Step 1: Trading Setup

Setup is the basic prerequisite to review trading. For example, if you are a trend trader, there must be at least one trend occurring. Your trading plan should define what a tradable trend is (for your strategy). This will help you avoid trading when the market is trending. Think of "setup" as if it were your reason for trading.

Figure 1. Stock in an uptrend, providing a viable trading setup for trend traders

Here is an example showing this setup in action. Stock prices are generally moving higher, indicated by higher highs and lows, as well as prices above the 200-day MA. Your setup may not be the same, but you should ensure that the terms favorable to the strategy are being traded.

If a reason for your trade does not exist, then do not trade. If the reason for your trade - setup itself - exists, move on to the next step.

Step 2: Trading activation point

If the reason for your trade already exists, you still need an exact event that tells you now is the time to trade. In Figure 1, the stock has been in an uptrend all the time, but at some point, during that big upside wave, you will find a better trading opportunity than others.

Some traders prefer to buy at new highs after the price has just flattened out or pulled back. In this case, the trigger point for trading can be when the price rebounds above the $ 122 resistance zone in August.

Other traders prefer to buy in a pullback, for example. For this gu, when the price pulls back to the support close to $ 155, wait for the price to form a bullish engulf candlestick pattern or let the price accumulate in a few candles and then break above the accumulation zone. Both ways are the exact facts that separate your trading opportunity from all other price movements (something that is not part of your trading strategy).

Figure 2. Potential trading trigger points in a rising stock

Figure 2 shows 3 possible trading triggers during this uptrend. What your exact trading trigger point depends on the trading strategy you are using. The first is the accumulation near support: A trade is triggered when the price moves above the highest point of the accumulation zone. Another possible trade trigger factor is the bullish engulfing candle pattern near support: A long position is triggered when a bullish candle forms. And the third trigger factor to enter buy orders is a recovery to new highs after a pullback or sideways move.

Before making trading, check to make sure it's worth doing. With the transaction trigger, you will always know in advance your entry point.

Step 3: Stop loss

Having the right conditions to join and knowing your trading trigger points is not enough to make a good trade. The risk to that trade must also be managed by stop loss. There are many ways to place a stop loss. For long-term traders, the stop loss is usually placed just below the recent low and for short-term traders, the stop loss is only slightly above the recent high. Another method is called the Average True Range (ATR) stop-loss; It involves placing the stop loss a certain distance away from the entry, based on volatility.

Figure 3. Example of a long trade with a stop loss place

Set the position where you will place your stop loss. Once you know your entry point and stop-loss price, you can calculate the position size for your trade.

Step 4: Price target

You now have the favorable conditions for a trade, as well as where your entry and stop-loss will go. Next, consider what the profit potential is.

Profit goals should be based on something measurable, not just randomly chosen. For example, chart patterns will give you price targets based on the size of the model. Trend channels can show where prices tend to reverse; If buying is near the bottom of the channel, place a price target near the top of the channel.

In Figure 3, EURUSD with the triangle pattern has swept 600 pips at the pattern's breaking point. If you trade in a breakout triangle strategy, 1.1650 is where you can set Take Profit to exit the order.

Determine where you set your profit targets based on the bias of the market you're trading. A trailing stop order can also be used to exit profitable trades. If you use a trailing stop, you won't know your profit potential in advance. However, that's fine as the trailing stop will allow you to systematically (not randomly) extract profits from the magnetic field.

Step 5: Risk: Reward Ratio

Almost done, try to only execute trades when the potential return is greater than 1.5 risks. For example, you risk only $ 100 if the price reaches a stop loss when you make $ 150 or more profit if the target price is reached.

In Figure 3, the risk is 210 pips (the difference between the entry price and the stop-loss), but the profit potential is 600 pips. That is an R: R ratio of 1: 2.86 (or 210/600).

If you are using a trailing stop order, you will not be able to pre-calculate the R: R ratio for your trade, but when you execute the trade, you should still consider whether the potential profit outweighs the risk.

If the profit potential is equal to or less than the risk, stay away from the trade. You know, avoiding bad trades is just as important to a trader's success as doing high-probability trades!


The above 5-step test above acts as a filter for you to only execute trades that match your strategy, ensuring that they will deliver a good potential for profit versus risk. You absolutely can add other test steps to suit your trading style. For example, day traders often want to avoid trading ahead of important data releases, so they can take an extra step to check the economic calendar and ensure that there are no events happening during the time you deliver. upcoming translation.

This seems like a long process, once you are familiar with your strategy and familiar with the steps, it will only take you somewhere a few seconds to go through this entire checklist!

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