How to Identify When NOT to Take a Trade

Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11am ET, as our risk management educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX, Bob brings extensive practical experience to the subject of risk management.

Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob's thoughts from a recent live session. If you'd like to save your seat to watch and participate in the next session, register here.*

Almost everything written about trading is about how to find a trade. Which patterns to look for, which indicators to run, which levels matter.Very little is written about the opposite skill — recognizing a setup that meets every visual criterion and deciding not to take it.

That skill has probably saved me more money over 30 years than any entry technique I've learned. Because the trades that hurt you are rarely the ones where you had no idea what you were doing. They're the ones where you knew better, saw something that looked close enough, and talked yourself into it.

I use three filters to decide when not to trade. The first is mental — am I in a position to execute my process exactly as I always do?The second is structural — does the reward-to-risk math work at the price I can actually enter? The third is event-based — is there a scheduled event that changes the nature of the risk I'm taking?

If any of the three fails, I don't take the trade. Not a smaller size. Not a tighter stop. No trade. Here's how each filter works.

The first question I ask has nothing to do with the chart. It's whether I'm in a position to run my process — the whole process, exactly as I run it every other day.

My morning is structured. I read ten pages of a book before I look at any screen. Not nine, not a quick glance at my phone first. Ten pages, no screens. That morning routine is the front end of a process that ends with a position sized correctly and a stop placed where the chart says it belongs. If I skip the front end, I have no confidence in the back end.

So the rule is simple: don't take a trade unless you've followed the identical process you follow every single day. If something has interrupted it — a long flight, a rough night, a family breakfast that ran into your review window — that's not a day to trade. That'sa day off.

Know Yourself Well Enough to Call It

Some people can run their full process after a red-eye flight. Some can't. I'm not going to tell you which one you are — you already know. What I will tell you is that the sentence "I'm not really myself today" should function as an automatic veto. When you catch yourself thinking it, you don't go near the screens. You don't check to see if price hit your levels. You don't open the platform "just to look."

The reason that matters more than it sounds: when you're not in the right headspace, you're not just more likely to make a bad entry. You're more likely to try to fix the bad entry with a second trade. In day trading that compounds fast, because the next opportunity is minutes away rather than days. That's how a bad morning becomes a bad month.

If you're carrying something heavy — emotionally, personally, financially — there's a real riskyou'll start using trades to resolve it. A losing trade stops being a losing trade and starts being evidence about you as a person. Then you take another one to prove the first was a fluke. The market has no idea any of that is happening, and it will price accordingly.

Where You Trade Is Part of Your Process

I have never traded on my laptop outside my office or the room next to it. Not once. When I speak at conferences, I bring the laptop and I don't trade for those three days. It's a different environment. I'll have conversations with people who are enthusiastic about a particular name, and that enthusiasm can nudge me in a direction my process didn't take me.

That's not superstition — it's recognizing that my process was built and validated in one environment, and I have no evidence it survives a different one. Trading is portable. Your process might not be. The fact that you can open a position from a hotel room doesn't mean the position you open there is the same quality as the oneyou'd open at your desk.

The "Day Off Without Pay — and Docked" Reality

Here's the thing that makes this harder in trading than in any other job. In most jobs, if you show up and perform badly, you still get paid. Trading is the only job I know of where you can show up, do the work badly, and end the day with less money than you started.

Think of a skipped day the way someone without paid time off thinks about a day off. It costs you the day's earnings. That'sa real cost and I'm not going to pretend otherwise. But the alternative — trading a day you shouldn't have — doesn't cost you the day's earnings. It costs you the day's earnings plus whatever the bad trades take out. A day off is zero. A bad day is negative.

Trading Under Financial Pressure

I want to address something directly, becauseit's the hardest version of this problem. What if day trading is how you pay your bills? Do you have to trade regardless?

I'm aware it's easier for me to answer this than for someone earlier in their career, and I'm not going to pretend that context doesn't exist. But my answer is still no. Because the pressure to generate a specific dollar amount by a specific date is the single most reliable way to guarantee you take trades that don't meet your criteria.

The question to ask before every entry is: am I placing this trade because all my criteria have been met, or am I placing it because I need to make money? Those two motivations produce different trades. Only one of them is repeatable.

If your account is small and the pressure is real, the practical answer is usually to reduce the pressure rather than increase the trading — supplemental income, lower fixed costs, a longer runway. A low cost brokerage account keeps your overheads down, but it doesn't remove the need for the trades themselves to clear your criteria. Nothing does.

