Trading can be tricky when you need to take into account many factors at once: price action, indicators, trend lines, support and resistance levels, Fibonacci extensions, etc. However, instead of keeping all this in your head, you can use a trader’s checklist to weed out everything unnecessary and focus on the main thing. In today’s article, I will share with you consistent steps that will take your trading to the next level.
Risk level
You can have the best trading strategy, but without proper risk control, you will still lose money.
For example, your strategy brings you profit in 50% of trades with a risk-to-reward ratio of 1:2. You make 4 profitable and 4 losing trades. If you risk 30% of your capital, four trades will wipe out your deposit (-30 -30 -30 -30 = -120%). But if you risk 1% of your capital, you will earn a 4% return (-1 -1 -1 -1 +2 +2 +2 +2 = 4%).
Do not forget, in order to restore the account to its previous level, you need to earn much more profit percentage than make losses.
If you lose 50% of your funds, you will need to earn 100% to return to your original capital. Therefore, it is always important to risk a small portion of your capital, especially if your winning ratio is less than 50%.
What level of risk is right for you? It all depends on the percentage of your winning trades versus losing trades, your risk to reward ratio, and your risk appetite. I would advise risking no more than 1% of your deposit on each trade.
We trade with the trend
I’m not saying that you shouldn’t try to catch countertrend movements in the market. But for new traders, one of the best ways to improve your trading results is to trade only with the trend.
When trading with a trend, you don’t need a perfect entry point. You have a better chance that your trade will be successful. And the profit potential is much greater.
Trade from a significant area
It is best to make trades from significant areas of the market. These can be support or resistance levels.
Or dynamic support or resistance lines that correspond to moving averages (I use the 20 and 50 EMA).
Advantages of trading from levels:
- You trade from significant areas in the market.
- It becomes obvious if we are wrong about the direction of price movement.
- The number of profitable trades is increasing.
- The risk to reward ratio becomes the best.
Point of entry
Here are the three main factors of your trading:
- Position size determines how much you enter the market with.
- Exiting the market determines whether your trade will be profitable or unprofitable.
- Entry points determine the frequency of your trades.
Don’t put too much emphasis on finding entry points because there are much more important things to consider (risk management, trading with the trend, trading from a significant zone).
There are two ways to enter the market: on a rebound or on a breakout.
A pullback is when the price temporarily moves against the main trend.
By trading pullbacks, we get an excellent entry point with a good risk-to-reward ratio. However, if the trend is very strong, it can move for a long time without pullbacks.
A breakout is when the price goes beyond a certain range.
By trading breakouts, we have the opportunity to enter the market at the very beginning of the trend. However, breakouts can be false, and the price may subsequently reverse.
Exit from the deal
The best place to close a stop loss position is at the level where our trading formation completely fails.
When trading a breakout, we exit if the price consolidates below the level.
When trading along a trend line, we exit if the price consolidates below the line.
Place of profit
You will never be able to exit trades at exactly the highs or lows. Therefore, it is best to take profits based on pre-set goals. It can be:
- Support or resistance.
- Areas of overbought or oversold according to the RSI indicator.
- Using a trailing stop.
If you decide to exit at support or resistance levels, ask yourself the following questions:
- If you are long, where would I sell?
- If you are short, where would I buy?
Generally, there is increased selling or buying pressure at levels, so these are the best places to close trades and take profits.
You can use the RSI indicator to identify overbought and oversold areas (a value of 70 for overbought, below 30 for oversold). These areas can also act as profit taking levels on the chart. This approach works best when the market is in a consolidation phase or the trend is too weak.
When the trend is strong and develops rapidly, it is best to use a trailing stop, pulling it under the level of previous lows on the chart.
Deal management
Managing a deal comes down to two options: exiting in parts or adding a position.
When you exit in parts, you close part of your position if the price moves in your favor.
For example, you bought 1000 shares of Apple at a price of $100. When the stock price rises to $150, you sell 500 shares. When the price reaches $200, you sell the remaining 500 shares.
The most common methods of taking partial profits are exiting when a given ratio of profit is reached in relation to the stop loss or at the nearest support or resistance levels.
Advantages of exiting a position in parts:
- A flatter yield curve, the ability to retain part of the profit when the price turns in the opposite direction.
- It is psychologically easier to hold a trade for a long time when part of the profit has already been recorded.
Disadvantages of exiting a position in parts:
- You may lose some of your profits if the price continues to move in your direction.
We can also add a position when the price goes in your favor.
For example, we bought 1000 shares of Apple at a price of $100, and then another 500 shares at a price of $150.
Most often, a position is reached on pullbacks or breakouts.
Pros of adding a position:
- Huge profit potential in trending markets.
Disadvantages of adding a position:
- More volatile yield curve.
- It is psychologically difficult to hold several profitable trades for a long time.
Some traders choose to close in parts, some add positions, and some do both. You need to find what suits you best.
Trading plan
If you don’t follow a trading plan, you won’t be successful in trading.
You will not be able to be consistent in your trading and will not know:
- Why are your trades profitable or unprofitable?
- How can you improve your results?
- How to eliminate random failures?
Without a trading plan, your trading will be like gambling.
How to develop a trading plan? Just answer these questions:
What is your timeframe?
You must choose a time frame for trading. If you are a swing trader, for example, then the daily or four-hour charts are suitable for you.
What markets do you trade in?
You need to know which markets you will be trading. These could be stocks, forex, futures, etc.
What is your risk on each trade?
You need to know how much you can lose on each trade. To begin with, it is better to limit the risk to no more than 1% of the deposit.
What are the conditions for entry?
You must know the requirements of your trading system. Will you trade with the trend or within a range.
How do you enter a trade?
On a pullback or breakout. Will you be entering with a market, limit, or stop order?
Where will the stop loss be placed?
No professional trader opens a trade without a stop loss. You need to know where you will close your position if the price goes against you.
Where will you take your profits?
If the price moves in your favor, you need to know where to take profits.
