THE FIVE-WAY TRADING TEST
How will you know if a trade is a good one or a bad one? Take the five-way trading test to find out.
Question 1: Is the instrument moves in a way it is feasible to generate profit based on the applied?
Markets are volatile in nature as it frequently shifts from low to high, and vice versa. What works in a specific condition may not be effective in another, meaning a trade is on the losing side if a trading plan is executed perfectly but in a wrong environment. Traders, you should consider if your entry points, profit targets, stop levels, and money management techniques are possible in the current market condition, or simply wait until the conditions become more suitable. Otherwise, implement alternative strategies.
Question 2: Do I have a set of rules for entering and exiting?
A trading rut may be emerging because the trader does not specify entry and exit points. Any well-laid plan should include how and when to enter and exit every trade. Traders, any small changes can shift a technique’s dynamics. Also, if a technique’s viability is in question, it can be checked through backtesting, a demo account, or paper trading.
Question 3: Am I trading with the trend or against it?
Traders formulate techniques to capitalize on trends, which occur on different timetables. They also consider if trends are currently relevant. Trading with the trend can be subjective. A short-term trend can go one way and a longer one the other way around. To ensure success, be aware of multiple trends and decide which ones to trade.
In the event a trend following strategy is applied but is not profitable, determine if the market is really trending. If a trend exists, perhaps the entry point is too late in the move, or stop levels are too near the price. If the strategy is supposed to be profitable (but is not), do you really adhere to the rules? Perhaps the problem lies on the trader’s lack of discipline, not the strategy itself.
Question 4: Am I trading all my signals?
Do you stick to your plan? Do you trade all the signals or only certain ones? Traders assume all signals indicated by the strategy will be traded when creating systems, especially if backtested. In case some trades were filtered out of the results, the same trades should be removed in actual trading as well.
If additional trades are taken, and it is not included in the trading plan, do not blame the plan itself. Instead, cease the excess trades until it can be integrated into a profitable strategy. On the other hand, if all the signals are not traded, it could endanger the opportunity to gain. Figure out if the trades being missed are profitable ones. If so, trade it.
Question 5: Do I follow my own money management rules?
Two questions, actually: Do you have your own money management rules? Do you stick to it? Let’s say the rules may be in place, but do you follow it? If losses are continually somewhat or greatly bigger than expected, cut position size, switch to a broker which charges lower fees, or halt trading when there is too much slippage. Remember, each trade should only be exposed to a small amount of risk, normally less than 1% of your capital.
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