Trading is a vast topic and a bit complicated when you don’t have the perfect roadmap or plan while initiating your trades. Traders often get into the fallacy that they will find some secret strategy or an indicator that will make them tons of money, but we all know what happens in the end. They end up losing all the money they had, and they blame the markets for their mistakes.
So, In today’s article, we are going to simplify this complex process, and we are going to set one system that you have to follow while trading. So, whenever you trade, you are going to ask yourself simple 3 questions, and those are-
1) Does this trade fits in my Trading Setup?
2) Have I planned for Risk Management before initiating the trade?
3) Did I follow my system throughout the trade?
These simple questions can remove a lot of complexity and can give you one crystal clear path whenever you initiate a trade. So, let’s discuss the logic behind the first question-
A new trader becomes very eager to trade when he enters the market, and this urge to trade without any setup costs him a lot of money. When you take a trade without a setup, and when that trade ends in loss (most of the time, it does), you start to regret your decision, which happens with most traders initially.
Also, one more disadvantage of trading without a system is that you totally become confused at the time of entering into the trade because there are no specific criteria to enter, to set the stop loss, to trail your stop loss and set the target. As there is no system, it is likely that you will end up committing errors somewhere in between. On the other hand, if there is a trading system, everything becomes standardized, and there are rules for everything like taking an entry into the trade, setting up the stop loss etc.
So, whenever you see a trading opportunity, your first filter is to check whether this trade fits into your trading system or not; if yes, then only move ahead, and if the answer is no, then there is no point in taking the trade.
Now comes the most crucial aspect of trading because anyone can spot a good setup or can master the Technical Analysis. But unless you are not planning for your downside, you are not going to become a good trader.
Often, most traders look at the rewards they will be getting, not the exposure of risk behind those rewards, because everyone wants profits, and no one wants to make losses; it’s a human tendency.
But with the hope of profit, if you ignore the losses, it becomes almost impossible to become a consistently profitable trader. So, before taking any trade, you must know how much will you lose if the trade goes against you; if you are comfortable with that amount, then go ahead and take the trade; if you are not, either cut down your position size or avoid taking that trade.
It doesn’t matter how good the opportunity is; if you are risking more than what you are willing to lose, pass on that opportunity, the market is kind enough to give you ample opportunities if you stay in the market for a long term. So, Risk Management will be your second filter while initiating your trade.
-Having a particular process for trading is important, but more than that, following that process is even more important because, in the end, it doesn’t matter how good your system is; if you are not following it, then that system will not work for you.
So, it is very important to review the process when the trade gets completed. Once you complete the trade, ask yourself the above simple question and be honest with yourself. If you did not follow your process in a particular trade, write it down in a trading journal so that you will avoid doing that next time.
One more significant advantage of reviewing the process after every trade is that we can instantly know where we made a mistake or where we went wrong, and this is how you can improve your trading.
Also, if you follow the process and book a loss, then always tell yourself that I did the right thing by following the process and that was a good trade to make, and this habit of following the process is going to help me in my long-term trading career.
So through this article, we have discussed 3 main aspects of trading, namely Trading System, Risk Management & Traders Journal Reviewing; if you ask these questions to yourself while trading, I am pretty sure that you will see a massive improvement in your trading.
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