Countless traders place tremendous significance on perfecting their entries. Indeed, entering the market at the most optimal time makes a massive difference in the outcome of every position taken.
However, too much reliance on a perfect entry alone is detrimental since traders unintentionally ignore or focus on all the other elements of making a trade in the forex market, e.g., not knowing how to exit a market logically, journaling, etc.
Trading currencies seems to provide a seemingly infinite amount of opportunities. Any uninformed person can click the buy or sell button at any random time and consider themselves a trader.
Yet, a lot more work goes behind the scenes in deciding what to buy or sell, when, and why. Regardless of whether someone is a scalper, day trader, or swing trader, there are repeatable, critical phases for making a trade in forex.
Planning is the main phase working in the backend, which no one should overlook. We immediately think of a trading plan here because it serves as the blueprint for everything a trader does in the markets.
Overall, the planning period is about scanning the markets for potential opportunities according to a set strategy by looking for highly defined set-ups and market structures. Traders will perform this stage at predetermined times, depending on their schedule and trading frequency.
At this moment, traders must know which markets to observe by keeping some form of watchlist. At the planning phase, the analyst is going through an elimination process, sifting between promising opportunities and not-so-promising ones.
As time passes, they will observe if certain markets have met the right conditions for a potential entry. Patient waiting is another part of planning since everything needs to line up according to a solid list of confirmation factors without the fear of missing out or entering on a whim.
The entry is, of course, one of the most straightforward steps to perform but is the one bearing considerable financial implications when done poorly. A stop loss should be the first thing a trader considers before entering a market instead of the profit levels. Depending on the strategy or approach, one will decide between using a fixed stop loss size or define their invalidation point and set their stops accordingly.
More importantly, one will decide the exact monetary amount to risk for an individual position. One tip more traders should utilize is a checklist which even the most confident traders use.
Traders can miss a critical piece of data during the planning instances, making an opportunity not worth trading anymore; this is where a checklist becomes essential. It’s simply a process of going over a particular chart one more time and double-checking if it meets all the necessary criteria before pulling the trigger.
A trader will ask themselves some important questions seeking to confirm if a particular trade is worth taking. Another part, which doesn’t affect all traders, is looking at an economic calendar for any possible high-impact news that might noticeably affect the price.
A helpful trick for better entries is through the use of pending orders instead of market execution. With the former, a trader can have time to decide against a trade by simply deleting the order without any risk, a luxury that is often not possible with the latter.
Trade management is an element of trading forex that’s challenging to deal with, reinforcing the high inherent uncertainty of being an analyst in the markets. This subject is more art than science and will depend drastically on one person to the next.
Perhaps the biggest mistake is micromanaging, where traders interfere with their positions mainly through moving their stops and manually closing their orders illogically.
Micromanaging is also the practice of watching charts obsessively after entry which is emotionally draining as the brain reacts virtually to every pip going for or against the trade.
Generally, those who trade frequently have to perform more active trade management, while others trading less aren’t so affected by this aspect. Regardless, this stage should be thoroughly covered in the trading plan through logic.
Below is the list of questions any trader should ask themselves after entering into a position.
- It begins with how the market is reacting after the entry. Is it moving in your favor or not? Observing this should provide clues of how likely the price will continue to move in one direction in the next few minutes or hours, depending on the trading style.
- If the price has moved at least one times the risk, what do I do? Do I move the stop loss the same distance or to the breakeven? Do I scale out or scale into the trade?
- If the market has moved against me, do I sometimes close the position at a small loss based on certain triggers, or do I leave it?
- If the trade has moved considerably in my favor but not quite to the desired profit target, where do I move my stop? Would I simply exit the market at that point or let the trade run?
These should be some of the questions a trader will need to answer. The trade management aspect comes down to experience and will not be the same for everyone. However, how a trader manages their trades should make sense and allow their positions the best chance of succeeding without micromanaging or interference.
Exiting does form part of trade management but in its actual sense deals more with the following:
- Never staying in a losing trade beyond the stop-loss; conversely, never letting a winner turn into a smaller profit or loss
- Being content with having followed the trading plan to the tee regardless of the outcome
- Maintaining a neutral and calm emotional state going into the next trade
If trading was straightforward, someone could simply move onto the next trade without thinking about what happened in their previous one. It’s not necessarily about dwelling on the past but more about post-trade analysis.
Mistakes can happen at any point in the previous four steps. If one cannot identify these errors, they will likely commit them again in the future. This is where journaling comes into the picture, which is paramount for maintaining consistency and performance.
Fortunately, traders have the option of doing journaling manually or through software. Journaling or just reviewing, in general, is about correcting any minor mistakes, tracking progress, and making proper adjustments for continuous improvement.
While entries make up a significant portion of the phases of trading, too much focus on this aspect leads to unfavorable performance. Trading goes beyond just execution, involving an iterative process of improvement, self-inspection, and maintaining consistency to sustain a profitable journey.