8 Sep 2014

QUESTIONS TO ASK YOURSELF BEFORE YOU PLACE A TRADE




I know the feeling, when you have found a "perfect" trade opportunity and you want to enter the market as quickly as possible. But before you enter any trade, there are some questions  you need to ask yourself.

Is this trade a part of my strategy?
Whenever you have an impulse to open a new position, you have to know - if this trade is a part of your plan or you are just acting on the impulse. How many times after a losing trade you have said - "Why did I just do that? If I had just followed my plan it would have been a winner".

Where will my stop loss/take profit be?
You are the most objective before the trade and that's when you need to enter these orders. After you've entered the market your judgement can be clouded due to emotions. You have thoughts like - "Maybe I should put a wider stop loss" or "Maybe I should close this position now, while it's still in profit". And because of these thoughts traders ruin a lot of good trades, either by losing more money, than they should have or by closing position to early, without realizing it's maximum profit.

Is my position correctly positioned for risk?
After you have set your stop, you have to calculate how large your position will be. It doesn't matter how high probability trade you are getting into. If you are risking too much on this one trade, there is always a chance you will lose it all.

Does this trade have a good risk:reward ratio?
1:1 is the obsolute minimum. Please do not enter the market with anything less. No one and I mean NO ONE is always right. Every trader loses money time to time. It is losing less money than winning that matters.

Have I prepared my exit strategy?
What if the trade is going nowhere for 5 days? How am I going to trail my stop? What am I going to do if the price makes a reversal before it has hit my target? You have to be ready to act after you have already entered the market but you have to make a plan before you've entered it.

If you are not asking yourself these questions - you are basically gambling. And as we all know - in the long term gamblers never win... 





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