Saturday, May 24, 2014

An internal conflict

One of my students in the mentoring programme recently contacted me requesting advice on how to deal with an internal conflict. The situation was that a possible short set up had been identified on a forex pair. Price was moving in the opposite direction to what his economic understanding thought should happen.

However, as he put it "on virtually all the macro levels the trade ought to be the opposite to what is occurring. When I was trying to look at it my mind was just saying "no, no, no" to the idea of that trade working."

He stated that he did not have this issue when trading equities, as he had learned to ignore the opinions of brokers, market commentators and other traders on a stock.

He went on to add "I found it interesting to experience this conflict and to have to accept that I was feeling it. It's given me food for thought about how I might react if setups occur and I have some "inner opinion".

The great thing is that he acknowledged this conflict and was trying to understand how to deal with it in the future.

If you are adopting a trend following approach, then you you have to accept that price is your guide. You have to trade based on what price action is telling you, and in the direction it is heading. This is a classic example of where you have to avoid letting your opinions or predictions cloud your judgement. If price is going in a particular direction, then you have to act accordingly. It is all part of developing the mindset required to follow price and its trends.

The irony in this particular situation was that the trade failed to develop as anticipated, and price quickly turned around and started to move in the opposite direction. Failed trades can occur even if price is going in a certain direction and your thoughts or beliefs match what is happening. Such is life. There's no such thing as a "can't miss" trade. If you are looking to trade price, then thoughts and opinions ideally should be put to one side.

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