Things before entering a forex trade

forex trade

It does not require a lot of skill to open a Forex account and become a market participant. However, it takes a lot of work to become a trader. I consider those individuals who randomly enter positions and hope for the best as gamblers and not traders. At the early stages of my trading career, it sometimes felt that I was pushing myself to trade even if there were no attractive opportunities. It took me some time to realize that trading is like fishing – a lot of hard work goes in before you catch a big fish.

These days I can be without a trade for a week or more, and it does not bother me at all as I’m willing to engage in a trade only if it has a strong rationale.

I would like to identify critical factors you should think of before you trade:

1. Why do I enter into this position?
It is crucial to justify yourself whether there is a strong logical reasoning which allows you to conclude that this position could be potentially profitable. At least two factors should be considered:
Detailed technical analysis – set a specific number of indicators (could be three or more) which have to be confirmed before you enter a trade.
Fundamental environment matters… – Although I am not a big fan of fundamental analysis, especially when it comes to speculative trading, it is vital to follow key developments in the market such as new macro data, news on interest rates and press conferences of senior officials. I usually do not trade around big announcements – I just wait and see how the market develops post big announcements. I do not argue that this is the best approach – this is just my opinion. All of us gradually develop our style than it comes to fundamental analysis. However, a big mistake would be to ignore it altogether.

2. Where do I set a stop loss limit?
Sometimes I see a chart with a good entry point, but before I engage, I check where I should place my stop-loss limit for a particular trade. As a swing trader, my stop-loss could be set 300 pips below the current level. This means if I am aiming for 1:2 risk, my profit target should be at least 600 pips.

3. What is my target level?
In the previous point we were talking about the profit target of 600 pips, the most important question is how feasible is this target? Some indicators should show enough space for the price movement of 600 pips. It rarely happens that we see these big swings at once (has to be driven by important macro events), usually a typical price move is ~100-300 pips.

4. Forex Position size
This is a crucial step, where mistakes can cost you big time. It is critical to stick to the principles of money management when deciding how much money you invest in a single trade. Do it consistently without risking more than 2% of your pot.

5. Place a trade
Once you have satisfactory answers to all four questions listed above, set an order.

6. Monitor a trade
This is where the most stressful part of trading starts, so it is important to place a comfortable trade and wait and see how it develops. Remember, to stay calm, relaxed and let the market do its part. Most importantly, even though we could face some losses, our downside is capped.

7. After closing a trade
It doesn’t matter whether your trade reached a profit target or a stop loss level was triggered, or you closed it manually, you should always take notes and make sure you improve next time (key components are: have you acted according to the plan? was it an optimal trade? what have you learned?). After that, please do a print screen and save this figure in one of the folders designated for forex trading.

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