The capital markets offer unique investment opportunities daily that has seen many investors turn in a fortune. Likewise, some investors have seen their investments dissipate in thin air on being on the wrong side of the market. Conversely, timing the market in terms of entry and exit points is a vital forex trading secret if one is to have a long and successful career as an investor.
Whenever the markets are opened, traders scan for investment opportunities in stocks, forex, commodities, and futures either by using forex expert advisers or manually. While each second the market is opened provides investment opportunities, not every opportunity amounts to a high probability trade.
One of the most critical money-making hacks in the capital markets entails taking trades that perfectly align with a given trading plan. Below are the five steps that any serious trader should follow during manual and automated trading for a good profit potential while investing in various asset classes.
Have a Trading Plan
Many investors have seen their investments amount to nothing on trading the capital markets without a proven trading plan. A trading plan must align with investor goals as well as the kind of trader one wants to be. Similarly, a trading plan allows traders to trade only when there is a high probability of generating profits.
For instance, a trend following trader carefully studies chart patterns to take trades only when the market is trending either upwards or downwards. Similarly, such a trader will avoid trading when there is no trend. Range trading is another popular trading strategy that involves buying lows of a range and selling as soon as price rallies to the highest point of a range.
In addition to trend trading and range trading, a trader can leverage scalping to take advantage of small price movements and make small amounts of profits over a prolonged period. News trading is another popular trading strategy that entails investors taking advantage of wild swings triggered by news releases to generate profits.
In addition to having a trading plan, it is essential to have preset rules that dictate when to open and close a trade. While some traders like to open trades during breakouts, some traders open positions whenever there is a pullback.
The chart above shows Constellation Brand stock is trending upward. For a trend following trader, the high probability trade will, in this case, be when the market pulls lower to the $115 level, which is the lowest point of the $121 to $115 trading range. Similarly, one can open a position as soon as price breaks out of the trading range, with the $121 level appearing as an ideal entry point.
A position is opened only when there is a confirmation signal. The signal, in this case, could be on the formation of a bullish engulfing candle stock at the $115 or $121 price level.
Stop Loss Use
Loss mitigation is an essential strategy when it comes to trading the capital markets. A stop loss is a popular type of forex order for traders focused on conserving capital and minimizing losses. While most traders focus on the entry points in the market, professional traders also pay close attention to exit points.
For long term trades, a stop-loss order should be placed slightly below the recent swing low in case of a long position or above a recent swing high in case of a short position. The Average True Range stop-loss strategy involves placing a stop-loss order a certain distance from the entry price based on the amount of volatility in the market.
Price Target Placement
Once you have ascertained the ideal place to enter a position and where to place a stop loss, the next step involves figuring where to take profits. A profit target is a special type of order that allows traders to lock in profits. Similarly, it is a vital forex trading instrument for ensuring any open position results in optimum returns.
Chart patterns provide ideal price targets for placing profit targets. For instance, trend channels indicate where price has a higher probability of reversing. In this case, a trader can enter a trade at the lower end of the channel and place a price target at the top of the channel.
While trading, the idea is to risk the smallest amount possible for a much bigger profit. As an important money-making hack in the financial markets, traders are advised to open trades only when the probability of making profits is 1.5 times more than making a loss. For instance, if you wish to gain $150 on a trade, then the stop loss should be set such that it limits losses to $100.
Conversely, whenever the profit potential of a given trade is lower than the risk, then the trade should be avoided at all costs. Missing out on bad trades is an important forex trading secret for traders focused on consistent profits.