Be prepared 8230

Have you ever been in a situation where you missed a major market move which turned into a sizeable profit? 

As traders we at some point have experienced regrettable moments where a trade has worked out just as we expected but we did not catch the move. This can be very frustrating and also dangerous.

It is easy to get caught into a trap where we chase a trade. Quite often a market starts a move and by the time we have seen it the risk could have increased but our mind is not on the risk. Instead it is on what we have just missed and how much more we could be missing out on.

The end result may turn out to be not what we expected and we could also find ourselves in a position where we are trying to deal with damage control.

If we take a step back and figure out why we ended up in a situation which we clearly should not have been in then you may find that it could boil down to trading impulsively. This is a result of not having a plan. One of the most important elements of trading successfully is having a well formulated plan.

A trading plan can be as simple as having an entry point, a stop loss, position size and exit strategy. Of course these are the basic elements and we can easily add more components to the plan but as an example here is a simple set up which includes all of the above.

Let’s say the market has gone through a period of consolidation which is essentially in contraction mode. We assume that the EUR/USD has had a daily range between a low of 1.2568 and a high of 1.2680 and has closed at 1.2585 which is just above the low.

From this information we can say the market has closed negative and if the high and low range is narrow compared to the last four bars our expectation is to see a move to the downside.

All we would need to do is log on to the City Index trading platform and place a SELL STOP order just below the low and a STOP ORDER just above the high in case the trade goes against us. We would use theORDER button on the platform as this allows us to place an order for an event that could happen in the future compared to the TRADE button which is to deal instantly.

We will assume that we are taking a risk of 2% of our account size which hypothetically is £400.00

From the point of Entry if the order is triggered to the Stop Loss level is 112 points in this example. If we divide the risk capital of £400 by 112 points this equates to £3.60 per point on a Spread Betting account. So if we trade and the market moves against us by 112 points we would lose the trade or 2% of our total account.

Our stop may be placed at a specified level based on Support or we could wait for a specific bullish reversal pattern or even seek to extract a certain number of points from the move. This is dependent on the trading style of the individual. But as a simple example if we are looking for double the profit of the risk taken then we could place a LIMIT ORDER224 points away from the Entry price which comes in at 1.2344 or simply bring our Stop Loss at our Entry Level and even take half of our profit and let the balance of the trade run to capture the rest of the move.

So in this very simple example we have planned a trade. We then placed a pending order which does not even require us to watch the screen. We know how much risk we have on the trade and we even have a profit target set in place to take half the profit of the table.

If the trade works then our preparation paid off and we collect the reward.

So the next time you place your trade, ask yourself “am I trading with a plan or on impulse?”