Knowing when not to trade Forex is crucial to your success. There are a number of scenarios where it is inadvisable to trade Forex. These can be separated into personal/environmental reasons and market reasons.
Personal reasons not to trade:
- Get rid of all distractions. You need to keep your focus on the charts and not lose your concentration to other things going on. For instance, you might be waiting for a trade and get distracted. When you come back to your chart you have missed the trade, or even make an error in creating your trade. Distractions can cost you money. However, life is full of them so just put the cat in the hallway and shut the door. Put your baby in a playpen so you don’t have to worry that she has wandered off again. Whatever your potential distractions are, find a way to manage them before you start to trade.
- Emotional times. If something emotional is happening in your life and you can’t maintain your objectivity, don’t trade! This could be any number of things that had a negative impact on your day. It could be that you had some road rage earlier or broke up with your partner etc. When trading, you need to be able to assess what is happening in quite a short amount of time. If you are mentally elsewhere then this will have a negative impact on your trading account. Emotionally taxing events are without doubt a sign of when not to trade.
The personal times that you should avoid trading in can be summed up as times when you are out of sync with your normal mental rhythm. There are absolutely times where your emotions or environment negatively affect your trading. This may impact the likelihood of a successful trade. The good news is that these things tend to be in the realm of your control.
The market reasons for not taking a trade are different in this sense. Market reasons tend to be external issues where you have very little control. These can really kick you in the leg and leave you limping for a while. Ignore them at your peril!
Market Reasons not to trade:
Bank Holidays. These are scheduled and there is nothing you can do about it. If there is a U.S. or UK bank holiday I typically won’t trade. This is because the Banks are the biggest participants in the Forex market. If they are on holiday then the volume of transactions being carried out is greatly reduced. This can lead to either really static markets or on occasion erratic markets. Either way, I steer clear.
If, however, it’s a Bank holiday in another country such as Japan or Australia then I wouldn’t trade currency pairs that belong to those countries (EUR/AUD, USD/JPY etc.) but I would trade all the other pairs. It isn’t always about when not to trade, but also what not to trade.
News. There are scheduled news releases and economic news throughout any given day. These can be found in advance by using an economic calendar. The most popular one is Forex Factory’s calendar. It can sometimes be difficult to know when not to trade when it comes to news.
There are 3 types of news: yellow, orange, and red. Each has a different expected impact which is explained in the calendar. High impact, red folders tend to really move the market, sometimes spiking in both direction, before finally settling down. These are high risk times where a lot of people get stopped out of trade.
The one’s I specifically avoid would be the ISM Manufacturing data, interest rate announcements, and NFP related news announcement. However, it’s not just the announcements themselves that can affect the market. Rumours surrounding what the potential numbers will be can cause the market to move in anticipation. Therefore, it’s generally not a good idea to trade the hour before and after news releases. With NFP, it’s a good idea not to trade that entire day.
See AlsoWhat is the 5 3 1 rule in Forex?That may seem extreme, but these can be the biggest account killers that lead to traders quitting.
Speeches. These tend to be on the economic calendar as well. If specific people are talking, please, do not trade. These people include the ECB President Mario Draghi, Fed Chairman Jerome Powell, and BOE Governor Mark Carney. It’s important that when the BOJ Governor Haruhiko Kuroda speaks to pay attention. These tend to happen when people are asleep, but if you are trading the Japanese session then be wary!
These people are notorious for dropping hints about economic policy changes that are likely to happen with the currency they are responsible for. These hints can cause a lot of speculation in the market which results in a lot of price movement. This can affect price substantially as they are responsible for setting interest rates for those countries. As mentioned earlier, interest rate announcements can cause big movements.
Erratic Periods. There will be times where a currency is moving differently from normal. Perhaps price is spiking and you don’t know why. This is a good time to stay out of the market. If you can’t understand why price is behaving in a certain way, it is usually due to some unscheduled news that has been released or leaked. That is bad news because the market will be unsure as to how to react. For instance, this happened recently during the credit crunch and the various Banks reporting that they were having major difficulties.
Weekends. It is not recommended to hold trades over the weekend unless your method is a long-term strategy which incorporates holding trades for a long time – weeks, months.
A lot can happen over a weekend. All it would take is for one Bank to go bust over the weekend for your position to flip on its head. Current tensions in a lot of countries around the world lead to violence which heavily impact the market.
These type of events will generally lead to the market opening after the weekend with a large gap and generally a large change in your position. This can often cause serious harm to your trading account balance.
Market close/open. It’s a good idea to avoid these or be wary around these times. At market close a number of trading positions are being closed. This will lead to volatility in the currency markets which can then cause price to move erratically. The same applies at market open. A lot of people are opening positions as they didn’t want to hold them over the weekend for the reasons stated above.
December and Summer Holidays. Banks tend to trade the Forex market at least once a day for balance sheet reasons. They can also trade multiple times throughout the day for speculation reasons.
When I say balance sheet reasons, I mean to balance out their currency book. They need a certain amount of each currency to meet the demand of their customers – both personal and business – that will need to buy foreign currency from the bank or exchange their foreign currency into their local currency. Banks have to balance this out each day otherwise they leave themselves open to Foreign Exchange risk. This means Banks are the major players in the Forex market.
So during December and the summer months a lot of bank staff take their holidays. Therefore, the Forex market tends to be slower in these months because there are fewer participants. This is typically a good time for private traders, such as us, to take our holiday! If the markets are flat there is no point in trading. You may as well go off and enjoy yourself.
You’ve got to keep your body in prime trading condition and holidays are a big part of giving your mind some time to relax. Recharge those batteries so that you are ready to go when you get back trading. If you know when not to trade, you will be better prepared for when you should trade!
