When it comes to trade or investing, there are many different ways one can successfully record consistent profits. All you need to do is find your own way of doing so.
To help you set out on your path you will be needing a set of ground rules. They will make or break your trading system and define just exactly how you will interact with the market.
Sure, these may look like not much at first, but you will soon learn that they are define the game.
So, what should this rule system look like?
You will obviously need to set up both entry and exit points, your own trade management, and a risk strategy.
This could be achieved by trial and error but we’ve made it a lot easier for you.
These are the 5 questions you need to answer if you want to figure out where you stand as a trader and where do you want to go from there.
Question 1: Are you in any way a market specialist?
When crafting one’s strategy, he or she must choose which stocks or currency pairs they’ll be trading simply due to one thing: not all systems are going to work on every market.
So, the underlying motive for this question is getting you to think about and figure out what is your trading profile and what type of trader are you.
If you are indeed a specialist in a specific market, then you might find success easily by concentrating yourself on said market.
In fact, market specialists usually have a high win rate, and some might even be the most profitable traders out there.
The reason is simple: they understand their markets better and have a more intertwined relationship with the it, and with the factors which affect it. In turn, this leads to them to better methods for determining the market’s mood.
But, if you’re not, do not be under the impression that you must go on a diversification-is-required spree and start trading every available market.
In fact, you can do the opposite and become a market specialist by learning the complexity of trading pairs and their correlations, for example, or even a single stock; it’s up to you.
By doing so, you will become familiar with the market you are operating in, and you will understand what it will do around certain events and announcements.
Keep in mind that this particular option will work best with a combination of fundamentals and technical analysis
Technical Analysis
In financial trading, technical analysis refers to the method of studying the previous history and price movements of an instrument, such as foreign exchange, stocks, commodities, etc.Key determinants include an asset’s historical price action, chart patterns, volume, and other mathematical based visual tools, in order to predict future movements of that instrument. Traders who utilize various means of technical analysis are known by a variety of terms, such as technical traders, technical analysts, or technicians.The crux behind technical analysis is the notion that past performance of a financial asset is a potential evidence for future activity. Unlike fundamental analysis, technical analysis does not bother with the causes of price fluctuations; it only deals with its effects. Therefore, technical traders diligently observe historical charts of the instrument they’re interested in trading. By applying a number of techniques, technical analysis ultimately helps forecast how prices will act, sometimes in relation to time as well. There are a multitude of visual tools available for the technical trader, with the most popular of them included in all of the major broker platforms today. Understanding Technical AnalysisTechnical analysis itself consists of a number of different methods, which generally fall into two main categories – leading indicators or lagging indicators. Leading indicators refer to those charting tools which enable the trader to predict the movement of an asset before it actually occurs. Such leading techniques include Fibonacci, pivot points, trend lines, divergence and harmonic trading, and are popular with traders who prefer to trade reversals. Lagging indicators are those visual tools which enable a trader to take advantage of a strong trend, entering upon it whilst in formation; such tools include the MACD, the Awesome Oscillator, and moving averages. Technical traders don’t all use the same tools of course, and even a trader that uses a particular indicator. For example, the Stochastic Oscillator will probably use it in a different manner to another trader using the same indicator or set of indicators, making technical analysis extremely subjective. Having said that, there is merit to technical trading, and as unintuitive as it may seem, previous price patterns do appear time and time again.As an increasing number of traders seek specific market points, the probability of those points holding significance also increases.
In financial trading, technical analysis refers to the method of studying the previous history and price movements of an instrument, such as foreign exchange, stocks, commodities, etc.Key determinants include an asset’s historical price action, chart patterns, volume, and other mathematical based visual tools, in order to predict future movements of that instrument. Traders who utilize various means of technical analysis are known by a variety of terms, such as technical traders, technical analysts, or technicians.The crux behind technical analysis is the notion that past performance of a financial asset is a potential evidence for future activity. Unlike fundamental analysis, technical analysis does not bother with the causes of price fluctuations; it only deals with its effects. Therefore, technical traders diligently observe historical charts of the instrument they’re interested in trading. By applying a number of techniques, technical analysis ultimately helps forecast how prices will act, sometimes in relation to time as well. There are a multitude of visual tools available for the technical trader, with the most popular of them included in all of the major broker platforms today. Understanding Technical AnalysisTechnical analysis itself consists of a number of different methods, which generally fall into two main categories – leading indicators or lagging indicators. Leading indicators refer to those charting tools which enable the trader to predict the movement of an asset before it actually occurs. Such leading techniques include Fibonacci, pivot points, trend lines, divergence and harmonic trading, and are popular with traders who prefer to trade reversals. Lagging indicators are those visual tools which enable a trader to take advantage of a strong trend, entering upon it whilst in formation; such tools include the MACD, the Awesome Oscillator, and moving averages. Technical traders don’t all use the same tools of course, and even a trader that uses a particular indicator. For example, the Stochastic Oscillator will probably use it in a different manner to another trader using the same indicator or set of indicators, making technical analysis extremely subjective. Having said that, there is merit to technical trading, and as unintuitive as it may seem, previous price patterns do appear time and time again.As an increasing number of traders seek specific market points, the probability of those points holding significance also increases.
