Day Trading Quick Tip # 8 - Find a Reason to Stay Flat

Successful trading involves looking for a reason to enter a trade (price patterns, indicator patterns, etc.) and then entering those trades without any hesitation, right? ... Wrong!

Find a Reason to Stay Flat

Most traders are more than willing to enter trades, and they will use any excuse to enter even the most marginal trades (those that barely meet their trading system criteria). A simple example of this might be a trader whose trading system requires a stochastic crossover above 80, taking trades when the stochastic lines are equal above 80, but then cross at 79. The problem with this, is that the trade is no longer part of their trading system, but they are willing to take the extra risk (of an essentially unknown trade) for the potential of making some money.

Instead of looking for a reason to enter a trade, successful traders will look for a reason not to enter a trade, and will only enter a trade if they cannot find a reason to stay flat. This works best when a clearly defined trading system is combined with knowledge of the market being traded (see day trading quick tip # 1- know your market). A realistic example of this might be a trader who is about to enter a trade that meets every criteria of their trading system perfectly, but knows that at this time of day (perhaps lunchtime) their market rarely moves enough to reach their target, so they stay out of the trade. These traders are risk adverse (which is a good thing to be), and they know that by protecting their capital they will have a greater probability of making money over the long term.

What Makes a Good Reason to Stay Flat

The reason that is used to avoid a trade must be a real reason, and not something that is made up. This means that things like the time of day, unexpected price patterns, support and resistance, trend lines, and any other valid trading criteria are suitable, but emotional reasons such as fear of a losing trade are not suitable.

Profitable trading is about managing risk and reward. Avoiding trades that are marginal, or that are conflicting with your knowledge of the market, is very effective at minimising risk and favoring reward. So, the next time you are about to enter a trade, try looking for a reason to stay out of the trade (stay flat). Obviously, if you are unable to find a reason to stay out of a trade, then it should have a high probability of being a profitable trade. Go ahead and make the trade according to your trading system, and pat yourself on the back for being a risk adverse trader.