There is more to Forex trading than your usual technical analyses and strategy. Trading psychology is an equally important part of trading, as human emotions and mental state can make or break your success in the market.
The different aspects of your character, your behaviour, and even your circumstances can influence your actions. These are only some reasons for having a ‘no-position’ approach as a valid trading strategy.
Why stay on the sidelines?
Having no position can be the best trading position you can ever have in a particular time or situation. Remaining on the sidelines may not be popular, but some circumstances call for this move. Here are common factors that may encourage you to do that:
Personal life conditions, especially distractions.
Market-related reasons, which could be any of the following:
- Economic news;
- Bank holidays;
- Central bank movement; and
- Weekend trading.
How can a no-position trading strategy be helpful?
Let us look at the factors that affect trading psychology and understand how each can impact your trading position.
Your personal life
Your emotional state can impact how you might interpret the forex market. For instance, the death of a loved one may lead to emotional strain. A confusing and wide range of emotions can result from this situation: depression, anger, denial, and disbelief are just a few to mention. When you interact with the market under these overwhelming emotions, you’re prone to experience disastrous consequences. With that, it is better that you take a break from your usual trading routines and avoid putting your live funds at risk. Emotional stress is a challenge, and you must address this first before moving forward in your trading journey.
On the other hand, distractions can come in different forms. Your full-time job or profession may require a certain level of focus. Dealing with interruptions while accomplishing the tasks at hand can be stressful. Hence, it is crucial to limit distractions during live trading. To clearly illustrate this idea, let us assume that you’re currently watching the 1.3020 support level on your EUR/USD pair and monitoring its movement to make a profit. Then, your telephone suddenly rings, and you need to go downstairs to answer the call. While talking for five minutes on the phone, the price bounced. Now, you’re having a dilemma on what to do: whether to chase the price that is now at 1.3027 or let it pass knowing you’ve missed the chance.
Social media is another source of distraction. While it has many uses to a lot of people, it can divert your focus from what is more important. Remember: focus is very important in any endeavour, especially Forex trading.
While you may exert a certain level of control over the internal factors mentioned above, we must also discuss certain external factors you may have little or no control over whatsoever.
High-impacting news events, such as the pandemic, can affect markets. Executing trades right before, during, or even immediately after these kinds of events may lead to adverse effects. It is best to wait for any sign of progress, reassess the situation, then trade as usual if everything goes back to normal.
Commercial banks play a major role in the currency market by facilitating the bulk of the trading volume. When they close due to national holidays, the market becomes less liquid. This can result in both abnormally high and low volatility. It is advisable to avoid currencies connected with closed banks as the price movement is typically thin.
Central bank movement
The overall monetary system in a certain country is the responsibility of its central bank. Hence, any announcement or unexpected policy shifts by the central bank jolts markets across the board. Surprise movements or changes in regulations can develop into significant currency movers, even clearing technical levels. The good thing is that central bank exchanges are normally scheduled. You may plan your trades or stay on the sidelines, as the case may be.
Having open trades over the weekend may be a risky strategy, so it is better to avoid trading during these times. Should a disaster occur, it can wipe out your account. Intraday traders are an exception since their trades are liquidated at the end of the day. If you’re into swing trading, it’s up to you to decide if your active positions are worth leaving as weekends come. Whatever you think is best for you, do it. But we know for sure that if you choose not to trade on weekends, you secure your funds.
Like any other endeavour in life, you should know when to step back and assess the situation. It is a real and viable strategy in Forex trading. There are some factors that you can and can’t control. But the important thing is knowing how to respond to these factors, even if it means stopping and just doing nothing. After all, you control your trades, and you can choose a no-position trading strategy.