Trading Tip of the Week #3
July 7, 2017 13:15
We're about to wrap up another successful week of trading here at The School of Trading and I wanted to take a minute to talk about something that I feel is very important for every trader to know and understand.
The problem a lot of newer traders face is they rush into things. It's natural to want to be part of the action and there is always that exciting driving force when it comes to trading. But what is not exciting is losing money, in fact a lot of money! That's what will happen if you rush into things. So, for any potential trade you are considering making, you should be able to answer the 4 W's.
Why: In simplest terms, why are you targeting this trade? What on the chart is showing you that it has potential to produce profit? Is it in a key level of support and previous reversal point? Is it near a breakout price point? What exactly is causing you to feel this trade has good potential? You should be able to answer this question in detail. By always asking why, you'll avoid entering trades purely off of emotions. As we've talked about before, emotions kill trading accounts, so we want to reduce emotion as much as possible. Always know why you are targeting a trade.
When: When will you enter the trade? What is the catalyst that will drive a buy signal? For a breakout play is it seeing a specific price on the bid? For a reversal are you looking for certain signals from the indicators? Perhaps it's a break above a key moving average. When will you pull the trigger and enter a trade? By having the when down in detail, you avoid allowing your emotions to drive you into a trade when the buy signal isn't there. This will help you create discipline in your trading and again remove emotions. Always know when you will enter a trade.
What: What is your profit target? Be specific. Know your profit objective before you enter a trade. Can you make adjustments after you're in the trade? Of course. But have a rough outline of what your initial profit target is before entering. This target should be realistic and largerly based off of what you're seeing on the chart. Always know what your profit target is. Have a clear objective. Once in a trade, automate your profit target with your broker so additional emotions are removed.
What: What is your stop loss? If you trade without a stop loss, you're skydiving without a parachute. It may be fun for awhile, but eventually you'll hit the ground. Never, I repeat never trade without a stop loss. Immediately after you enter a trade you should be setting your stop loss and automating it with your broker. Do not ever adjust this stop loss unless the price of the stock you are in has moved up and you are adjusting your stop loss upward to reduce risk. Never adjust the stop loss downward for any reason.
Any trade you are ever planning on entering, you should always be able to answer each of the questions above. Why are you targeting the trade? When will you enter the trade? What is your initial profit target? What is your stop loss?
If you cannot answer each of these 4 questions, there are cracks in your trading foundation that need to be fixed. I recommend taking the weekend to review some of your past trades and to put the 4 W's test to each trade and see if you are answering each question for each trade. If you're not, it's time to step back and focus on the education side of things for a bit before moving forward (and that's ok!).
So there's my tip for the week! Hope it helps you find more success in trading!