Learning to Read the Market
For many new traders, risk management is a complex subject. Learning how to properly manage your risk in a dynamic environment requires plenty of time spent in front of the charts getting to grips with the way price moves, the way your strategy works and most importantly, the way your mind works. Any successful trader will tell you the same thing, preservation of capital comes first.
This can seem counter-intuitive to beginners who feel like if they aren’t constantly engaging the market, they can’t make money. However, there are plenty of times when staying out of the market is the right thing to do. This idea is best summed up by trading legend Jesse Livermore who said “It was never my thinking that made the big money for me, it always was sitting.”
Coming to terms with the constantly shifting landscape of the markets is key to effective risk management. One particularly important aspect that new traders need to come to terms with is the issue of Friday trading. The last day of the week can either be a time for proud reflection or disastrous regret as the last trading day of the week can be a double-edged sword. For some, what might seem like the last chance to make some money can often be just another chance to dig a deeper hole. Learning to properly manage your risk on Friday’s can be a quick way of improving your overall performance.
So, what are the particular risks around Friday trading and how can you protect yourself against them?
Don’t fight the drift
Many traders get caught on the wrong side of the market on a Friday. While trading is often lighter due to reduced activity and lower volume heading into the weekend, we often see strong, pronounced moves on Friday’s which are a result of bigger players squaring up their positions and taking risk out of the market. This can lead to runaway moves which don’t have the same propensity for reversal as retracement as we might see earlier in the week. Unless the market is moving explosively in reaction to a news release such as the Non-Farm payrolls, strong moves on Friday’s can be particularly hard to fade.
Don’t make things worse
This one is particularly relevant for traders who are just starting out and struggling to achieve consistent returns. If you’ve had a bad week it might seem like Friday is the perfect opportunity to try and recover your losses. However, Friday can also make things a lot worse and if you are trading emotionally on a Friday in an effort to recover losses made over the week it is very easy to make mistakes and stray from your trading plan. All this does is set you up negatively for the next week of trading after regretting your decisions over the weekend. While of course, if a setup occurs that meets all of your plans criteria then it is fine to take it, you should never be entering the market on a Friday in the mindset of “needing” to make money back as this will often set you up for error
Mind the Gap
Perhaps the biggest risk of trading on a Friday is the fact that you expose yourself on the Sunday open. There is a common phenomenon in Forex markets of the market “gapping” open on a Sunday. This is essentially where the market opens at a different price than it closed on Friday and although this can sometimes work in your favor, it also has the potential to work against you. Gaps occur because of the electronic nature of the Forex market which means any orders which weren’t completed on Friday night will be completed at the open, leading to a gap in price. While it can be necessary to hold a longer-term trade over the weekend, especially if it was opened earlier in the week, it is advisable (for new traders especially) to avoid placing trades late on a Friday.
So, hopefully, you now have a much better understanding of the unique nature of Friday trading and the sort of risks that can present themselves. As always, your focus should be on protecting your risk and sticking to your trading plan and, if you stay focused and take your time, trading on Friday can be a great way to the week.