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Working With Your Directional Bias

Working With Your Directional Bias

 

Keeping an open mind and staying available for valid trading opportunities.

It is common to hear traders say they are “bearish” or “bullish” on a certain currency pair. This is often warranted due to the current fundamentals but it is important to keep an open mind with regards to what can happen next. Great buying opportunities can often present themselves when everybody is screaming sell and vice versa.

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– Always do your own analysis.

It is important that traders do not “curve fit” the current market conditions to fit in with their analysis. When glancing over the charts it is common for people to see what they want rather than what is actually happening in the here and now.

It is always worthwhile spending some time before the trading week begins examining the price action to tune-in with current market conditions.  The last thing we should be doing as traders is taking someone else’s opinion as a fact and allowing it to give us a bias without, ultimately, running through our own top down analysis process.

Going into a trading session with your own plan based on detailed technical/fundamental analysis or market sentiment is a different proposition though – as long as you have a flexible approach and recognise when you have got it wrong.

 

– How do I keep a flexible mindset when trading?

A solid understanding of price action analysis can be of great help with regards to this particular challenge. It is important to be able to quantify exactly why you think the market is going to do something at a given time rather than putting it down to a “hunch” or “a feeling”.  Feelings are not the most reliable indicators of future price direction when we are dealing with fear and greed during trading. If we can identify why we have formed an opinion we can subsequently identify when this opinion is no longer valid.

If you have a feeling that something is going to drive price in a certain direction there is usually a solid underlying reason for this. If there is any doubt in your mind as to why you have this bias conduct your top down analysis again.  Let’s look at how this can be broken down.

price direction

Ask yourself probing questions at the start of each trading session and document your findings.

 

Here’s an example:

Q. Do I have a bias going into this trading session?

A. Yes the market looks bullish and set to break out of the weekly range.

Q. Document the conditions[s] that have given you this bias.

A. Break of a trend line and subsequent rejection candle (price action).

Q.What timeframe is this bias applicable to?

A.Daily time frame.

Q. What would it take to invalidate this belief?

A. A close below the rejection candle.

 

This is a very simple example for the purpose of illustrating the point.  A more complex scenario could have multiple dependencies which, when aggregated, make the trader bullish or bearish.

The process of identifying and then crossing out any negated elements gives a common sense method for justifying a bias and understanding when it is no longer valid.

 

Constantly question your bias.

As the session progresses it can be worthwhile repeating the exercise as new information comes to light.  Ask yourself is the market trending up, down or in a consolidation period and why you have a bias leaning towards any of the aforementioned market phases. 

Make sure you have identified the correct time frame for your bias as it is no use being bullish on the weekly timeframe and becoming frustrated when a 1 hour timeframe trade doesn’t move in your desired direction.

Exercises like these are particularly valid for impulsive traders and help reinforce discipline.

If you are not already doing this you may benefit from giving it a try yourself.

Good trading to you!

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