When you trade Forex in a professional way, every trade you make should go through four stages. Each stage has its purpose in the trading plan and risk management. These four stadia are the setup, the entry, the determination of the stop loss and take profit points and the exit.
First step: the setup
Initially, you will need to find out if the market is favorable for your trading strategy. You will analyze the market to see, if all parameters are suitable to make possible beneficial trades, by following your trading plan. At this stadium, you take a look at the charts of the currency pairs you are used to trade with. The trading system usually indicates which currency pairs you should use to be successful with the strategy of your choice. When you have become more experienced with your trading strategy, you will see rather quickly if the market is appropriate or not. If not, you concentrate on another currency pair. If so, you get a more detailed view on the chart of your interest. In many cases, you will use the larger timeframes to get an idea of the trend and major support and resistance lines. The smaller timeframes can be used to get a closer view of the setup conditions. A proper setup condition does not necessarily means that you have to trade. At this phase, you only consider placing an order.
Second step: enter the trade
When the market conditions are met, you will need to wait until the right moment, to enter the trade. Any significant trading strategy provides you with a set of rules that will help you to find the right time to start a trade. Psychologically, most beginners will tend to enter the trade too early. At this stadium, you have to be extremely patient and not too greedy. Most of the times, it is better, that you wait a couple of minutes in order to be rewarded with a higher profit. Each gained pip is a profitable one and will count for a satisfactory result at the end. Mostly, smaller timeframes are more appropriate to determine the exact entry point.
Third step: set a stop loss and determine the profit target
Just after you placed the order, or while you are doing it, you place a stop loss. This step is primordial for trading success. Respect your money management rules at all times and stick to your trading plan. Beginners tend to change their stop loss in the hope that the market will turn into their favor. The ability to accept loss comes into play and should be trained. Of course, you can trail the stop loss so to break even or to a first profit level, but never expose your account to more risk than necessary. Conventional money management states that you should never risk more than 2% of your trading capital. The ATR is an indicator that can help you to set your stop loss and take profit target. It calculates the average true range of a number of previous bars.
Fourth step: exit the trade.
The exit point is determined in your trading strategy. Most reputable trading strategies have been tested for several months. In my opinion, it is better, that you stick to the trading plan and follow the rules to determine the exit point.
There are two main ways to exit the trade. On one hand, the trade can reach the predefined profit target or stop loss. On the other hand, you can get out of the trade manually. In that case, you will need to make sure, that you found your decision on market analysis, and not on fear. Getting out of a trade too soon, is also one of the common mistakes of a beginner.
In a summary, we have seen the four stadia of a trade. In every strategy you evaluate, you should find these four elements. Hopefully, this information will help you to have a better understanding of your trading system.
To your trading success.
Trading is like driving a car. When you know how to do is, it's childs play. It is a natural set of actions. But, when you have not learned how to drive properly, it can become dangerous. The same applies to forex trading. This is why I started a forex currency trading blog with tools and tips that will help you to build a good trading toolbox.
Visit my blog at http://www.myforextoolsonline.com/
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