The Only Question You Should Ask Yourself Before Taking A Trade

Successful discretionary trading is supposed to be black and white…but it isn't.  That is half the challenge (and the fun).  There is a constant battle between the “Spring Break/Girls Gone Wild” part of your brain that wants to risk half your account on one trade while drinking a Tequila shot and the other part that will make you start acting like Adrian Monk and not take any trades at all.

So what is the best way to meet in the middle when taking a trade?  I have found that asking one simple question helps me a lot.  Nothing is foolproof of course, but it does cut through a lot of the emotion and anxiety.

The question is…

“Do I have an advantage? “

Duh.

Yes, it may seem idiotically simple now, but how many times have you been caught up in the moment and taken an impulsive trade?  Don't worry, I'm not judging…I'll bet that I have done that twice as many times as you have.

This question reminds me to do a quick logic check and see if this current setup will give me an edge.  Doing this not only keeps me out of stupid, impulsive trades, but it will also force me to take trades that I may be apprehensive to take (for whatever reason).

Missing out on profit can be just as bad as getting into a crap trade.

An Example

Here is a chart from a couple of days ago where I kept myself from taking a bad trade by asking this simple question.  This is the exact point in time where I had to make the decision of “go” or “no go.”

This is a 1 hour EURUSD chart, trading the Wallaby method.  I identify an advantage in this trade when price and the Wallaby indicator (red) become divergent and Stochastics (blue and yellow) are at an extreme.

In this case, my maximum advantage would be when the Stochastics are as close to the top of the range as possible and the yellow line has crossed over the blue line, with good separation between the two.  As you can see, it has already moved down through most of the range and is actually starting to turn back up again.

Price has also almost hit the first profit target of support, which means that it will be harder to make any profit from there.

It would have been easy to justify taking this trade and if I'm honest, I did hover over the Sell button for about half a second.  But then I asked myself the question and the answer was “NO.”  My advantage was gone and there was no reason to take the trade.

Even at optimal entry, shown in the chart below, price was too far gone and the easy (er) money was already off the table.

After 1,000+ backtesting trades in this pair, I understand what to look for and I know when I have an edge.  That doesn't mean that I am immune from taking a bad trade or taking a loss, it simply means that I understand the trade and am less likely to do so.

How did this trade turn out?  It would have been profitable.  🙂  But I'll take the odds over 20/20 hindsight any day of the week.

If you don't know how to identify an edge in the market, then you have bigger problems.  Get to work stress testing your method and learn to spot a good opportunity.  It is hard work, but it is worth it.