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7 Questions to ask before each trade

Forex traders typically have a plan of action before they play the markets and putting a plan into practice is an essential component of trading success.

Whether you have a trading plan or not, asking these questions before each trade can put you in a better frame of mind and increase your chances of beating the odds.

A Guest Post by  FXTM

Q1. What is the direction of the major trend?

Often, the major trend is the most important consideration when placing a trade, since if you trade in the same direction as the major trend, you swim with the tide, not against it. In this way, you can make poor entries and still wind up making money.

Q2. What are the probabilities with taking the trade?

It may not be possible to work out the exact possibilities, but through historical testing you can have a decent idea, and by knowing the probabilities you can better decide on risk.

Q3. What will your risk be?

Knowing your win/loss probabilities allows you to meticulously calculate what your risk should be so that the profit potential of your account can be maximised. Even if you don’t know them exactly, you still need to calculate how much to buy and where to place your stop.

Q4. What is your exit strategy?

Finding a good entry is important but exits are even more so, since they are what ultimately results in recording a profit or a loss. Exits are of course very important to get right so you should know what criteria will cause you to close your position.

Q5. How will you know when your trade is wrong?

You can have a stop and this will guard against losses but it’s equally as important to know what to do if your trade doesn’t go as planned. If your trade is losing or hasn’t made money after a certain time you should think about closing the position. Knowing at what point to give up on a trade is crucial.

Q6. How much profit are you looking for?

It’s important to have an exit strategy in place and it’s important to think about good entries but you should also consider exactly how much money you are looking to make on a trade. Not only will this help you manage risk but it will help put your mind at rest when you’re in a winning position. You don’t want to get greedy and end up hanging on for too long.

Q7. Are you in the right frame of mind?

Before you pull the trigger it’s also important to consider your mental state. You may have just received the perfect signal to go long, but if you’re exhausted and about to go home, you may be better off passing on the trade and waiting for another opportunity. The effects of trading through fatigue or stress can be devastating.

Further reading:  5 Most Predictable Currency Pairs – Q3 2014