If you want to trade smart and stay disciplined, you need to implement a trading checklist to guide you when to open and close a trade.
It’s important that you set clear parameters and conditions that must be met before you enter the market to ensure a positive outcome most of the time. While 100% profit is never guaranteed in Forex, sticking to a tried-and-tested trading plan consistently can reduce the probability of a loss.
What should go into your pre-trading checklist?
1. Trade setup
Make sure that the basic conditions necessary to even consider a trade is present. If you’re trading the trends, for example, the market should be trending or shows a strong trend. If the market is ranging or that you don’t see your trade setup, put off trading for another day.
2. Trade trigger
You need a trigger that tells you now is the best time to trade. If you like to buy during a pullback, then you wait until the price pulls back to near support before you do. If you prefer to buy during an uptrend, you buy currencies when they’re moving upward or after a candlestick confirms the price will continue to go up.
3. Trade indicators
An effective way to confirm trades with high probability is to use indicators. The best trading strategy should use one or two indicators that complement it. Using RSI or MACD, for example, could confirm a trade setup’s profit potential.
It’s important that you place a stop-loss order to mitigate risks in Forex trading. While using a stop-loss may limit the amount of profit you gain, it will also protect your account from total annihilation.
5. Price target
Consider a trade’s profit potential before you enter. You can measure profit target based on several tools.
- Chart patterns will help you set a target based on pattern size.
- Trend channels will show you where prices tend to move or reverse.
- Set a target near the top of a channel if you want to buy near the bottom.
If you want to exit trades with the best profit, you may want to add a trailing stop loss. While this doesn’t allow you to calculate your profit beforehand, you’ll be able to systematically extract profits.
6. Reward-risk ratio
To ensure a profitable trade, only open positions where you’re likely to profit 1.5 times than the risks. For example, if you lose $100 when the price hits stop-loss, you should earn $150 if the target price is reached. Don’t trade when risk is higher than the profit potential.
There you have it. Only take a trade if:
- Your trade setup is present
- A trigger tells you it’s the perfect time to trade
- The indicators you use confirm a high probability trade
- You set a stop-loss order and price target
- The profit potential is higher than the risks
In the event that one of these conditions are not met, don’t force yourself to trade. Wait until tomorrow. The markets might give you more opportunities to profit.