The mechanics of opening a trade are remarkably simple. In just a click of a button, you can take a position on any given major currency pair. The evolution of technology has made this process even simpler. You can now open positions on the go. But opening a trade shouldn’t be this simple. In fact, you should ask yourself a set of questions each time you open a trade. To help, I’ve compiled 9 questions to ask before opening a trade.
Is My Mindset Correct?
This is a critical question. Before opening a position, it’s paramount that you ensure you’re in the optimum mental state. Specifically, you need to be calm and completely focused on the trade you’re about to take. In an ideal world, you should be at your trading station/desk. This will help to slow your thinking, which will help you to make a sensible decision.
If you’re distracted, rushed or feeling stressed, my advice would be not to open a trade. Traders who place trades on the go have a tendency not to follow the necessary risk management steps. It can also be more difficult to set stop loss or take profit levels.
What Strategy Am I Using?
You should only place a trade once you have a set trading strategy in place. You should know that I advocate starting with fundamental analysis as your foundation. Remember, this is a key part of the trading strategy used by professional traders across the globe. News and events move the markets. The traders who can anticipate how those events will impact currency price are in a much better position to be profitable.
If you are ignoring the fundamentals, I’d encourage you to stick with your strategy and monitor the results of your next batch of trades. See if you can improve your results by waiting for a fresh, fundamental reason to back up your trade. I am a firm believer that technical analysis by itself will produce inconsistent results over time.
Why Do The Fundamentals Support My Position?
Next, we need to consider the specific trade you’re about to place. Remember, the first task is to identify a clear reason why the fundamentals support your position. If you cannot do this, do not open your trade.
Let’s consider a recent example. In 2016, the result of the European Union referendum produced a shock. The UK actually voted to leave the European Union. This was a shock to the markets – sending the pound 31-year lows against the US dollar.
It also provided an excellent trading opportunity for traders who went short on GBPUSD as the early referendum results unfolded. This is because they recognised the fundamentals in play. Moreover, they recognised that Britain leaving the European Union would affect the confidence of investors looking to put their capital into the UK. This is what caused the pound to fall as the referendum result unfolded.
Or consider Mario Draghi’s hawkish speech on the 27th of June. The ECB head hinted that monetary policy may begin to tighten in the near future. This sent the Euro higher over the next few days and provided excellent day trading and swing trading opportunities.
Am I Using Leverage?
When you open a position, you will likely have the option to use leverage. Keep in mind that leverage is capital that a broker lends to you so that you can trade larger volumes. The positive aspect of using leverage is that it can amplify your profitability by many multiples. But this also applies to your losses. It’s why I advise against using leverage in your trading. I’ve seen many traders use leverage and lose significant amounts of capital.
Do I Know Key Levels Of Support And Resistance?
Before you open a position, you need to ensure that your entry point is appropriate. You also need to ensure that you have an exit point defined. To set these points, you need to be aware of key support and resistance levels in your chosen time frame (I suggest either 15 minutes or 1 hour). If you’re unsure how to enter and exit trades using support and resistance levels, you can read this article, which explains everything you need to know in detail.
Have I Set Stop Loss & Take Profit Levels?
You also need to check that you have stop loss and take profit levels set for your trade. Again, these should be placed in line with your key support and resistance levels. The benefit of using stop loss and take profit levels is that you can let a trade run its course. This means you can spend time away from your trading station and devices (remember, you need adequate time to rest and recover).
Do I Have Any Other Open Positions?
This is another important question. If you intend to trade with multiple open positions, you need to check that your chosen pairs are not negatively correlated. Remember, some major pairs are linked in price. For example, if one pair goes up in price, another may tend to fall. This is a negative correlation – and it can lead to unnecessary losses if you have the same position open on each pair. I have written an article on how to use currency correlation in your trading – you might find it useful.
Am I Following A Risk Management Strategy?
Do you have a risk management strategy in place if the market moves against you? It’s important to recognise that your job as a trader is to minimise your exposure to the market. This is exactly what a risk management strategy does – it protects your account capital. If you don’t have a risk management strategy in place, do not proceed with your trade. Instead, I suggest you read through my risk management checklist.
Am I Prepared To Let This Trade Go?
If this trade goes against you – are you willing to accept the loss and move on? This is an important step in a trader’s professional development. The truth is that every trader will experience losing trades – it’s just a reality of the profession. If you can quickly move on from your losses, you’ll be in a better mental state to take on your next trade.
9 Questions To Ask Before Opening A Trade
Try to ask yourself these questions every time you’re about to open a trade. In fact, you might want to consider printing this article out and keeping it close to your trading station. I hope you’ve found this article useful. If you have any questions, please leave them in the comments below. I’ll do my best to reply to as many as I can.