This is the mechanical filter, and it's where most of my "no" decisions actually happen.

Every trade I take is at least 1-to-1 reward-to-risk. In practice I rarely take a straight 1-to-1 — I generally want at least 1.1-to-1, which is a psychological thing for me more than a mathematical one. But 1-to-1 is the hard floor. Below that, there's no trade, regardless of how good the pattern looks.

A Scanner Gives You Candidates, Not Trades

Worth stating before we get into the mechanics, because it's where a lot of unnecessary losses start. A stock scanner is a filtering tool. It surfaces names that meet a set of quantitative conditions — price, volume, moving average position, momentum. What it produces is a list of things to look at.

It does not tell you whether the reward-to-risk works. It can't. The scanner doesn't know where your stop belongs on that chart, doesn't know what's sitting between the entry and your target, and doesn't know what price you'd actually be able to get on the open. Every one of those is a manual judgment that happens after the list is generated.

So the fact that a name appeared on your scan is not a reason to trade it. I'd go further: the scan output is the first place the structural filter should be applied, not the last. A good stock scanner run will hand you eight or ten candidates. On most weeks, the majority of those will fail the reward-to-risk test once you mark the levels.That's the tool working correctly — it did its job by narrowing thousands of names to ten. Your job is to reject most of the ten.

I Never Adjust the Stop to Make the Trade Work

This is the most important sentence in this piece, so I'll state it plainly: I do not move my stop in order to make a trade qualify. Ever.

My stop selection is rigorous. There's some flexibility in the exact price — I'll place it a little beyond a level rather than right on it, for the reasons I've covered in previous pieces in this series. But the area the stop has to be below (for a long) or above (for a short) is not negotiable. It'sdetermined by the chart structure, not by what I need it to be for the math to clear.

The temptation is obvious. You find a setup you love. You run the numbers and the reward-to-risk comes in at 0.7-to-1. If you just move the stop up a little — tighten it — the ratio clears your minimum and you can take the trade. Nothing about the market has changed. You've just changed the number on your own spreadsheet.

What you've actually done is guarantee you'll be stopped out by normal price noise before the setup has a chance to work. You didn't reduce your risk. You reduced the trade's chance of surviving. Those are opposite things.

How I Measure It Before Entry

Before I place anything, I have four levels marked on the chart:

• The entry trigger — the level price has to close above (long) or below (short) for the setup to be live
• The close-based stop — if price closes beyond this level, I stop myself out manually and cancel my working order
• The hard stop — the level where I have a stop order sitting in the market, exiting me immediately if price trades through it
• The target — determined by the measured move framework for whichever pattern I'm trading

The reward-to-risk calculation runs from my intended entry to my hard stop, against my intended entry to my first target. If that ratio is 1-to-1 or better, the trade is live. If it isn't, it isn't.

When a Beautiful Setup Still Isn't a Trade

Here's the example I walked through in the session, and it's the one I'd want people to remember.

A quantum computing company had produced a three-candle double bottom. Structurally, it was lovely — the kind of pattern where you look at it and think, that's a textbook one, maybe I should size up. (You already know I don't do that. Position size is set by the framework, not by how much I like the picture.)

The problem wasn't the pattern. The problem was the 21-day EMA — the upper boundary of my rotation zone — sitting directly between the entry and the full measured move target. That moving average is a level price is likely to react at, which means I can'treasonably project through it. So my target has to be set below it, at the first extension rather than the full one.

Run the math with the compressed target and the ratio comes in at roughly 1.02-to-1. Technically that clears my floor. Barely. It also means my acceptable entry range is extremely tight — a few cents of slippage and the trade no longer qualifies.

If the 21-day hadn't been in the way, I could have used the full extension as my target. That opens the ratio up considerably, which in turn gives me a much wider band of entry prices that still work. Same pattern, same stock, same day — but a completely different trade depending on what's sitting in the path.

What a Gap Open Does to Your Math

Now take that same setup and imagine it gaps open above my trigger. I'm now entering meaningfully higher than I planned, but my stop hasn't moved — it's still where the chart says it belongs. My risk per share just increased and my distance to target just decreased.

In that specific example, the ratio drops to somewhere around 0.6-to-1. I won't take it. And this is where people push back: "But it's still the same pattern — you still have a good chance of reaching that target."

