When Should You Sit in the Sidelines?

Contrary to popular belief, staying on the sidelines does not necessarily imply that you are a slacker trader.

In fact, there are times when sitting tight and not taking any setups is a trading decision in and of itself.

Here are the top four instances in which it may be best to sit on the sidelines rather than make a trade:

1. You’re feeling disconnected from the marketplace.

Accept it. There are days when you aren’t quite on top of your game, and it appears that the market is out to prove that your analysis and biases are utterly wrong. During these moments, it is easy to believe that traders are acting impulsively and that the market is incorrect.

The truth is that you must admit that you are most likely missing something and that you must take a step back to examine your analysis and trading decisions.

Don’t allow your pride prevent you from practicing patience. It may be wiser for you to sit out for a time and avoid trading on off days until you are back in sync with the market’s behavior.

2. You’re having a bad streak.

This is frequently the result of the first instance, in which you are having difficulty comprehending market behavior. This could also be the result of inadequate risk management or a string of poor trading decisions.

If you insist that your analysis is correct and that the market is incorrect, you may find yourself in a slump.

In both circumstances, you should take some time to review your recent trades to see whether you’re doing something incorrectly. Keeping a detailed trading log should help you identify trading mistakes and how to correct them.

3. There is simply too much uncertainty.

This is intended for catalyst hunters who exchange news events. Just because your tried-and-true economic calendars have identified a specific report as a potential market mover doesn’t mean you have to trade it.

To trade the event, you must first conduct extensive research and observation.

Have you considered alternative scenarios? How will you manage your trade if any of these possible outcomes occur? Has a comparable occurrence occurred in the past, and if so, how did the market react?

If you can’t answer these questions now, or if you’re uncomfortable exposing your holdings to such extreme volatility, you could be better off sitting on the sidelines and recording the impact on the markets, the trade setup you were considering, and how you could’ve played it better. Remember how this is part of purposeful practice?

4. The possibilities are stacked against you.

Many traders (particularly those with an uncompromising directional bias) continue to trade setups with a low reward-to-risk ratio or a low likelihood.

But keep in mind that the goal of trading is to benefit from such high-probability setups. After all, why would you put your money at risk on a setup that is unlikely to result in a win? That is paradoxical and essentially gambling.

If there are enough technical or fundamental indicators indicating that the odds aren’t in your favor, it may be best to stay tight and wait for a better one.

While taking advantage of market chances is an important component of becoming a consistently effective trader, that doesn’t imply you should execute trades just to be in a trade.

Sometimes sitting on the sidelines and cherry-picking the greatest situations is better for your account and trading confidence.

Don’t worry, there will be many more possibilities to expand your account in the markets!