the question is, should you trade when there is a great deal of uncertainty in the markets and consolidation?
Regardless of whether or not you place a trade, it takes the same amount of analysis to determine that you should stay out of a trade that might be against your trading strategy, as it does to find a trade that honors every rule. Your challenge is, do you have a trading plan that includes how you will control your behavior when the markets begin to move in a manner that you are not familiar with?
If you are new or inexperienced with certain types of market environments it may be a good idea to start off with a simple rule that states when you lose more than two or three trades in one day but you follow every rule and price is moving in a sideways unpredictable manner, stay out until you have analyzed where the mistakes are being made and there is a sense of direction and you can gauge market sentiment.
When uncertain times begin to develop, it sometimes takes even more time for the majority to accept the reality of change in the markets.
So the question is repeated, should we be trading in uncertain trading environments that could cause us to give back previously earned profits?
Yes and No. It depends on many factors:
Your experience ( have you traded through this type or market environment before?)
Can you stop trading when your strategy isn't providing any trade signals?
(this is important! You must have a strategy or routine that will help you overcome the urge to trade when you should be trading at all based on market conditions)
Your trading plan and strategy so be a detailed "blue print" with exact entry, target and stop loss and specific trade criteria that signal a trade. Once you have a comprehensive trading plan, it will make finding your trading errors much easier to identify and you can then work on correcting the behavior.
Remember, (and you already know this) trading is not gambling. It is to be treated like any other business and preservation of capital is one of the most important rules of any trading plan or system.
Ultimately, your ability to remain sensitive to market changes is what will allow you to make the necessary changes quick enough to prevent giving back earned profits. This sensitivity can be practiced even without live trading.
