The
Three Things You Need to Know Before the Trade
Many times trading gets boiled down to the entry, the profit
target, and stop loss. Sure, these are important, in fact they are the building
blocks of a trading plan, but they aren’t all that you need to know. Quite
frankly, they are the lastthree
things you need to know. So then what are the first three things that you must do before the trade? These
first three things are the most influential because they determine the
following:
Which
pair you will even consider for a trade
Which
direction you will enter a trade
Which
time frame to focus on
Which
strategy to use
How
much risk tolerance you will need
The last step of a trade – the last thing you need to consider –
before the entry is your risk to reward ration but all-too-often this becomes
the point at which traders begin their trading plan and it’s why so many
traders struggle. Unfortunately it’s because they don’t understand the larger
forces at work: the risk environment, the economic environment, and the
dominant psychology of the symbol they are trading.
We’ll examine these broadly in this article and re-visit this
topic in more detail in the future, but let’s start the conversation now.
Economic Calendar - Before the trade, any trade, I
make sure I am keenly aware of the economic calendar and dominant headlines not
just for today but what happened while I was away from my trading computer. For
economic releases that means looking at the week in its entirety with
particular emphasis on the session that proceeded, the current session, and
what the market could be looking ahead to. For the headlines, I will look to
sites like Forex Factory and Bloomberg to see what traders are reacting to and
therefore discounting into the market. This allows me to gauge the potential
risk of the session, when volatility is most likely to increase, and what time
frames I will consider in this environment.
Directional
Bias - Time frame selection is determined in great part by identifying
the Directional Bias in the market. Whatever symbol you are trading, the daily
time frame is the first consideration and not necessarily for a trade, but to
know what the dominant psychology of the market is. This is done by using my
34EMA Wave and GRaB candles. By understanding the sentiment, momentum, and
trend in the markets you are actually identifying whether it’s the bulls or
bears or NO ONE who’s in the driver seat. Trending daily time frames have what
I call a “trending Directional Bias” and that is the best type of market to
focus your efforts on because there is a clear, dominant psychology. You want
someone behind the wheel. You really shouldn’t care if it’s a bull or bear (you didn’t know bulls and bears could
drive!?) If there is a trending
Directional Bias, entering a trade with the trend is valid across all intraday
time frames, and of course on the daily itself. However it would be best to
limit counter-trend entries to only short-term time frames like the five, 15,
and 30-minute. It is always the path of least resistance to follow the trend
and therefore better to trade a symbol that has a trend on the daily.
Cost
per Trade - Another aspect of a trade is cost and pip movement. Many
traders do not factor in the cost for a trade before they enter in terms of
understanding the spread – and this can change slightly for each of the major
sessions. Cost per trade can also include rollover if applicable to your
trading account and depending upon how long you hold the position. Longer-term
time frames are not impacted as greatly by a short-term time entry and may be
reconsidered if the pip movement doesn’t justify taking the trade because of
the spread. Pip movement ranges are part of that same discussion. Each market
has a rhythm of its own whether we’re talking about a stock, futures contract,
or forex pair. For forex, I know exactly what the expected pip movement range
is for each pair I trade during each hour of the day! This is a must. Consider
this: If a trader were to reference the hours between 8:00am and Noon EST and
use that as a gauge for pip movement for 8:00pm to Midnight, their expectations
would be severely off the mark since the pip movement between the European,
U.K. and U.S. overlap can be (sometimes) twice that of the Asian session.
Keep these three things in mind as you prepare to enter any trade.
For more education and analysis, check out the dailyforextradingedge.com.
Posted By:
Raghee Horner
Raghee Horner, chief currency analyst for IBFX, provides her personal daily trading tips and insights through Dailyforextradingedge.com. An experienced trader with over fifteen years in the markets, Raghee is the co-founder of EZ2Trade Software and has taught her brand of technical analysis and charting strategies to students all over the world. She is an international author and has taught currencies, futures, and equities trading for over a decade.
The Three Things You Need to Know Before the Trade
Many times trading gets boiled down to the entry, the profit target, and stop loss. Sure, these are important, in fact they are the building blocks of a trading plan, but they aren’t all that you need to know. Quite frankly, they are the last three things you need to know. So then what are the first three things that you must do before the trade? These first three things are the most influential because they determine the following:
The last step of a trade – the last thing you need to consider – before the entry is your risk to reward ration but all-too-often this becomes the point at which traders begin their trading plan and it’s why so many traders struggle. Unfortunately it’s because they don’t understand the larger forces at work: the risk environment, the economic environment, and the dominant psychology of the symbol they are trading.
We’ll examine these broadly in this article and re-visit this topic in more detail in the future, but let’s start the conversation now.
Keep these three things in mind as you prepare to enter any trade. For more education and analysis, check out the dailyforextradingedge.com.
Raghee Horner