Preparing is an important part of trading and so in this article I will break down what a trader should do before entering a position, what to do during holding a position and what to do after you close a position. This will help give an insight into maintaining a trade from the beginning to the end as well as how to handle winning trades, losing trades or certain conditions that effect psychology.
Firstly, before I get started into this topic, I want to emphasis that the market is always telling us a story, that story is shown on the chart and us as traders become a part of that story every time we enter the market. In other words, whether the story is long or short, every trade has an impact on the market and by being a trader and trading you are participating in that markets story.
Before a Trade Entry:
- Know your trading plan and the strategy that you use and make sure that the trade meets all requirements for entry. This includes aspects such as assessing management points, long term targets, risk to reward and where you would be wrong in order to place stop. This relates to if you are trading the strategies and methodologies that I teach in the Forex Training at the website or any other strategy.
- Make sure you are risking what you feel comfortable risking, nothing worse than a trader risking more than they can handle. I recommend risking less than 2% of account size as a general rule.
- Enter the trade after following the above steps and place management aspects on trade such as stop loss, potential partial profit levels or break even levels. These aspects will vary depending on the methodology you are trading.
During Holding Position – The Management Cycle:
- Remain calm and relaxed, you know the rules of the trade and risk, so no need to panic.
- Remember that the setup is a valid setup following the strategy and trading plan that you use, so be patient.
- One way of dealing with the emotional response of the market is walking away from your computer, watching the trade does not help the trade move in your direction and leads to undue stress. I refer to this as set and forget trading, before walking away I recommend setting alarms at management point areas in order to check the trade when it hits important areas and make sure management orders are filling correctly.
- Wait until either one of two options happens, the market hits a management point from entry where you can take some risk off the table ( partial profits or setting breakeven ), making remaining of trade potentially risk free or market moves against you and you are wrong on the setup with the market hitting your stop loss.
- If market turns before hitting the first management point, remain calm, it does not always mean a losing trade, markets move in waves so it is normal for a market to move higher, then pullback or move lower and then pullback as it moves in a particular direction.
- When the market moves past the first management point set on position in your favor, then allow trade to continue to next management zone or long term target area.
Relax, remain calm and let the trade move the way it will move. Try not to let emotions get in the way of a profitable potential trade.
Ending a Trade – Closing:
- Option One: When the market hits your long term target set on the position, allow the trade to close.
- Option Two: Another option when the market tests a long term target area is closing another partial profit on position or locking in more of the trades profit with the stop loss. By taking partial profits or locking in more of the trade with the stop loss as an option instead of a full close it allows you to reduce risk and to see if market will continue further with remaining of trade. A good example of this would be a trend based position.
- Accept the full win when it happens, it is part of trading, try not to let the win make you feel like you can start breaking your trading rules and trading outside your trading plan and strategy.
- Accept the loss if it happens, it is part of trading and remember as long as you are following a high probability trading process that losses are less than winning trades. So stay positive and try not to let it effect you emotionally. Try not to let the loss make you feel like you should start breaking your trading rules and trading outside your trading plan and strategy in order to make the profits back. For a video on accepting loss which I refer to as the trading wall visit here.
- Look at the trade as a whole and see if there was anything you could of done with the trade to improve.
- If you followed everything correctly referring to the strategy and trading plan whether the trade worked out or not, then compliment yourself and move onto the next trade.
*Be aware that this checklist above could vary between different methodologies, so apply accordingly if so.
A good way of preparing for a possible losing trade is finding a comfortable risk level before opening the position in the first place, a risk level ( percentage ) that you are comfortable losing if wrong. It is always good to go into a trade preparing for a positive outcome and we must as a trader, however being prepared to lose ‘x’ amount when wrong is also important. As highlighted earlier in this article I recommend risking less than 2% of account size per position, however you may feel more comfortable with 1% risk or less. This relates to psychology and how you deal as a person with loss in general, every trader is different, so what I always recommend is finding a percentage of your account size that makes you feel comfortable and then starting with that amount. No reason to push your risk tolerance, unless you are ready to do.
Have a great rest of the trading day and speak again soon.