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Price Action Swing Trading: 3 Warning Signs That No Trader Should Ignore – 9-Jun-16

Hello there Forex Traders!

It’s no secret that I’ve been going through a tricky period in my trading. It’s nothing that I haven’t experienced before though. And I’m sure I’ll experience much worse in the years to come.

So, with that in mind, I’m not ashamed to admit that I’m just not quite in sync with the markets right now.

My style of trading thrives when the market is really moving. Those times when the market has a clear direction in which it is heading. When there is a clear theme at play.

This market feels like a scalper’s market. And I’m not a scalper.

We are seeing little in the way of trends – certainly nothing that can measured in anything more than a few days. Things are choppy. The market feels like it is moving alright, but despite that movement, it’s not going anywhere.

There’s movement, but no direction.

Trust me, I don’t relish sounding like a broken record.

I feel as if I have been saying the same thing over and over again for the last six weeks. Tricky markets. Brexit. Break-evens. Small losses.

If you are bored of listening to it, let me assure you, I’m weary of saying it. I’d love to be able to report that June heralded in a change and that things are different to May.

But they aren’t, and to pretend otherwise would be dishonest.

But there is a silver lining to this cloud. Because it’s during the difficult times that we learn the most. Muscles require stress to grow. Diamonds require pressure to form.

So don’t miss out on the learning opportunities that difficult markets offer you.

Over the years, one of the most important lessons that I’ve learnt during difficult markets is the following:

We have to learn when to ease off the pedal

One of the biggest killers when it comes to forex trading is not being able to recognise when it’s time to move into defensive mode. There are times to go for the jugular, yes, but there are also times that we need to dial down the risk a bit.

There are times that making the most money possible is the top priority.

But there are also times that survival and capital preservation has to come first.

There are 3 warning signs that I look for when considering whether it is a good time to think about reducing my position size at the very least, or even consider stepping away from the market completely for a while.

If just one of these warning signs is flashing, there’s probably not too much to be worried about.

If two of these warnings are flashing at the same time, we should start to pay attention.

If all three of these warnings are flashing at the same time, we need to take action.

(It just so happens that all three warning signs are flashing for me right now, hence the reason I’m writing this post!)

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1. Warning Signals From The Charts

Most people, when they are trading, have a bias.

Whether that bias is based on technicals, fundamentals, or something else, people usually have a direction is which they feel the market is most likely to move.

But there are times that the market doesn’t follow that bias.

In fact, there are times that not only is the market failing to move in line with your bias, but is actively and decisively moving against your bias.

That’s a warning sign that you should ease off the pedal.

For example, for the last while I have been bullish the US Dollar. But when the NFP figures came out last Friday, the US dollar sold off hard.

Really hard.

Now, when you look at the charts, there are large bullish weekly candles on many of the USD pairs.

It’s tempting to ignore this sort of signal and just continue to persist with your bias. But if we ignore the market, and try to take it on, there is only ever going to be one winner.

Hint: it’s not us.

Another example is EURGBP.

I was bearish EURGBP on account of the monthly candlestick reversal signal/head and shoulders pattern that I’ve been reporting on for the last couple of months.

But take a second and pull up a EURGBP weekly chart. Look at last week’s weekly candle, which formed due to the strengthening of the Brexit campaign.

We just cannot afford ignore that price action.

If we get these kinds of signals from the market that are directly opposite to what we think should be happening, we have to sit up and take notice.

It’s a warning sign that shouldn’t be ignored.

2. Warning Signs From Our Account

What’s the most valuable data resource in the market?

No, not backtesting tick data for MT4, no matter how error-free it may be.

No, not economic data either.

It’s our own account data.

Our own data from our own accounts, from our own trading. The insights we can get from analysing our own account data can be huge.

And it can, sometimes, contain warning signals that we need to take account of. I’ve been monitoring my stats over the last few weeks, and I have noticed some key changes.

Firstly, the number of losses has increased. Not dramatically, but enough to be noticeable.

Also, the number of breakeven trades has increased. This results in no net loss to me, but when it happens a lot, it means there is something going on.

In the last couple of weeks alone, I have seen over 1,000 pips of floating profit disappear, with those trades getting stopped out at breakeven. Trades are getting into significant profit, but are retracing the whole move, right back to the entry price.

These are warning signs.

They’re warning sign that trends are not developing. That price is continually retracing over old ground. That price is range-bound, and that market conditions are just not conducive to my style of trading right now.

Again, these are warning signs that should not be ignored.

3. Warning Signs From The Outside World

It’s common knowledge that I don’t think fundamental analysis is much use when it comes to making trading decisions.

But that doesn’t mean that I ignore what is going on in the world completely. It’s just that I don’t use news to make trading decisions – I try to focus on the charts alone when taking trades.

Most of the time, real world events are just a distraction as far as the markets are concerned. Sometimes an event will cause large moves, but over the long term, individual events have little lasting impact on the global forex markets.

But – every now and again you get a warning sign about an upcoming event.

Over the last week or so, I have been seeing various forex brokers putting out press releases. They’ve been notifying their clients that they are raising their margin requirements on account of the EU/UK Referendum on 23rd June.

Some brokers have raised margin requirements already, and have pledged to raise them further as we get closer to the event.

This is a warning sign.

It’s a sign that brokers are not altogether comfortable about their ability to withstand the potential volatility surrounding the event. If your broker is uncomfortable with volatility, then you have to be too. You can have the best trading plan in the world, but if your broker (or their software) gets steamrolled by the market, you will end up taking that bath with them; you won’t have a choice.

Again, it’s a warning sign that shouldn’t be ignored.

Individually, in isolation, none of these warning signs are probably much to worry about. Charts move against you all the time. There are plenty of occasions when your trading statistics fluctuate for no real reason at all. And brokers have raised margin requirements before and the world hasn’t ended.

But right now, all three of these warning signs are flashing for me, at the same time.

I’m seeing some vicious, unexpected moves on the charts, my account stats aren’t great, and I’m seeing brokers raising margin requirements in advance of a big event. It would be foolhardy of me to ignore all of these warning signs.

Kenny Rogers said “Know when to walk away, And know when to run.

I’m not sure yet if this is time to run. But I only like to operate in a market where I know I’m displaying a trading edge. That edge just hasn’t been there over the last few weeks. And given the way the markets are right now, I don’t think it’s likely to return before the referendum in two weeks time.

So for now, I’m not running yet, but let’s just say my risk will be significantly reduced over the coming fortnight.

All the best,

Nigel

PS: I’d be really interested to hear how you are all planning your forex trading for the EU/UK referendum.

Are you going to hold positions open during it? Hedge? Go flat/close everything? What are the risks you have identified? What are the potential rewards? Are you going to trade right up to the event? Are you going to take a couple of weeks off?

It looks like Brexit is going to dominate the markets over the coming fortnight, so I would love to gauge what Forex Useful traders are thinking on the topic. If you leave a comment below, I will read and reply to each and every one.

Thanks!

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DISCLAIMER & COPYRIGHT

This update is based on my analysis on my charting package. It may differ to yours as it can be affected by time, market movements, charting packages and broker prices. I accept no liability for loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on any information in this report or analysis.