Because the eventual outcome of a trade is entirely in the hands of the market, it’s widely accepted that traders must simply “let go” at some point and let fate take over. That’s why traders often generalize that their “job” is simply to find good trade setups. Well, I’ve got a problem with that generalization, and I’ll tell you why:
Because good trade setups don’t always result in winning trades.
Sometimes even high-quality trade opportunities wind up going bad, and while it may be the random nature of the markets that’s to blame for that, other times, it’s because of certain technical or fundamental factors the trader may have overlooked or missed altogether. Here are some of those “hidden” variables, which routinely have the power to transform perfectly good trade setups into losing trades.
The above generalization might suggest that trading is as simple as spotting a particular pattern or signal, and taking a trade because of it, with no additional questions asked. However, patterns alone don’t make good trade setups!
For example, some patterns, like our “bread and butter,” the pin bar reversal, aren’t valid unless they occur at or near established support or resistance on the chart. As a result, we don’t trade pin bars that occur anywhere mid-range, because it’s the combination of the pattern and the juncture at which it occurs that makes the setup valid.
In addition, many good trade setups that ultimately fail are reversal or countertrend opportunities. By nature, these are lower-probability trades, but the favorable reward/risk profile means that some are still worth taking, provided they satisfy all the conditions of your strategy, of course.
Even then, setups like these may tend to go against you, and sometimes it’s not your fault in the least! Be objective anytime good trade setups do lose money, though, and diagnose for yourself if it was just that the market went against you, or if there were other technical or fundamental factors at play that weakened the validity of the setup in the first place.
Without much question, trade timing is the most important variable for every trade, because the reality is this: Even good trade setups won’t work if taken at the wrong time. Intraday traders have to be especially precise, as there are actually known hour blocks within the trading day that are considered more and less favorable for trading.
See related: When Do You Trade Your Best?
The first two hours, for example, are usually a volatile time of “price discovery,” when traders try to get a feel for the markets and decisive trend moves are less likely. We recommend end-of-day trading for longer-term trend traders, in part to avoid the effects of that intraday volatility, when good trade setups have been known to get taken out more often.
That, however, isn’t the only important application for trade timing:
Entering Too Early or Too Late: Good trade setups could also be prone to fail because of flawed execution, if the trader entered too early, perhaps before a confirmation signal were seen; or too late, once a move had already started to develop. There always seems to be more focus on finding the setup in the first place, but it’s how you act on it and manage risk that ultimately determines profitability. Faulty execution can be the difference between winning and losing, and that’s a factor traders can control.
News-Driven Whipsaws: News, on the other hand, is a variable traders can’t control, but that can often creep in and ruin good trade setups. These are news-driven markets, and even flawless execution will go for naught if a headline or data point produces some volatile price swing that trips your stop, or invalidates the setup altogether. Always hold yourself accountable for following your rules for proper trading and execution, but do your best to shake it off when (not if) you do everything right and the news causes your trade to go wrong.
See also: Low-Risk Tactics for Trading the News
It’s really tough to sum up or generalize what it takes to be profitable trading. Outsiders think it’s just about “being right” about the direction of the markets. Some active traders even think it’s about finding good trade setups, but only consistently successful traders understand that being profitable is about managing the entire trading process, from analysis, to execution, and trade management, and beyond.
“Stuff” happens before and during the trading process that can ruin good trade setups and result in losing trades, and sometimes, these variables might even be foreseen or prevented. So don’t lose focus once you’ve found good trade setups. Be mindful of execution and objectively assess what happens to produce good (and bad) trading outcomes. Often times, it is subtle variables that make the difference between winning and losing.