Whether you trade forex or stocks, the markets provide vast trading opportunities, yet not every trade you take will be profitable. In an industry with infinite possibilities, you want to ensure that your trades align with your trading strategy and objectives. Many traders have a trading plan, risk management plan, and a checklist to help them determine when to enter a trade and when to stay away from the market. Whether you’re a beginner or not, having a checklist helps you enter a profitable trade every time. Checklists also help prevent overtrading. Here is what you need to consider before entering a trade.
What is the market doing? Trending or consolidating?
Before you even think of trading, you need to open your chart and check what is going on. Whether you’re looking at Bitcoin, Gold, or Doge Coin price chart, you need to determine whether the market is trending or consolidating. When the market is trending, you will notice strong upward or downward movement. A trending market is the best setup to use if you want to catch higher-probability trades.
On the other hand, consolidating a market shows no particular direction. A consolidating or ranging market moves from one support to another resistance without breaking either and mainly signals indecision among buyers and sellers. It’s prudent to avoid the market when it’s consolidating as it can continue in the same direction or reverse.
What does the confirmation indicator show?
Indicators assist traders in confirming high probability trades. Ideally, you want to go to the lowest timeframe to check whether the trade is established, but be careful with short timeframes, as they can be deceiving. Make sure you have two or more indicators giving the same confirmation. Do not overcomplicate your analysis or use too many indicators in your chart as they can be confusing and damaging to your strategy.
The risk to reward ratio
Like any other business, it’s essential to define your risk to reward ratio on each trade before executing. The Risk to reward ratio is the number of pips that you will risk in hopes of gaining a specific amount of money. Most traders use a minimum of 1: 2 ratio. That means that you’re risking half of what you stand to gain if your trade goes well. However, it’s crucial to target a risk to reward ratio of 1:5 for more profits. If you’re using a trailing stop loss, you won’t be able to calculate your risk to reward ratio on a trade.
The top profit and the stop loss
Once you’ve determined how much your risk to reward ratio is, you also need to decide on your top profit and stop loss levels as you place your trade. Your top profit is the maximum amount of money you’ll collect when the market reaches your targeted price. When you place a top profit, your trade will automatically close when it reaches your target price. A stop-loss, on the other hand, helps reduce losses when a trade goes against your prediction.
The amount of capital to risk
Your risk to reward ratio should also be accompanied by the amount of capital you intend to invest. You don’t want to use all your balance on a single trade or place too many trades at the same time using big lot sizes. Always have a specified amount of capital for every trade and remain consistent. Remember, this should be capital you’re ready to lose.
Economic releases that can affect your trade
Significant economic release directly impacts the behavior of prices. In most cases, they will dent or invalidate a perfect trade depending on the outcome. That’s why you might want to stay away from the market if there are high-level economic releases such as GDP, CPI, NFP, and PMI, as they can damage your trade.