That's true, and it's beside the point. These patterns fail a meaningful percentage of the time — often enough that a sub-1-to-1 ratio produces a negative expectation across a long series of trades even with a respectable hit rate. I'm not trying to win this trade. I'm trying to have a framework that survives a hundred of them.

What I might do instead is wait for a pullback and enter at a price where the math works. If that pullback doesn't come, I don't get the trade. That's an acceptable outcome.

"That's Somebody Else's Doggy Bag"

The way I frame this mentally: if I can't enter where I need to enter, that's not my trade. It's somebody else's trade. It might be a good one. Someone with a different framework, a different stop methodology, a different risk tolerance may take it and do well.

I go into a restaurant, I take my own doggy bag home. I don't grab someone else's off the next table because it looks good. A setup that doesn't fit my process is food I didn't order.

The third filter is about scheduled economic and corporate events — Fed decisions, nonfarm payrolls, CPI releases, earnings. My rules here are more specific than most people expect, and the asymmetry in them is deliberate.

I Won't Enter Before a Scheduled Event

I won't put on a new equity position minutes before a Fed decision. I won't enter on the day of a nonfarm payrolls release. I won'tenter on the morning of a CPI print.

The reason is that these events introduce a category of risk my pattern framework doesn't price. My measured move targets and my stop placements are derived from chart structure — from how price has behaved around levels. A macro data release can move price in a way that has nothing to do with that structure, straight through my stop, in seconds. That's not the risk I signed up for.

Each event type gets treated slightly differently. A Fed decision in the afternoon doesn't stop me entering that morning. A nonfarm payrolls release does stop me entering atall that day. The distinction is about how much of the session sits between my entry and the event.

But I Won't Exit an Existing Position for One

Here's the part that surprises people. If I'm already in a trade and an event is coming, I don't exit for the event.

I was long a US steel producer with earnings due after the close. I hadn't reached my first target yet. I could have closed the position the day before and told myself I was being prudent. I didn't.

The logic: I have roughly as much chance of the event pushing price rapidly toward my targets as I do of it pushing price into my stop. Exiting early removes the downside and the upside. Meanwhile my stop is already in the market doing exactly the job it was placed to do.

There's an obvious asymmetry between these two rules and I want to name it rather than paper over it. Before entry, I have a free option — I can simply not be there. Once I'm in, exiting is itself an action with a cost, and it overrides a stop I placed for structural reasons. Not entering costs me nothing. Exiting early costs me the trade.

Why My Research Keeps Event Days In

When we researched this style of trading, we didn't exclude earnings days, Fed meeting days, or payrolls days from the sample. We kept everything in the stew and looked at how it tasted.

The obvious question is whether the results would look better with those days stripped out. Honestly? They might. I haven't proven otherwise mathematically, and I want to be straightforward about that.

My working theory is that filtering out event days would eliminate more of the fast moves in my favor than the fast moves against me — because in equities specifically, price tends to grind upward and drop sharply. Cutting out volatility events cuts out a chunk of the upside distribution. But that's a theory, not a finding, and anyone building their own framework should test it on their own data rather than take my word for it.

The filters above are the easy part. Applying them consistently is hard, and it's hard for reasons that are well documented outside of trading entirely.

The Endowment Effect — Why You Fall in Love With a Position

There's a well-known behavioral economics study in which participants were given an item for free — a branded mug worth about twelve dollars. When a second group was brought in to buy the mugs, almost nobody would sell at twelve dollars. Most wanted eighteen or nineteen.

Rationally, they should have sold at almost any price — they paid nothing, so any sale is an infinite return. But once the thing was theirs, they attached to it and valued it above market.

Traders do this constantly. You get into a position, it moves your way, and now it'syours. You don't want to let it go — not because the chart says hold, but because giving it up feels like a loss even when it's a gain. This is also why traders resist a trade that has to pull back through breakeven on its way to a much larger target. The attachment is to the position, not to the plan.

Present Bias — Why Small Certain Gains Beat Larger Ones

In another study from the same body of research, people were offered a hundred dollars today or a hundred and twenty dollars a year from now. The overwhelming majority took the hundred today — despite the second option being a guaranteed twenty percent return with the same guarantee attached to it as the first.

This is the same instinct that makes traders take a quarter of their target and call it a win. The certainty of the small gain now feels safer than the larger gain later, even when the framework says the larger gain is the higher-value outcome. It's also, as I've covered in a previous piece in this series, exactly how you compress your money factor until the math stops working.

