Don’t be predictive but be reactive instead to the current price actionPredictive vs. Reactive Approach

Predictive vs. Reactive Approach

“Don’t be predictive but be reactive instead to the current price action” emphasizes the importance of basing trading decisions on what the market is currently doing rather than trying to anticipate or predict future movements. Here’s a detailed explanation:

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Predictive Approach

• Involves making assumptions about what the market will do in the future, often based on opinions, forecasts, or gut feelings.
• Traders might enter trades before there is clear confirmation from the market.
• Risks:
  • Predictions may not align with reality, leading to premature or incorrect decisions.
  • Emotional bias can influence predictions, increasing the likelihood of losses.

Reactive Approach

• Involves observing the market and waiting for clear signals or confirmation before taking action.
• Traders respond to current price action, such as breakouts, rejections, or patterns that are unfolding.
• Benefits:
  • Reduces emotional and cognitive biases by focusing on objective market behavior.
  • Minimizes the risk of entering trades too early or against the prevailing trend.

Core Principles of Being Reactive

1. Follow the Market, Don’t Lead It
   • Wait for the market to confirm a move (e.g., breaking a key support or resistance) before acting.
   • Example: Instead of assuming that a resistance level will break, wait for the price to close above the level before entering a long trade.
2. Focus on Price Action
   • Pay attention to real-time information such as candlestick patterns, volume, and key levels.
   • Price action reflects the collective decisions of all market participants and provides the most up-to-date view of market sentiment.
3. Adapt to Changing Conditions
   • Be flexible and willing to change your bias if the market behavior contradicts your initial expectations.
   • Example: If you expect a bullish trend but the price forms lower highs and lower lows, adapt by considering bearish setups.
4. Trade What You See, Not What You Think
   • Base decisions on observable facts (e.g., a confirmed breakout or rejection) rather than speculation about future events.

Practical Applications in Trading

• Trend Trading: Instead of predicting when a trend will start, wait for confirmation (e.g., higher highs and higher lows for an uptrend).
• Breakout Trades: Don’t assume a breakout will happen; wait for the price to close beyond the key level with momentum.
• Reversals: Don’t predict a reversal at every support or resistance; wait for confirmation like a double bottom or a bullish engulfing candle.

Why Reactive Trading is Superior

1. Reduces Overtrading:
   • A predictive mindset often leads to forcing trades based on expectations, even when the setup isn’t clear.
2. Improves Risk Management:
   • Reactive trading ensures you act based on confirmation, increasing the probability of successful trades.
3. Enhances Discipline:
   • Waiting for confirmation fosters patience and reduces impulsive trading.

Example

• Predictive:
  A trader assumes that the price of XAU/USD will break above a resistance level and enters a long trade prematurely.
• Reactive:
  The trader waits for the price to close above the resistance with increased volume and then enters the trade, confirming the breakout.

Sometime when we only wait and react just after price creating pattern, we can avoid trap in false signal or movement. Below is example if planning to go long for XAU/USD but then it failed, instead price is drop or plunged.

Based on current price action, price is breaking resistance and expecting to rise further. To make prediction, price can be predict to move more up and higher. But if we wait for discount or better lower entry, we can wait for price to retrace back to the breaking resistance as our best buy low entry.

Wait, price break the RBS area? Let see what’ next.

Okey now we can see that after breaking back the breakout resistance which is by now becoming support(RBS), we can see the price is retrace back to it and rejected. We can see bearish engulfing candle is form there. This mean, the right entry is not buy but sell. So we need to react to current situation only, which is, SELL/SHORT xauusd.

See what’s happened next, price falling far from the entry. So I guess, instead of hurrying buy, waiting for price to retrace and react will help avoid the rookie mistake and earn profit instead. Hope this will be good lesson to all of us.

Conclusion

Being reactive means aligning your trading decisions with the current behavior of the market rather than relying on predictions or assumptions. It emphasizes the value of patience, discipline, and adaptability, ensuring you only act when there’s evidence to support your trade idea.

Being patient and only react when necessary also not just giving you good opportunity but also avoid you becoming FOMO for unnecessary entry signal, focusing only the good and profitable one!

ADMIN
27/01/24