A trader is someone who gets involved in financial markets to make money. Some believe that in order to trade profitably, you need to get your hands on some magical trading strategy, that there is some sort of Holy Grail out there, after finding which the trader can forget about losses for good and make consistent profit.
1. Being trader is not about finding the holy grail
2. Trading plan is trader's law
3. Things you should know about the creation of a checklist
Experienced stock traders know that being a successful trader implies having strong self-discipline.
A lot of people cringe and think of something rather unpleasant when they hear this word. However, when it comes to trading, self-discipline is linked to profit, since only a disciplined trader will be able to earn consistently. And you have to admit - it’s really nice to have a hefty amount of money in your account.
A clear trading plan that factors in every little detail helps to stay disciplined and not let emotions take over you. When you have a checklist in front of you allowing you to decide whether or not to enter a position, it becomes much easier to remain disciplined.
So, what exactly is the trading plan? Essentially, it is a list of rules that help decide whether to enter the position or stay out of the market. From a practical standpoint, the handiest option is the trading plan arranged in the form of a checklist with a list of questions to be answered before you open a position.
Traders can create such checklists on their own based on the trading strategy they use and risk management rules. By reading this article, you can familiarize yourself with a similar checklist designed for those who trade technical levels.
1. Where is the price in relation to the technical level?
2. How does the price behave when approaching a level?
3. How strong is this level?
4. How does the level get confirmed and who generates the price movement in the market?
5. How many times did the price tested the level?
6. Have there been any false breakouts of the level?
7. What is the possible risk?
8. How far is the price in relation to strong daily levels?
9. What is the daily ATR and price movement potential?
10. What is the current market trend?
A profitable trader is the one who sticks to the strategy and doesn’t trade chaotically.
When opening a chart of a trading instrument, the trader needs to evaluate the price position in relation to the nearest levels. When the price approaches the level, there are two possible scenarios - either a breakout of the level or a bounce-off.
If we are dealing with support, it is important to assess the likelihood of the upward bounce and the opening of a long position. In case the level of strong resistance is approached, the quotes will most likely bounce downwards. If the price is in the middle of the range, we should wait.
At this stage, we have outlined possible scenarios and will be trading based on them.
Let’s assume that the price has approached the level of support. Depending on the quote behavior, there can be different scenarios here. If the price is only approaching the level, it can either break it out or bounce off it upwards.
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It's way too early to make any trading decisions, and we have to wait for the situation to become clearer. If the price starts consolidating at the level, forming a horizontal trend (the base), or bounces upwards (which is called confirmation of the support level), we have every reason to get ready to go long.
Technical levels on the chart are notable for their strength. E.g. the level of historical highs or lows is quite strong, whereas the level that has been repeatedly “pierced” can be broken out again.
There is a rule:
The rule of thumb states that levels formed on higher time frames are stronger.
So, when the prices approach support level drawn on a weekly chart, especially if the level is located at the long-term lows, it is likely to result in the price bouncing upwards rather than breaking out the level and consolidating below it.
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When the price bounces off the level, it serves as its confirmation. Pay attention to whether or not the level has already been confirmed by bounces. If there are false breakouts, especially by shadows, this also indicates that the analyzed horizontal line on the chart is strong and can stop the price.
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The trader is a person who should assess market probabilities. This is why traders use another trick to assess the strength of the level.
If the analyzed horizontal line stopped the price more than three times, the likelihood of level breakout increases with each subsequent approach to the level.
As previously mentioned, some types of false breakouts confirm the strength of the level. That being said, the traders should also factor in the levels of false breakouts in order to place a stop loss accurately, assess the risk and decide whether or not to enter the trade based on the parameters of their own money management system.
In the previous item, you have already evaluated false breakouts. Typically, you should place your stop loss behind them.
After calculating the stop loss in pips, you need to evaluate the volume you are going to enter with so that the risk in money terms does not exceed about 1% of the deposit. Make sure to add this value to your risk management rules.
IMPORTANT!
If in case of the minimum lot you cannot afford such a risk in the deposit currency, simply skip this trade.
During the previous stages, you have assessed the position of the price in relation to the levels formed on a 4-hour, 1-hour, or even lower timeframes. What you have to do now is evaluate how close/far the quotes are from strong daily levels, since in case of a breakout, there will likely be a movement to the daily horizontal lines. Keep this in mind when deciding whether to open a position.
Average True Range (ATR) is a technical analysis which measures market volatility by decomposing the entire range of an asset price for that period. It is vital to use it in order not to open the trade when the price has already traveled the biggest portion of the way. It is generally recommended to use a 14-day ATR. It can be determined based on the size of 14 daily candles arranged in a row. For this purpose, we pick the one of the average size and measure its value in pips by a crosshair. We also ignore abnormally large (news) candles.
So, if the price has passed 20% of the daily ATR, the quotes still have the movement potential in order to maintain 1:2 or 1:3 risk-reward ratio in the trade. If most of the ATR is passed, it is not a good idea to open a position.
After you have checked all the previous parameters, what you have to do next in order to make an informed decision is figure out the trend. As we all know, trend is our friend. Trading against the trend is dangerous. In case of the uptrend, it makes sense to go long. During the downtrend you should go short. In the presence of the flat market, you can trade in both directions.
So, if you have analyzed all of the items on the checklist and have gotten a solid confirmation for position opening, go for it. However, if there are certain issues and inconsistencies, it is better to skip this entry point. The fact remains that successful trader’s rule of thumb is to first preserve the deposit, and then make money while taking reasonable risks only.
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