Financial markets are off to a pretty good start this year, as we’re seeing sizable rallies left and right.
It can be tempting to hop in those huge price swings while they’re happening, but is it true that only fools rush in?
Here are some quick questions you can ask yourself before you even think about chasing a move:
1. Am I feeling FOMO?
No, FOMO doesn’t mean “FOcused and MOtivated.”
The fear of missing out (FOMO) is a very common emotion among traders, and it might be something that you need to be aware of before attempting to join in any big moves.
Worrying about not being able to catch a potential windfall is not a good enough reason to hop in a trade blindly. Who knows if the move is already waaay overdone or if price is likely to whipsaw?
If you often catch yourself feeling regretful about not being able to ride hundred-pip rallies or drops, it might be a wake-up call to reevaluate your trading strategy.
Instead of wallowing in negative emotions, start off by reviewing those big moves and figuring out which indicators, inflection points, or economic events you should’ve looked at instead.
2. Are the factors that caused the move still in play?
As the saying goes, the only thing constant is change. And when it comes to forex trading, changes can happen pretty quickly.
Before trying to go with the flow, make sure that the tables aren’t about to turn. Other helpful questions include:
Has the market environment and risk sentiment shifted since the move began?
Are there any new game-changing factors (ex: regulatory change, market circuit breaker, trading restrictions) that came up?
Are technical indicators, candlesticks, or market volume showing any signs of exhaustion?
3. How will I manage my risk properly?
Now that you’ve concluded that it’s still worth chasing the big move, the next step is figuring out how you will protect your account and limit your losses just in case price goes against you.
No such thang as a sure thang in trading, right?
As you’ve learned in our School of Pipsology, trading without any kind of risk management is no different from gambling.
Setting exit levels while catching sharp market moves can get tricky since higher volatility could easily trigger any tight stops, so you can’t be too conservative.
Of course you shouldn’t trade without any stop losses either!
Also, consider trading with smaller than your usual position sizes and then scaling up if the trade goes your way. This eliminates some of the FOMO now that you have skin in the game.
While you probably won’t hit a home run with a small position size right away, you can go into it knowing you can’t get blown out either if you’re completely wrong.
4. Can I still hop in at a much better price?
It’s easy to get caught up in the excitement of price action that you might be overlooking potential entry points that could offer you a much better return-on-risk.
Do you have a good chance of hopping in at a pullback, even on short-term time frames? Are psychological levels holding and allowing for quick bounces where you can enter?
If so, you might be better off waiting patiently for these bargain prices that could allow you to manage your risk much better as well.