Forex Trading Strategies - Trade Your Setup, Don’t Let the Setup Trade You

Trade Your Setup, Don't Let the Setup Trade You

Although most likely he has never seen an FX screen, I am sure that Rick Harrison would make an excellent trader. I’ve written about Harrison, the star of the History Channel reality show Pawn Star before, but this week he was on my mind more than usual as I navigated the treacherous waters of the currency market.

What makes Harrison so good as a businessman and so powerful as a trader is that he flat out refuses to chase price. If Rick does not get the deal he wants he will simply walk away. He knows his margins, he knows the demand in his store and he remains utterly disciplined in sticking to his business plan.

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Rick’s equanimity is a timeless lesson in proper trade management that we should all try to emulate. It is particularly important to day traders such as myself, where margins are slim, opportunities are many and a single mistake could cost you a day’s worth of profits. When it comes to daytrading the old dictum that it is better to pass up an opportunity than it is to chase a trade holds very true, One of the ironies of intra-day trading is that so many people believe that more trades will generate more profit. That attitude reminds of an old garment center joke. A t-shirt maker who loses money on every item is asked how can he intends to earn a profit. “We make it up on volume,” he answers nonplussed.

That misguided attitude only intensifies when a trader is hit with a series of losses. The urge to press the trade becomes stronger and stronger as the desire to “get back to even” trumps all other analysis. It is at that time, that I often ask myself, “Am I trading the setup or the setup trading me?” Just that simple question can often jar you back to reality as you consider whether this particular trading idea truly has merit or is simply your attempt to get into the market as soon as possible.

Speculative markets are an exercise in manipulation. Market participants often move prices to entice the weak longs or shorts to enter at the worst possible time only to instantly reverse the price action in the opposite direction once the trade is made. Trading is hard enough as everyone tries to get you to make the wrong move. That’s why it is really important to follow your trading plan the tee. Markets are already manipulative. You need to make sure that you are not manipulating yourself.

Are you trading your setup or is the setup trading you?

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