One Must Pass Before Making Trade

Every second the markets are open, it gives traders the chance to transact, whether they are trading stocks, foreign exchange, or futures. However, a high-probability transaction does not always present itself. Put each prospective trade you are considering through a five-step test so you can only make them if they are in line with your trading strategy and have a fair chance of paying off the risk you are taking. Whether you're a day trader, swing trader, or investor, use the test.

 

It will take some practice at first, but once you get used to it, it just takes a few seconds to determine whether a trade passes the test and whether you should trade or not.

 

•    Regardless of your trading approach, success depends on your ability to maintain discipline, knowledge, and thoroughness.

 

•    Here, we outline five easy actions to follow before starting any deal.

 

•    Understanding your strategy and goal, spotting opportunities to determine your entry and exit points, and knowing when to give up on a losing trade are some of these.

 

The setup consists of the fundamental requirements that must be met before a trade can even be considered. For instance, a trend must exist if you trade according to trends. A tradable trend should be defined in your trading approach (for your strategy). You can prevent trading when a trend isn't present by doing this. Consider the "setup" to be your rationale for trading.

 

Although your trade setting could be different, you should make sure that the environment is favorable for the trading technique.

 

Offering Potential Trade Setups for Trend Traders, Don’t trade if your justification isn't there. If the setup—your motivation for trading—is present, move on to the following action.

 

 

Even though your motivation for trading is present, you still need a specific occurrence to signal that the moment is right to place a transaction. 

 

Some traders prefer to purchase after a price range or pullback on new highs.

 

Some traders prefer to purchase after a pullback. 

 

However, make sure the deal is worthwhile before executing it. You always know where your entry point is with a trade trigger. For instance, a trader would be aware throughout July that a rally above the high from June is a potential trade trigger. This gives you enough time to verify the trade's authenticity using steps three through five before you actually make the trade. 

 

It takes more than just understanding your trade trigger and having the correct entry conditions to make a profitable trade. A stop-loss order is also required to control the risk associated with that deal.

 

A stop loss can be put in place in a variety of ways. A stop loss is frequently positioned just slightly below a recent swing low for long trades and just slightly above a recent swing high for short bets.

 

The Average True Range (ATR) stop loss strategy is an alternative; it entails setting the stop-loss order a specific distance from the entry price based on volatility.

 

Now that you are aware of the advantageous trading conditions and the locations of the entry and stop losses, you can place a trade. Next, think about the possibility for profit.

 

A profit objective is based on something quantifiable rather than being set at random. Chart patterns, for instance, offer targets based on the pattern's size. Trend channels identify areas where the price has a propensity to reversal; if buying around the channel's bottom, place your price goal near the channel's top.

 

Based on the trends of the market you're trading, decide where your profit target will be. Profitable trades can also be closed out using a trailing stop loss. You won't be able to predict your prospective profit if you use a trailing stop loss. That is acceptable though, as the trailing stop loss enables you to take winnings from the market in a methodical (and not haphazard) way.

 

Make an effort to only enter deals where the reward possibility exceeds 1.5 times the risk. For instance, if the price approaches your stop loss and you lose $100 that means you should gain $150 or more if the goal price is attained.

 

You won't be able to assess the trade's reward-to-risk if you use a trailing stop loss. However, you should still think about whether the possibility for profit will likely surpass the danger before making a transaction.

 

Avoid the trade if the profit potential is equal to or less than the risk. That can include putting in all this effort only to decide that the transaction is not for you. Success depends as much on avoiding bad transactions as it does on making good ones.

 

The five-step test serves as a filter to make sure that you only enter into trades that are consistent with your strategy and that they have a favorable profit potential in relation to the risk. Adapt the additional stages to your trading strategy. For instance, day traders might want to refrain from opening positions just before the release of important economic data or a company's earnings. When taking a trade in this situation, make sure there are no similar events scheduled for the time you're going to be in the trade by looking at the economic calendar.

 

Make sure the environment is appropriate for using a specific trading strategy. Create a trigger that alerts you when it's time to take action. Establish a stop loss and a target before deciding whether the risk is worth the potential return. If so, make the transaction; if not, search for a better opening. Take into account additional elements that can influence your trading, and take further action as necessary.

 

Even though it could seem time-consuming at first, once you figure out your approach and become accustomed to the processes, going through the full list should only take a short while. It is worthwhile to make sure that each trade passes the five-step test.