Knowing when to stay out of market

When developing a trading strategy and assessing entry and exit points, always appreciate the benefit of staying out of the market as much as possible. In trading it is equally important to know when to enter, when to exit, and when to stay out.

Some traders feel they have to be trading all the time because they equate the occupation of trading only with the actual process of buying and selling. Since everyone else works a full day, they should be "working" too. The act of trading requires intense concentration and knowing when to be in or out of the market. Inactivity in trading should never be confused with not working; it is just as much a part of the trading process. Others feel that as soon as they enter the market it should now begin moving. Remember that markets do not always present good trading opportunities because they may be inactive or random much of the time. There is no sense in trading a market when there is no clearly defined trend or movement; the trader has no advantage during these situations.

An even more important reason to avoid overtrading is to keep your strength and health. You must know when to stay out of the market to maintain a proper perspective, but most importantly to avoid burning out. Trading saps your mental and physical energy. Staying on the sidelines at the right time allows you to build up your stamina for the next trade. Overtrading can not only be financially ruinous, but also mentally and physically debilitating. Stay in shape mentally and physically by not trading too much.

 

ABILITY TO SEPARATE THE PRESENT FROM THE PAST AND THE FUTURE

The trader must focus on the present condition of the market and determine whether it is right to be long, short, or out of the market. Many traders make trading decisions about the market based on their current positions. For example, a trader holding a long position may buy more contracts because there is already a profit from the original position. Others take positions because they believe the market will go higher or lower and do not want to miss out on the move, irrespective of the current condition of the market. These are poor reasons to take positions.

The trader must take a position based on the present condition of the market. If the present environment does not hold good trading opportunities, the trader should not have a position. For example, if you are long the market and have a profit, you should buy, sell, or hold based on the condition of the market and not on your current position. Of course, you must trade within the limits of the amount of risk you can incur.

Execution costs are relatively small in futures, compared to the amount that can be lost in a trade. The trader must make a conscious decision whether to be in or out of the market all the time.