Missing a Gain Hurts More Than Taking a Loss

About a decade ago, a technical analysis publication surveyed roughly two thousand traders. A majority admitted that making less of a gain than they could have aggravated them more than taking an outright loss.I've found that to be true of myself and of nearly every trader I've worked with.

This is the single biggest obstacle to the discipline of not trading. Because if you correctly pass on a setup and it then runs to its target without you, what you experience is exactly that feeling — a gain you could have had and didn't. It stings more than a loss would have.

SoI'll say this as plainly as I can: you should be prouder of the trade you passed on that worked than of the trade you passed on that failed.It's easy to feel good about avoiding a loser. Feeling good about avoiding a winner — because it didn't meet your criteria — is the actual skill. It means the process is running the decisions, not the outcome.

Everything above is about not entering. There's a mirror image problem on the other side, and the same psychology drives it.

Three positions I've held recently all did the same thing: they moved my way initially, then reversed and traded well below my entry — in some cases closing below it — before eventually working. Every one of them required me to sit through a period where the position was underwater and the obvious move was to get out.

Most traders won't endure that. They see a close below their entry and exit, reasoning that the trade "isn't working." But the stop wasn't hit. The pattern wasn't invalidated. Nothing about the framework said exit — only the discomfort did.

Here's the connection to everything else in this piece: the reason I can sit through that drawdown is that I know the trade qualified before I entered it. The reward-to-risk cleared. The stop is where the chart says it belongs. The size is correct. There's nothing left to reconsider in real time, so the discomfort has nothing to act on.

If I'd entered a trade that didn't quite qualify — tightened the stop, chased a gap, ignored a moving average in the path — I'd have no such confidence. Every tick against me would be a live question. That's the hidden cost of taking marginal trades: it isn't just the expectancy,it's that you can't hold them properly either.

Position Size Is Why You Can't Hold On

There's a line I come back to constantly: when it's a losing trade, you always have too many shares. When it's a winning trade, you never have enough.That's not a joke about hindsight — it's a diagnostic.

If you find yourself unable to sit through normal adverse movement in a position, the problem usually isn't your conviction. It's your size. A position sized correctly relative to your account produces drawdowns you can tolerate. A position that's too large produces drawdowns that force decisions. For a day trader running several positions in a session, that pressure arrives from multiple directions at once, which is exactly when sizing discipline matters most. I covered the full position sizing framework in a previous piece in this series, and it's the foundation underneath everything here.

The filters I've described are mine. Some of them will apply to you and some won't. But there's a category of rule that can only come from your own trade history, and it's worth looking for.

For a long stretch of my career, I didn't take trades on Fridays. Not because of anything structural about Fridays — because when I reviewed my own records over a multi-year period, my Friday results were consistently the weakest part of my week, with multiple Fridays finishing negative. I don't have a satisfying theory for why. I just had the data, so I stopped trading Fridays.

That's the exercise I'd recommend to any day trader with a reasonable sample of trades behind them. Go back through your history and segment it:

• By day of week — is there a day where your results are consistently worse?
• By time of day — are your first-hour trades better or worse than your midday trades?
• By setup type — is there a pattern you keep taking that doesn't actually perform for you?
• By environment — did you trade from your usual desk, or from somewhere else?
• By whether you followed your full process — this one requires you to have been journaling it

If a segment shows up as consistently weak, you've found a non-trading rule. You don't need a theory for why it works. You just need enough data that it isn't noise, and the discipline to apply it.

Everything above applies to short selling trades as much as long ones, with a few conditions specific to the short side.

The first is availability. A short setup where the shares aren't available to borrow isn't a trade — it's an observation. On a short selling platform with real-time locates, this is a check you run before you draw the levels, not after. Building the levels for a trade you can't execute is wasted preparation, and discovering the shares aren't there at the moment you try to execute is the most avoidable way to lose a setup.

The second is borrow cost. Hard to borrow locates carry a rate, and if that rate is high enough it eats into the reward side of your reward-to-risk calculation on any position held beyond the session. A trade that clears 1.1-to-1 before borrow costs may not clear 1-to-1 after them. That cost belongs in the math before you enter, not as a surprise on the statement.

