Trading Strategy - Opening a Trade

Opening a trade can be easy. Furthermore, it’s all about pressing a few buttons. Wrong. Opening a trade is both an art and a science. It requires a lot of thinking and analysis to do. Doing it the wrong way can lead to your account suffering a huge blow. Certainly, you don’t want that. Successful traders always take opening a trade very seriously. In this article, I will highlight five of the key questions you should ask yourself when opening a trade and how to build you own Trading Strategy

Question #1 - Why am I opening This Trade?

This is an important question you should always ask yourself. Before you open a trade, you should always ensure that you have a reason of doing it. When I was a new trader, I made the mistake of looking at a chart and then opening a trade based on my instincts. If the chart was going up, I would open a buy position. This was an expensive mistake. I lost thousands of dollars in the process. The solution to this problem is to always have a reason to open the trade. For instance, if you are a technical trader, you should only open a trade when the technical indicators you use indicate that the price will move up. The following points will help you:

  1. Have a notebook where you journalize your trades.

  2. Always read your journal. This will help you avoid the mistakes you did before.

  3. Have a checklist. This will help you improve your decision making.

Question #2 - How long will this trade last?

Every trader needs to be certain of the duration he expects to hold the trade. Broadly, there are three types of traders. One, there is the day trader who expects to hold a position for a few hours or minutes. This is known as a day trader. Then, there is the swing trader who expects to hold a trade for more hours. Finally, there is the long term trader who can hold a position for more than a week. Knowing the duration will help you in a number of ways. One, it will help you allocate the funds in line with the economic data. If there are a few crucial economic data coming up, you should open a trade in such a way that enables you to accommodate huge movements. Secondly, it will help you set the right lot size. For instance, if you have $10,000 in your account, it would be illogical to open a long-term trade with a lot size of 5. This is because chances are that you will lose all your money within a short period of time.

Question #3 - How much can I afford to Lose?

No matter how much analysis you do, when you open a trade, there are chances that your trade will not go as planned. This could be the result of a few things. For instance, there could be some breaking news which was not anticipated. Also, it could be that you made a mistake during the analysis. Alternatively, maybe you made the wrong assumptions. To protect your account, you should decide the maximum amount of money you are willing to lose. Many traders put this probability at 5% of the total amount of the account. Once you have made this decision, you should set-up the stop-loss accordingly.

Question #4 - What is the Alternative?

You can trade your money in thousands of places. Today, markets are interconnected which means you can buy shares from different countries. In the United States alone, there are more than 3000 listed companies as shown in the chart below. In the developed and emerging markets, there are thousands of companies. To this, add currencies, commodities, bonds, ETFs, and indices among others that you can buy and/or sell. Therefore, before you open a trade, ask yourself whether you have clearly exhausted all the available opportunities.

Question #5 - What is my goal for this trade?

Having a goal in trading is very important. When you open a trade, you should have in mind the amount of money you want to make from the trade. You can quantify this monetarily or in form of pips. Having this goal will prevent you from making bad decisions such as extending your take-profit. For instance, if you aim to make 200 pips in a trade, once that level is reached, you should exit the trade and do something else. Many times, traders are so excited about winnings that they make the wrong decisions. They end up losing a significant amount of money.

Trading Strategy - Useful Links

  • Discover how to Build a Trading Strategy on DailyFX

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