So much of our research and analysis as forex traders focuses on figuring out when to get into the market. That’s why we often neglect to consider when staying out of the market is a better option.
In fact, learning how to handle when not to trade and avoid taking unnecessary risks, for a lot of forex traders, is the key to success.
The simple answer for when you shouldn’t trade is when your strategy says you shouldn’t.
There are a lot of circumstantial reasons why you should stay out of the market at particular times. After a while, you get a handle on them. But there are also some general guidelines that might help most FX traders avoid being in the market when they shouldn’t.
If it Doesn’t Feel Right, Don’t!
This might sound like common sense. But, especially for newer forex traders, there is this drive to jump on every opportunity. Even if you’re not sure about it!
No one has a gun to your head to trade. And there will always be another market opportunity coming up.
If you absolutely have to trade and can’t let a potential trade go by, then there’s probably something wrong with your money management strategy.
For many FX traders, it takes some convincing to get them to accept that they can let a trade opportunity pass and hold out for better circumstances. It’s almost like you “lost” when you decide to not jump on a trade.
However, a very important part of forex trading is risk management. And if you are unsure about a trade, you’re better off passing on it.
Unless you have a strategy that is specifically oriented towards trading in periods of high volatility, then you might want to stay away from the markets when there is increased erratic movement in the markets.
This is different from generally increased volatility due to more traders, for example, during the London-New York session. If there is a major geopolitical event, such as a war, or an election, the markets can react to rumors and incomplete information that can render an otherwise good strategy useless.
Again, unless you have a strategy that is specifically built around certain news releases, major economic data can cause the market to veer into a new direction.
Many technical FX traders hold off on trading ahead of major fundamental events. These can cause high volatility and typically include interest rate decisions, NFP and GDP figures.
When countries go on holiday, usually the major FX traders from those countries won’t be active in the market.
If a significant number of countries or a major economy’s markets are closed for holidays, it can pull a lot of liquidity from the market. This causes it to act more erratic and uncertain.
Usually, in the two weeks around Christmas and New Year’s, most major forex traders take a vacation.
This means that many trading strategies won’t perform as well during that period. Other major holidays that sap liquidity from the markets include Easter, May 1st and Thanksgiving.
Many forex traders also avoid trading on those days.