The third is the asymmetry of the risk itself. A long position can go to zero. A short position has no theoretical ceiling. That doesn't make short selling unusable — I trade both directions and always have — but it does mean the hard stop is doing more work on the short side, and the discipline of placing it where structure says rather than where arithmetic wants is even less negotiable.

How do I know when not to take a trade?

Run three checks before every entry. First, the mental check: can you execute your full process exactly as you do every other day? If your routine was interrupted or you're in an unfamiliar environment, don't trade. Second, the structural check: does the reward-to-risk ratio come in at 1-to-1 or better from the price you can actually enter, with your stop where the chart says it belongs? Third, the event check: is a Fed decision, CPI release, or nonfarm payrolls report about to land? If any of the three fails, the correct answer is no trade — not a smaller position or a tighter stop.

What is a good reward-to-risk ratio for a trade?

My hard floor is 1-to-1, meaning the distance from entry to first target is at least as large as the distance from entry to stop. In practice I prefer at least 1.1-to-1. The critical rule is how you get there: the ratio is calculated using a stop placed where chart structure dictates. If a trade only clears your minimum after you tighten the stop, it doesn't clear your minimum — you've just changed your own spreadsheet without changing anything about the market.

Should I move my stop to make a trade qualify?

No. Moving a stop closer to entry to improve the reward-to-risk ratio doesn't reduce risk — it reduces the trade's chance of surviving normal price movement before the setup has time to work. The stop is determined by chart structure: below a significant support level or pattern low for a long, above a resistance level or pattern high for a short. The position size then adjusts to that stop. Not the other way around.

Why would I skip a setup that looks perfect?

Because the pattern is only one input. A structurally excellent double bottom can still be untradeable if a major moving average sits between your entry and your measured move target — that obstacle forces you to compress your target, which can push the reward-to-risk below your minimum. Same pattern, same stock, different verdict depending on what's in the path. If you can'tenter at a price where the math works, it isn't your trade.

Should I trade if a stock gaps past my entry price?

Usually not. A gap in your favor past your trigger means you're entering higher (for a long) while your stop stays where structureput it. Risk-per-share goes up, distance-to-target goes down, and the ratio can drop well below your floor. Chasing the gap means taking a trade with materially worse math than the one you planned. The alternative is to wait for a pullback to a qualifying price — and to accept that if the pullback never comes, you don't get the trade.

Should I avoid trading around Fed meetings and economic data releases?

I don't open new equity positions immediately before a Fed decision, or on the day of a nonfarm payrolls or CPI release. These events introduce a type of risk that chart-derived stops and targets don't account for — price can move through your levels for reasons unrelated to the structure you based the trade on. The exception runs the other way: if I'm already in a position with a stop placed, I don't exit it because of an upcoming event. Not entering costs nothing; exiting early removes the upside along with the downside.

Can I trade while travelling or away from my usual setup?

Only if you can genuinely replicate your entire process — the pre-market routine, the review, the level-setting, the sizing — exactly as you do at your desk. Most people can't, and most people know it. I don't trade from my laptop away from my office, including at trading conferences, because the environment introduces influences my process wasn't built around. Trading is portable. Your process may not be.

What should I do if I'm under financial pressure to make money trading?

Recognize that the pressure itself is the risk. When the motivation for an entry shifts from "my criteria are met" to "I need to generate income," the quality of the decision changes, and it changes in a direction that reliably costs money. The practical fix is to reduce the pressure — supplemental income, lower fixed costs, a longer runway — rather than to increase the trading. Lowering your entry standards to meet a bill is how small accounts become smaller ones.

Is it wrong to feel bad when a trade I skipped goes on to work?

It's normal, and it's worth understanding why it stings so much. Research has consistently found that traders are more aggravated by a gain they missed than by a loss they took. That's precisely why the discipline of not trading is so hard to maintain. The reframe I'doffer: being pleased you avoided a losing trade is easy and means nothing. Being pleased you avoided a winning trade that didn't meet your criteria is the actual skill — it means your process is running your decisions rather than your outcomes.

Why can't I hold my trades through normal drawdowns?

Two likely causes. The first is position size — if a position is too large relative to your account, ordinary adverse movement produces discomfort strong enough to force a decision your framework never called for. The second is that the trade didn't fully qualify when you entered it. If you tightened a stop, chased a gap, or ignored an obstacle in the path, you have no settled basis for holding, so every tick against you reopens the question. Trades that qualified cleanly at entry are considerably easier to sit through.

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