Read this Term which, in turn, can lead you to apply different strategies for different situations.
Question 2: Are you a trade specialist?
If the proposition to become a market specialist isn’t too enticing, becoming a trade specialist might be right up your alley.
A trade specialist will focus on trading setups and the good news is that you can choose whichever setup you feel more comfortable with and back-test it until you can apply it consistently across multiple markets.
If you are planning to do so, you will want to master all the crucial moments of your trade: the beginning (where you filter out subpar setups and aim for the best possible ones), the middle (where you actively manage the trade), and the end (your exit strategy).
This leads us to question number 3.
Question 3: How are you planning to manage your trades?
The way one manages their trades is a strictly personal decision as managing entries and exits points will depend on how you decide to approach your trading.
Some may argue that every single decision should be made before the trade is placed (entry, stop-loss, profit targets, and so forth) while others will prefer to have a more active approach while manage their trades (moving stop losses on market action, for example).
So, by either stepping away and having a hands-off approach or actively managing, the choice will be yours to make and will depend on your personality.
And speaking of personality, that leads us straight on to the next question.
Question 4: Which time frame are you planning to go for?
Personality and the time you have to trade during your day will mold your strategy.
If you are a patient trader you will certainly be able to storm the fluctuations in long-term trades (these are inevitable, by the way).
Impatient people on the other hand will often gravitate towards scalping
Scalping
Scalping refers to a method of trading in which the trader executes quick, short term trades. It is the quickest form of trading and the one who trades in this manner is known as a scalper. Scalping is considered to be the most difficult form of trading, primarily due to a relatively poor risk reward ratio. Whilst there is no exact agreed upon definition of scalping, this form of trading can be characterized as utilizing either one or both of the following attributes: a) holding a position for a short period of time, i.e. from a few seconds to a few minutes, b) trading with the intention of profiting with a small number of pips, usually not more than ten pips per trade.Should You Be Scalping?As such, it follows that many scalpers seek out multiple trading opportunities throughout the day, aiming for a cumulative pip gain. Naturally, traders will use lower time frames to scalp, such as the one-minute or five-minute charts. Scalping differs from most other types of trading (such as swing or position trading) due to the fact that fundamentals are rarely considered. Rather, scalpers mostly utilize classic technical analysis tools such as support and resistance and indicators such as MACD to assist in making decisions. While scalping may seem initially attractive with the potential for quick profits on a daily basis, its poor risk reward can be exceedingly debilitating.This especially true for novice traders due to the cost of the spread versus the profit target. Consequently, this notion is why most forex scalpers tend to focus on the major currency pairs such as the EUR/USD, which, because of their higher liquidity, carry lower spreads. In reality, when scalping, the spread is one of the key determining factors as to whether a trade is successful or not.
Scalping refers to a method of trading in which the trader executes quick, short term trades. It is the quickest form of trading and the one who trades in this manner is known as a scalper. Scalping is considered to be the most difficult form of trading, primarily due to a relatively poor risk reward ratio. Whilst there is no exact agreed upon definition of scalping, this form of trading can be characterized as utilizing either one or both of the following attributes: a) holding a position for a short period of time, i.e. from a few seconds to a few minutes, b) trading with the intention of profiting with a small number of pips, usually not more than ten pips per trade.Should You Be Scalping?As such, it follows that many scalpers seek out multiple trading opportunities throughout the day, aiming for a cumulative pip gain. Naturally, traders will use lower time frames to scalp, such as the one-minute or five-minute charts. Scalping differs from most other types of trading (such as swing or position trading) due to the fact that fundamentals are rarely considered. Rather, scalpers mostly utilize classic technical analysis tools such as support and resistance and indicators such as MACD to assist in making decisions. While scalping may seem initially attractive with the potential for quick profits on a daily basis, its poor risk reward can be exceedingly debilitating.This especially true for novice traders due to the cost of the spread versus the profit target. Consequently, this notion is why most forex scalpers tend to focus on the major currency pairs such as the EUR/USD, which, because of their higher liquidity, carry lower spreads. In reality, when scalping, the spread is one of the key determining factors as to whether a trade is successful or not.
Read this Term, meaning, much shorter time frames.
To put it simple, this means that the shorter time frame you opt to trade in, the more concentration and intensity you will need to bring to the table.
And in what concerns your own time, if you can stay glued to the screen for long periods of time, you will find that a lower time frame might suit you best.
People who keep themselves busy with other activities on the other hand, may prefer a higher time frame.
Question 5: How well can you handle risk?
Can you place a trade, slap that laptop shut, and easily go about your day or do you constantly check one of your screens?
If you’re in that last group, your trade might just be too big for your risk appetite and will want to reduce it right up to the point in which you can have peace of mind, go about your chores, and sleep easily through the night.
Another thing which might help is setting yourself with a max drawdown, meaning that you will stipulate beforehand just how much you are willing to lose over a given period of time.
By doing so you will also be reducing your risk in a clever way because you will inherently try to avoid reaching your weekly or monthly drawdown.
Wrapping up
It might take time but you’ll find your own brand of trading.
By answering these 5 questions you will surely be on your way to do so and become a better trader.
As always, good luck out there.
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