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In today’s episode, you’ll discover the 7 critical things to look for before you enter a trade.
So tune in right now…
Price Action Trading: 6 Things To Look For Before You Place A Trade
The 5 Best Trend Indicators That Work
Forex Risk Management and Position Sizing (The Complete Guide)
Hey, hey, what’s up my friend? In today’s episode, I want to share with you 7 critical things to look for before you place a trade.
1. Are you trading based on emotions?
Because often when the market is moving quickly, especially when the price just broke out of resistance, the candles are big and bullish, you can get carried away because of your fear of missing out.
You’re letting your emotions dictate whether you should hit the buy button now or not. Beware of trading based on emotions because when you trade based on emotions, you’re usually entering your trades at one of the worst possible times.
That’s when the market is about to make a pullback or reversal. Be aware of this and don’t trade based on emotions. Don’t have the fear of missing out. You want to be calm, you want to be collected.
2. Are you trading into an obstacle?
For example, let’s say you buy at a swing low and shortly after, the price hits higher and comes into a key area of resistance. You want to ask yourself this question, “Is it worth buying at the swing low when shortly later, a strong area of resistance is going to be in front of me?”
It’s kind of like an obstacle in your way that will hold the price there. If the obstacle is near your entry point, then your risk to reward isn’t going to be very attractive.
Let’s say you’re risking 100 pips stop loss but maybe 20 pips later you’ll be coming into an obstacle. You can see that your risk-reward is pretty skewed. So you must ask yourself if there is any obstacle coming in your way.
3. Are you trading with the trend?
Sometimes when you are focused at the moment, you might lose sight of the big picture especially if you’re looking to buy low and sell high. As the price keeps breaking down lower, breaking support, or breaking a swing low, you might think it’s cheap and you want to buy.
But unknowingly, if you take a step back, you’ll realize that the market is actually in a downtrend. Why do you want to be buying in a downtrend? It makes much more sense to look for selling opportunities instead of buying opportunities in a downtrend.
So the third point is to take a step back and ask yourself, are you in line with the trend or against it?
4. Are you trading from an area of value?
Here’s the thing, just because the market is in an uptrend doesn’t mean you should blindly hit the buy button. Because the uptrend could be overextended or it could be far away from an area of value.
When I talk about an area of value these could be things like a respected moving average in an uptrend, an area of support or a swing low, etc.
Are you trading from an area of value or far away from it? As much as possible whenever I trade pullbacks or buy low and sell high, I want to trade from an area of value.
5. Does the price form a buildup before the breakout?
If I’m not trading from an area of value, the next approach that I’ll take is to trade breakouts with a buildup. A buildup is in essence, a tight consolidation where the range of the candles is small.
I like to see a buildup before I buy a breakout because when there is a buildup formed, two things are working in my favour:
- I can set a pretty tight stop loss just go below the low of the buildup
- The market is in a volatility contraction and there’s a good chance that a low volatility environment could expand in my favour
The volatility of the market is never static. It’s always moving from a period of high volatility to low volatility and back to high volatility, etc.
So if I were to buy the breakout with buildup, that trade would offer me an attractive risk-reward on the trade. This is why I love to look for a buildup before trading breakouts.
6. Can you afford to take the loss on the trade?
Here’s the thing, it doesn’t matter if all the stars align, all the technicals and fundamentals, the macros and the sentiments are aligned. If you cannot afford to take the loss on the trade, then you have no business taking the trade.
When you can’t afford to take a loss it makes you do weird stuff, like refusing to adhere to your stop loss because you can’t swallow the loss as the loss is simply too big for you to take.
You’ll tend to ignore your stop loss and pray that the market moves back in your favour. Or how about, you will consider averaging in your losses and pray that the market does a slight rebound for you to quickly recoup back your losses.
When you start trading with money you can’t afford to lose, when you start trading and picking trades that you can’t afford to lose it makes you do weird stuff. So don’t do that.
7. Are you trading according to your trading plan?
This is the most important question. Because you can do all the analysis, but if it’s not according to your trading plan, then you have no business training.
If you’re not trading according to your trading plan that you’ve laid out for yourself, this tells you that your actions are not going to be consistent.
Because if one day you’re doing price action trading and the next day you’re doing quantitative trading, the next day’s chart patterns or candlestick patterns, etc., then your actions will not be consistent.
When your actions are not consistent, you can expect an inconsistent set of results. This is why you must have a trading plan, you must adhere to your trades, and trade according to your trading plans.
Only then will you achieve consistent actions and consistent results.
- Are you trading based on emotions? Are you letting the fear of missing out affect your trading?
- Are there any obstacles in your path? Is it very near your entry point?
- Are you trading with the trend?
- Are you trading from an area of value?
- Was there a buildup formed before the breakout?
- Can you afford to take the loss?
- Are you following your trading plan?
With that said, I’ve come to the end of today’s episode. I will talk to you soon.