Importance of sticking to the plan
SITTING down and making a trading plan is fairly straightforward – what is your overall objective, where are you going to place your stops, how much of your capital are you going to have in each trade and in open positions at any one time and so on. But making the plan is the easy part – sticking to it when the markets don’t go your way is the bigger task. How often have you moved a stop hoping to ride a wave for longer or for a reversal to take you out of a losing move? This is especially so when you get caught up in the noise of the markets – yet another Greek “solution” crumbles into the Ionian Sea, surely euro-dollar will follow it?
“Trading the price and not the news has never been truer than it has been in recent months,” says Michael Hewson, senior market analyst for CMC Markets. “If traders followed news flow the key themes would have been Greece is fixed, Greece isn’t fixed, it’s fixed, it’s not fixed and such news can cause flip flopping in sentiment.” Following the underlying trend in price movement is key to gauging trading decisions and timing and – while news flow is important – trading what you see and not what you hear is probably the wisest course of action for any trader.
Many traders argue that trading on price action is key to avoiding getting caught up in the noise of the markets. “Trading in line with the trend is much more important than trading based on an idea based on macro fundamentals as it’s scientifically proven that certain macroeconomic indicators and ideas come and go out of fashion,” says Alejandro Zambrano, market strategist at FXCM. “The only way to know if other people agree with you is if prices trend in line with your macro idea.” Zambrano adds that you might even be right about an idea and get rewarded, but an idea will at some point get saturated: “The idea to short the euro might be one of those ideas, as everyone has been looking to short the euro, but if everyone is short the euro then there will not be anyone left to move prices lower (see chart, below). In this case, the price will start to increase as fewer and fewer traders become concerned about the euro.” If the price trend shifts and the price trend and your ideas do not agree, follow the trend to reap the profits.