Trade of the week: stand aside

(Partial video transcript)

This week's trading opportunity

Hello and welcome to this week's "Trade of the week", which is to stand aside. And I've got three reasons for that. Heightened volatility as we're seeing now with the conflict in the Middle East leads to emotional overtrading, wider spreads, and more slippage. All three of which are not conducive to you probably being in the right state of mind to make money. So let's go through all of these points individually.

When markets are very volatile, and we saw that earlier this morning for example, with the DAX 40, the German stock index, dropping over 100 points in less than five minutes and then rallying over 100 points five minutes later. You need to be really on top of everything in order to get trades on quickly, and then get out very quickly again. And the risk is most people love volatility and trade the same size they normally do. I wouldn't suggest you do that. It's probably better to cut your trading size, if you must trade that is, to half or even a third of what you usually do, or even a quarter, because of that heightened volatility.

And the reason for that is, the second point, wider spreads. Because of the heightened volatility, the spread between your buy and sell level will be wider than it normally is because the market just moves faster. So therefore, even if you make profits, you will pay, in a way, a higher commission for doing so. And the third point is a higher risk of slippage. So slippage is when you don't get filled at your entry level or on your exit level, on your stop-loss for example, at the level you think you would like to get filled. Because the markets move so quickly, you can very easily get a fill, which is far worse than what you expected it to do. And when that happens, basically, your risk profile becomes skewed towards the negative side so your potential losses are much greater than you potential gains.

So for those three reasons I would stand aside today. And also, let's not forget, if markets move very quickly, you need to react very rapidly to the market movements. If you're distracted, or even if you aren't distracted, you are going to probably trade emotionally rather than rationally. Because the markets move so fast, you'll be probably drawn in with fear, hope, greed, all these emotions, which might really detract from a rational approach to risk adjusted investments and trades.

So basically, it's probably best to stand aside until we have some sort of clarity of what exactly is going on in the Middle East, because otherwise the risks are extremely high at the moment.

Previous week's trading outcome

Let's talk about last week's "Trade of the week", which was to go short EUR/GBP. And you can see here on my chart (at 2:59 in the video) that basically I went short at £0.8745. It looked like the perfect trade set up because for three days, we did decline as expected. But then the whole trend basically changed direction (see the chart at 3:12). As you can see, we went back up again.

Now we haven't been stopped out. Our stop-loss is above the highs seen here in the middle of December above £0.88. So we are still in this trade short at £0.8745. Stop-loss is £0.88 and our downside target still down here below £0.8660. So that one is still valid.

This week's trading strategy summarised

But as I said before, today's "Trade of the week" is to stand aside simply because the risk of you over-trading, trading emotionally, wider spreads and increased probable slippage is not conducive to the best setups for you to make money.