Jay Meisler’s Common Sense Trading Tips – Part 1

I believe that when you step back and take a deep breath you will see that trading is just comment sense. It is hard to think this way in the heat of battle and I hope that my common sense trading tips will help you out trading in perspective. Most of these you will not find in a trading textbook or course as they come from years of experience.

I have taken my 20 common sense trading tips and divided them into 4 instalments to make them easier to read and if you see fit, add them to your trading toolbox.

1. News Matters!

News drives markets and it is the surprise in news or economic data that triggers the larger reaction. Most traders look forward to key news events as it more often than not is followed by some volatility.

While some technical traders say news does not matter anyone who trades these days knows better. So don’t trade with blinders on. You need to stay on top of what news is due and what is expected as markets move most when there is a surprise (i.e. miss vs. market expectations.

Tip: Remember, it is the reaction to news more than the news itself that gives us clue to a currency’s (or any instrument’s) strength or weakness.

2. Stay Alert! Markets Move When There is a Surprise

It does not take a rocket scientist to quickly realize that global markets move when there is a surprise vs. expectations. This is true for key economic reports as well as other key market events.

Positions are often tilted to one side or the other based on market expectations ahead of a key event. You need to stay alert to consensus forecasts so you know how to react to a surprise, either one that exceeds or misses expectations.

As with any trade, you need to be aware of the overall technical picture in any decision to go with or fade a reaction to a surprise and whether there are any levels that would accelerate or reverse the prevailing trend. As always, it is the reaction to news that will tell you more than the news itself.

The key is not to become complacent before a key event as it is easy to get lulled into a feeling that it will be a non-event, especially when a market is trading in a tight range. While this may sound like an obvious tip, you would be astounded how many ignore it.

Tip: Stay in touch with market expectations so you know how to react in case of a surprise.

3. Complacency Can Be a Traders Worst Enemy

There was a time in my trading career when every time I left for a break or lunch the market would stage a big move. It was uncanny. There were times a currency would be stuck in a range and I would use that time for a break. When I came back to my desk, guess what. there was a big move in my absence.

I am not saying to stay glued to your screen but just be aware that it pays to stay on alert. Markets have a tendency to move when traders give up on the day and get lulled into complacency.

Why?

• It may be a matter of liquidity thinning when traders back away and this verates an inability to absorb fresh flows.
• It may be that positions get trimmed during periods of sideways trading (i.e. congestion), making it harder here as well to absorb fresh buying or selling.
• It could also be that stops get closer to the market during these times, making them vulnerable and inviting targets.

Tip: Whatever the case, when the market turns quiet and complacent, it pays to raise your level of alertness and be on watch for a setup and a market move.

4. Why Do Retracements Work?

As those who have followed my thinking know, I believe trading is common sense. When you think of trading this way you can make sense of what many take as blind faith.

Take retracements as an example. Why do FIBO levels work? Is it because they are magic levels? There is no magic. These levels work because many traders, both technical and other, use the same retracement levels, such as 38.2%, 50%, and 61.8% and thus they increase in importance.

Using a common sense approach, retracements work because trends, no matter what the timeframe, need to shake out the weak positions with the trend (e.g. longs or shorts) to setup the next high or low.

The reason this works is that once a retracement runs out of steam, the market has less ability to absorb fresh buying (in case of an uptrend) or selling (in case of a downtrend) after weak longs (or shorts) have been shaken out.

Tip: FIBO levels give the market reference levels for retracements and can be a self-fulfilling prophecy because many use them more than magic levels and react once they hold. When you think of trading in these terms, trading is common sense. 

5. When to Fade a Correction

There is not a set rule for this but my experience is that fading a correction (retracement) of a prevailing trend that takes place early in the European or NY session has a good chanve of working out.

Think about it.

A market is better able to absorb retracement flows (i.e. buying or selling) that take place early in the session when there is full liquidity and less able to absorb correction flows that take place late in the NY trading day when liquidity has thinned..

As with any trading pattern, the overall picture needs to be taken into account and whether news, technical levels or indicators being violated, etc. have occurred that would make it more than just a retracement and would change the trend.

Tip: Identify a trend and then keep in mind it is a better odds trade to fade a correction when a market is at full liquidity than later in the day when flows are harder for a market to absorb flows..

Related articles:

Jay Meisler’s Common Sense Trading Tips – Part 2

Jay Meisler’s Common Sense Trading Tips – Part 3

Jay Meisler’s Common Sense Trading Tips – Part 4