Five Must Do Things Before Taking Your Next Trade
1. Check if You Have an Edge and How Strong Is Your Edge?
What are the chances that your next trade is going to be a win?What to consider.
Tiredness or boredom may set-in even before the real action begins.
Is this the best place: This is where your understanding of technical analysis is crucial if you enter at the wrong place, the market will first pull you in the opposite direction before it will then begin to go in your direction. There is a chance you are already knocked out before the market begins to go your direction. Nothing creates a feeling of sadness as much as this. Unless you have a very big capital that can cushion a big Drawdown, you should wait till the market get to the very right place you have marked down (setup) before your market entry.
2. What lot size am I using?
Too big a lot-size will cause certain pain if the market goes against you, and too small a lot-size may create a feeling of sadness if the trade goes in your favour. Hence it is important to carefully choose a lot size that will have a commensurate compounding effect as your capital.
A good lot-size is such that will accommodate your carefully chosen stop loss. Before you place that trade, ensure that the lot size you choose will not take more than a desired percentage of your capital. Maximum of 5 percent is considered okay by some school of thought. 1 percent or less is considered perfect by many.
3. What is the right stop loss.
The right stop loss is a measure of how many pips the market will move opposite your desired position before you pull the exit plug and consider the trade a loss.If you enter the trade in the wrong place as discuss above, your stop loss may have to compensate for the wrong entry, you don't want that especially if you have a limited capital. As a day trader, your stop loss should be between 10 to 300 pips depending on the asset or currency pair you are trading.
If you are trading EurUSD for example, and your set-up accommodates 50 pips stop loss, then your lot size shouldn't take more than 1-5 percent of your capital on 50 pips drawdown.
4. What is my exit point.
Choosing the right exit point is very crucial otherwise you will end up leaving the market with too little return on your trading or leaving money on the table too many times. Neither of this scenario is good for your trading, if you want to be successful. They both will leave you feeling sad.This means you need to understand technical analysis to a degree. Because even if you trade the news or event, at some point the market will begin to obey the chat's historical fact. So your understanding of technical analysis is essential to identifying the right exit point.
5. Emergency exit
Even with the best of planning and execution, sometimes, the market seems to follow conflicting emotions, and exhibits mother of irregular randomness. It will be smart to put in place emergency exit point. In other words, If the market seem to have clearly declared a trend opposite your entry or desired direction, you should activate your emergency exit. There is no point leaving your capital on the table. You are in the markets to make money, and not to hand-out money.Always Remember, get rich quick can get you poor as quickly.
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