Trader Education
Trading Forex: What to ask yourself before placing a trade?
21 Jul 2014
One of the keys to success when trading forex is to have a plan of action in place, and have the discipline to put it into practice. But even if you don’t have a trading plan, it can still pay to ask yourself a few key questions before you place any trade, as this will give you a better chance of profiting from the trade.
What is the major trend?
In many cases, the direction of the major trend will be the most important factor when weighing up a trade. When you trade with the trend, you are swimming with the tide rather than against it, and this means that even if you get the entry points a bit wrong you still have a better chance of making some money.
What are the probabilities involved with the trade?
Although nobody can predict the future with any certainty, you can use historical data to help you arrive at the most probable outcome of the trade, which gives you a clearer picture of the relationship between risk and return in the trade. Although it’s not an exact science, it will give you a better idea of where to place your stop, how much leverage to use, and the percentage of capital that you can risk on the trade.
Do you have an exit strategy?
Although it is important to find a good entry, it is even more important to find a good exit point, as it will be this that is decisive in whether you see a profit or a loss. It’s important to get these right, so decide before you place the trade on the criteria that will cause you to close the position – basically, the point at which your trade idea has been proved wrong.
While a stop will guard against big losses, you should also evaluate potential manual exit points if things aren’t going as planned, as getting out of a losing trade at the right time can help to protect your bankroll.
What is your profit target?
As well as knowing when to get out of a trade if it is not going well, it’s just as important to know when to get out when it is going to plan. By setting a profit target for the amount of money that you are looking to make from a trade, you can help to manage risk and also keep a clear head when you are in a winning position, as if you get greedy and hang on too long, you could lose out on profits.
How are you feeling?
Your mental state is another thing that you should question before every trade. If you are tired or stressed, the chances are that your judgement and reflexes will be adversely affected by this. There will always be another opportunity to trade, and if you try to trade when you are not feeling up to it, your chances of losing are dramatically increased.
