A common mistake novice traders make is what’s referred to as; “chasing the market”. The phenomenon takes place due to a combination of factors, such as: impatience, emotions, inexperience and ultimately trying to force profit out of the market, generally from an account which is poorly capitalized. Chasing the market is a habit performed by manual traders only, therefore automation will immediately correct it. However, this article is not intended to dismiss manual trading in favor of automation, as manual trading is a perfectly legitimate method to take profit out of the forex market. We’re suggesting methods of ensuring you don’t chase gains, but in effect set what we’d term “price traps”; you can witness the market come to you and profit accordingly.
Observing the Price action
If we stared at charts for thousands of hours and made notes as to where, when, why and how the most prominent price action occurs, then we’d quickly discover that the major prominent price action takes place when major news announcements are released, or if unexpected, outlier announcements are suddenly made. Moreover, observing price action (when it’s monitored historically) after a major news release, reveals that typically it’s the most likely time for price to push through the various levels of resistance, or support. Therefore, wouldn’t it make sense to use the various tools at our disposal on our platform, in order to capture some pips, as a consequence of this time honored price action behavior, relating to economic calendar events? Sure it would, so let’s suggest some manual trading methods for doing just that.
Let’s experiment using a hypothetical, but likely situation. We note that our economic calendar is highlighting that a major news announcement is being made at midday concerning the euro and the Eurozone. Let’s suggest that rumors are circulating that the ECB are intending to raise the base interest rates by 0.5%, as they’re now concerned that inflation needs containing, the ECB want to ensure the currency rises significantly above the 1.10 level, versus the USD level.
For the purpose of this exercise we propose to only trade the EUR/USD. We note that at 11:30am, precisely half an hour before the announcement is due to be made, the currency pair has hovered on the daily pivot line for most of the morning. There’s been regular, short, unstained bursts towards R1 during the London trading session after opening at 8:00am, without price gaining sufficient momentum to reach, or indeed finally breach R1.
Now we’re not gamblers; we strictly adhere to the strict rules in the trading plan, which we’ve put hundreds of hours into developing. However, we believe that this price action is suggesting bullish conditions for the EUR/USD and we’re confidently predicting that the price action is representative of overwhelming sentiment, suggesting that the ECB will announce that they’re raising rates. This is where and when we decide to set out our plan to let price come to us.
We observe where R1 is, we place our entry order at one or two pips above R1, we place our take profit limit order at R3 and we put the order into the market at 11:50am in the full knowledge that we might manually overrule the trade at any stage to either; take a profit that we’re comfortable with, or close the trade if our prediction proves to be wrong. We also place the stop paying strict adherence to our risk rules, perhaps we only risk 1% of our total account on the trade, after using our position size calculator.
The announcement is released, the ECB do raise rates, but only by 0.25% and not the 0.5% widely broadcast and predicted, the market participants still regard the news as bullish and price pushes up through R1 immediately, it reaches R2 then pauses, it then retraces to below R1 and flirts with hitting the daily pivot point, price then gathers more momentum and pushes back up through R2. This whole exercise plays out inside five minutes after the news release from the ECB. You’re now convinced that price will fail to reach and or breach R3 in the session, price has moved by 40 pips in your favor. You close out and bank your profit. Price does eventually breach R3, but then retraces. You feel completely vindicated regarding your decision making.
Compare and contrast the levels of control you’ve displayed when executing this trade and banking your profits, versus entering too early; you’ve waited for the market to come to you and reach the pivot level points automatically calculated by your trading platform. This is in stark contrast to chasing the market, entering the market too early and sweating on the outcome, and it’s worth recalling that it’s often the simple strategies, which we repeat time and time gain, that reap the longer term rewards.