TO TRADE OR NOT TO TRADE?
To trade or not to trade forex, that is the question. Take this five-step test to find out whether to make the move or not.
Test 1: Trade Configuration
We refer to the basic conditions or prerequisites a trader needs to see in order to determine if a trader should trade. That setup should be the primary reason for trading. For instance, if you are a trend trader, needless to say a trend has to be present. A trading plan should define what a tradable trend is for the chosen strategy, helping you to avoid trading in case there is no trend.
Test 2: Trade Driver
Granted there is a good reason to trade, you still need a specific event such as consolidation to tell you this is the right time to trade. Some traders prefer purchasing on new highs after the price has pulled back, while others like to buy during a pullback. Not all trades are worth trading, so make sure to check its validity before taking it.
Test 3: Stop Loss
Having the right setup and knowing the trade trigger does not end there. A trader also needs to manage the trade with a stop loss. There are many ways to place a stop loss. For short trades, a stop loss is placed above a recent swing high; for long trades, slightly below a recent swing low. Another method is the Average True Range, which entails putting the stop loss order in a particular distance from the entry price (in terms of volatility). It is vital to establish the placement of this order.
Test 4: Price Target
Now, take into account the profit potential. It is based on something measurable. One of the metrics used is the chart patterns, displaying targets according to the pattern’s size. Another is trend channels, indicating where the price can reverse. If you are purchasing near the bottom of the channel, set a price target close to the top of the channel.
Determine the profit target based on the tendencies of the market you are trading. A trailing stop loss can also be used to exit profitable trades. If you are going to use this, you won’t know your profit target in advance but it allows you to generate profits in a systematic manner.
Test 5: Reward-to-Risk Ratio
Take trades if and only if the profit target is greater than 1.5 times the risk. Conversely, do not trade if the profit potential is similar (or lower) than the risk. If implementing a stop loss, you won’t be able to compute the trade’s reward-to-risk. Still, figure out if the profit potential is greater than the risk.
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