A popular concept in the world of trading, especially among technical traders and chartists is to
wait for confirmation before entering a trade.
This means you have a Signal, for example a price action pattern and now you wait for the markets
to confirm that pattern before you enter. The idea of course is to filter out bad trades this way
and to gain confidence before entering the trade.
But that confidence might come at a very high price in the long run. The problem with waiting for
the markets to confirm your trading idea is that this „Confirmation“ often already is your profit!
In other words the Signal has worked and you would have been paid to take the risk and trade it.
And that’s what you get paid for as a trader, you try to anticipate a price move you believe is
going to happen. Please notice that this is true despite of your trading style. You might hear
statements like „I just follow the markets, I don’t try to anticipate what’s going to happen.“
(usually these come from traders following some kind of trend following approach). But what they
really mean is that instead of trying to get into a trade early anticipating the markets to reverse
direction, they get in late anticipating that the markets will move even further in the direction
it has already been moving. Of course nothing wrong with that, but in both cases traders anticipate
a future price move they want to profit from and it’s important to be aware of that fact.
Another example is trading a specific support/resistance level. Sure the risk to buy into a support
level while the market is in free fall is risky. But that’s precisely why these trades often offer
you a great profit potential. In case the trade works out, you’ll get paid for that risk you took.
But again…once you see that huge reversal price bar on your chart that bounced nicely off that
support level - you probably already missed the opportunity.
You now know that you’ve been right. That really was a support level and market participants bought
again at that price. Because of that price moved up and that’s why you now see that huge reversal
bar. But that move is over now…and those who took the risk and bought at the level are now taking
their profits - hopefully you’re not the one buying from them now.
I could come up with many more examples like waiting for an indicator to confirm a trade etc, but
the point to consider is that whenever you wait for confirmation you give up a significant amount
of potential profits. And more often than not, these potential profits cost more than the couple of
losing trades you might filter out waiting for confirmation. Your job here is to find a good
compromise between getting in too early due to a Signal coming from market noise and getting in to
late due to a Signal that misses most of the opportunity.
The Ambush trading method for example is an extreme case, it gets into trades again the ongoing
short-term trend all the time. But that’s precisely the idea behind it, trying to anticipate where
that short-term trend is likely to end. Sounds risky? Well I believe it’s actually a lot more risky
to be on the other side of these trades ;)
When it comes to the AlgoStrats:FX systems, these are well diversified when it comes to the
question of confirmation. Some of the systems try to get into trades very early without waiting for
the market to show any signs that it’s reversing, other systems are waiting for a breakout looking
for situations where the market already strongly moved in one direction but is still likely to
continue that move.
And as always testing what works in the long run is the way to go here, that I can confirm :-)
All content on AlgoStrats.com is only for educational purposes to show you the type of trades that you may consider once you have learned to trade and analyze the market yourself. It does not constitute investment advice. Marco Mayer & Trading Educators, Inc. will not accept liability for any loss or damage, including but not limited to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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Trading Futures, Trading foreign exchange on margin and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures, foreign exchange and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, foreign exchange, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. You should be aware of all the risks associated with forex, futures, and futures option trading, and seek advice from an independent financial advisor if you have any doubts. In addition, the information contained on this website is not intended to be investment, legal, accounting, tax or other professional advice. If such advice is sought, or other expert assistance is required, the services of a competent professional should be sought.
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