Trade Timing

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It goes without saying that trading without the mastery of trade timing and the knowledge of certain good trigger points, both based on experience, will never bring us any profits. Money management is pivotal to successful trading; so is the perception of entry and exit points. Imagine the situation where the analysis that encouraged the opening of a certain position is false, the right mastery of trade might salvage the situation by allowing us to register positive returns due to the high volatility in the forex market. In the same way, it is not sufficient to know that the value of a currency pair will appreciate in the future, we need to know when that appreciation will end and where it will end in order to bring us profits.

We will identify some principles for the management of positions, covering various ways of how to create stop-loss orders. Every aspect of trading is important and requires a lot of careful and patient analysis but an area which deserves top attention is the opening and closing of a position; the most frequent activity of any trader. In order to achieve a complete and successful understanding of trade-timing, a trader needs to be trained on technical and fundamental analysis which may not seem to have benefits at first sight but end up being pivotal for timing our trades successfully and profiting from them.

Trading is not only about technical techniques, or achieving the mastery of money management and trade timing but in order to achieve a successful trading career, one needs to have total emotional control and master all the psychological aspects involved in the decision-making process of trading.

The Main Principle of Trade Timing

One can never be certain about the price and the technical pattern simultaneously in trade timing, and this can be a disadvantage. In actual facts, the trader can base his timing on the actualization of a technical formation, or he can base it on a price level, and it is only when either of these events occur that he can ensure that his trade is executed, but he is unable to formulate a forex strategy where his trade will be executed and both of these happen to occur at the same time. However, although rare, there have been occasions, when a predefined price level is reached precisely at the time that the desired technical pattern occurs although this can be unpredictable.

Let’s look at an example. The trader decides to buy one lot of the EUR/USD pair, he can decide to either base his entry point on the realization of a technical pattern, or to reach a price level. He has various choices: he may decide to buy the pair when the RSI indicator is at an oversold level, or he may decide to reduce his risk by buying it at 1.35, for the sake of money-management purposes. Another decision he may take is to place his stop-loss order at the price point where the RSI reaches 50, or he may decide to enter an absolute stop-loss at 1.345 to cut losses short. Unfortunately it is impossible to define an RSI level and a price level simultaneously for the same trade due to the unpredictability of the price action.

How to time our trades: Layered trade orders

Three important issues are evident in the example given. First, there is an obvious weak correspondence between technical values and actual prices; and we should remember that it is impossible to base our trade timing on a price and an indicator at the same time. Secondly, the trader’s risk tolerance and trading preferences will dictate which technical indicators he will use, taking into consideration their unpredictability. Lastly, although technical divergences are useful as indicators, they can also be dangerous if they occur at the time when we are realizing a profit.

How can we use technical analysis in timing our trades? How are we going to ensure that we do not suffer great losses with the appearance of divergences on the indicators undermining our strategy, and blurring our power of foresight? The trader community has extensively examined the potential of the divergence/convergence phenomenon for creating entry points; however, they have not dedicated much study to the fact that the same phenomenon tends to complicate the exit point. This is another example of how certain aspects of trade timing are complicated when unexpected price fluctuations occur. In order to avoid all this uncertainty and chaos related to trading, the ideal situation would be to exclude price calculations altogether but that will never be a possibility as price is actually the sole determinant of profit and loss in our trades.

Trade timing is all about the trader taking risks. Using a layered defense line is the best way to take the risk but avoid excessive losses against market fluctuations and sudden movements. This very subject was discussed in our article on stop-loss orders. Entry timing is all about taking the risk and maximizing profits and this should be done with an attack line that is layered.

What does this actually mean?

In the old battle days the Commander of an army would always have some reserved troops in case he were to lose his front men; much in a similar way the layered attack technique of the trader aims to avoid exhausting capital at the crucial moment. It is always advisable that we commit our assets or capital in a layered manner in order to eliminate the problems caused by faulty timing, and also survive the periods associated with volatility. Only a small risk is involved when we open a position with only a small amount of our capital. By gradually increasing the amount, we are encouraging our rising profits to last long. The moment the trend shows signs of weakness and we commit our capital, we are actually building up our confidence because we are placing stop-loss orders on a price level that may bring profits instead of losses, thus controlling our risk successfully.

In a nutshell, the key to successful trade timing is to keep it small, and to avoid timing by entering a position gradually. Since the markets are full of uncertainty, we can contribute to an ideal market situation in our favour by gradually building up small positions. This action will help eliminate all complicated trade timing issues while offering us reassurance where the risk/reward ratio is so positive that gradual entries are not really a necessity. In this situation the exact price where the position is opened is not so important so there is no need to discuss such issues in this article.

Conclusion

An interesting fact is that in surveys when traders are asked what is the most difficult thing about trading, timing is often the top answer. Unfortunately, timing is the only variable that directly influences the profit or loss of a position, and the emotional intensity involved in every decision is very deep. In fact, whilst every successful trader should strive to achieve certain emotional control and confidence, sometimes the tremendous pressures involved in trade timing are so severe that many beginners, unable to stand the pace of uncertainty and pressure, give up and never manage to develop into successful traders. This can be solved by minimizing the role of trade timing, particularly at the beginning of a trader’s trading career. The only way of achieving this is if the trader has built up the size of the position with full confidence, and stop-loss orders will only be executed where the closing of the position will result in some kind of profit, even if small. All these factors convince us that for trade timing, the gradual method is the best one, whilst minimizing our risk.