By Marco Mayer on Thursday, 20 October 2016
Category: Trading General

Waiting for Confirmation? Don’t wait too long!

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 :-)

Happy Trading!


Marco

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