Before You Trade: Have a Plan

Before You Trade: Have a Plan

Before you click that button to enter a trade, have you made sure that you are not just entering on emotions? I think you can probably relate when I say that the majority of traders fail is because they are not executing their plan or they have no plan at all.

When traders are running a business trading stocks, futures, options, or currencies they should know specific information before entering a trade. Trading is a business that an individual must plan and prepare for. Trading is not gambling unless you are just entering blindly without a plan. Every time you enter a trade you should already what your target price is, what the risk level is, and what strategy you are using. These three keys that I am going to be explaining in detail in this article will ultimately be the difference in being successful or being a complete failure.

Key #1 Target Price:

Before you put an order in to buy or sell you should know what your target price level is. The reason this is important is because you need to know where you are going if you want to be able to get there. What I mean is that if you have a target you are more likely to stay in a trade until you reach that target. Most traders get in then the price moves in their favor and they close the trade for small gains. To be profitable long term in the Forex market you should have your winning trades as large as possible and having targets keeps you in your trades. This will enable the trader to reach the profit target with one lot and let the other lot ride for greater profits. Allowing your winners to be bigger than your losers, is a skill that will enable traders to be profitable long term.

Key #2 Risk:

The next key to being a profitable trader is to use risk management. What I mean by that is that before you ever make a trade you should know how much risk is involved with that trade. For example lets say your account size is $1,000 than you should know how much of that total amount you are willing to risk on that trade. The way to achieve success is to limit risk to 1 to 5 percent of your total account balance. So in this case $1,000 you should risk no more than 10 to 50 dollars per trade. That will help your profitability and stop you from blowing your account. One other key point about figuring risk is to make sure that you have at least a one to one risk reward ratio. What that means is that if your target has to be equal or greater than you risk.

Key #3 Strategy:

Lastly, when entering trades it is important to know what strategy that is being used for each particular trade. If you have a strategy that is proven and that you can use over and over again that will help you achieve successful trading results. The best way to develop a strategy is to read and learn about different strategies and then test the results for yourself. Make sure when you are testing the strategies that you are following all the rules to each strategy.

Conclusion:

In conclusion, these 3 keys will help you on the road to profitability and then you can use trading as a way to earn a living. Once you have mastered these techniques you can begin to refine your trading skills and go from just earning a living to building wealth. You have to be systematic in your approach and follow your plan.

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Winners Edge Trading was founded in 2009 and is working to create the most current and useful Forex information and training available on the internet.

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  • Phoebe Ejimbe

    Very clearly stated; a trade based on good strategy should have a set Profit Target, with not more than 5% riskl per trade; if strategy works, continued use of same would would help one achieve success. Straight forward guidelines! Many thanks!

  • Bart

    Thanks for these explanations. And for the site.. I continuously follow your posts and learn from it everyday. I use your risk calculator, risking only 2% per trade at a time. I trade using mostly H4 and H1 and above, and I set myself some goals of around 40 – 70 pips per day. When I’m done – I end for the day. Even when it’s close to 40 pips, but I am not able to recognise any strong signals I quit for the day. I divide my trades into 2 and take small profits of 10 or 15 pips. I do this after your advice – using price and pivot points (S & R and sometimes confirming moves with fibs). But I have a risk:reward ratio problem as I am afraid to wait longer (and perhaps setting up SL of more than 60 pips) to get some more profits (like 50+ pips), so what am I doing wrong? I mean, I believe, that most of the times it is a matter of recognising a strong entry point (with it less likely to go against me strongly – and even if hard SL of no more than 60 pips). And the 40 or 60 pips SL is not out of the blue, but this is what I have noticed taking the swings with the price (hence placing SL’s a little above these swings).
    I tried to set TP a little more than 30+ pips, but usually then I hit -60 pip SL – was the range too high? As far as I noticed it is better to take small profits than maybe wait for BIG home runs (but also with a possibility of BIG SL’s). Unfortunately my broker doesn’t allow trailing stops.
    But maybe all of the rest: the confidence and for eg. even bigger SL’s and TP’s come with the experience… I got a lot to learn still :)))
    Thanks once again!
    Bart