Definition of a trading method
A trading method is an action plan to be followed on each of your trades. It’s a sort of checklist giving you the different steps leading up to taking a position . All traders practicing technical analysis must follow a method of trading. This method varies among traders but the different steps are the same.
Having a well-constructed trading method helps prevent your emotions from taking control of your trading. Your position is then made on objective technical elements (study of probabilities through different chartist configurations) and not on a personal feeling of the market. A trading method brings together all the elements of technical analysis and risk management. It allows you to gather your knowledge and structure it to take a position under the right conditions.
Step 1 – Choose the unit of time for your trade
The time unit of your trade depends on your trading strategy (scalping, swing trading, carry trade … ) but it is also a personal choice. Some are more comfortable with short term trading, others prefer medium to long term trading. The investment horizon you choose depends on the time available to trade, but above all you need to feel comfortable with it. If you are a beginner, do not trade in small units of time. Short-term trading involves monitoring your trade regularly and it takes some trading experience to control your emotions and act rationally.
Step 2 – Identify the meaning to be processed
Once the unit of time for your trade has been chosen, you must identify the general trend by analyzing a unit of time greater than that of your trade. For example, if you are treating for 15 min, analyze the 1h. If you treat the 1h, analyze the 4h…. The important thing is to give yourself an overall view of the trend in order to set a one-way street to trade on the time unit of your trade. If you see that the trend in h1 is up, it is forbidden to trade short positions on 15 min. You can only do this if the h1 gives you a sell signal (signal of a bearish reversal).
You can therefore differentiate your signals graph (unit of time of your trade) and the trend graph (upper unit of time). VS’One- Way Trading book (available for free at Centralcharts). To determine the trend, you need to do technical analysis to identify key levels. You can also use moving averages to get a quick view or to confirm your analysis.
Step 3 – Perform a technical analysis
Once you have identified the direction to trade, you can perform an analysis on the shorter-term unit of time (that of your trade). This is where you will detect the buy and sell signals. You then apply your trading strategy. You must therefore trace resistance and support , identify chart patterns, analyze technical indicators and Japanese candlesticks…
There are thousands of winning strategies. Just remember that often the simpler ones work the best. There is no such thing as a miracle strategy, so don’t waste your time trying to use unknown indicators or wanting to link dozens of indicators together…. Keep it simple!
Step 4: Plan a trade
Once your technical analysis is done, your buy / sell signals are clearly identified. The position is generally taken at the exit of a chart pattern or following a support / resistance breakout (see how to trade resistance and support breakouts ). You then have two possibilities:
–Place a buy / sell stop
: You place your stop above / below a key level (highest / lowest or support / resistance) taking into account the spread. The great thing is that you don’t have to watch your chart to take a position. You must also determine the level of your stop loss to integrate it into your buy / sell order. .
–Monitor the graph
: You can choose to take a position manually by monitoring your chart. Your position is taken on a market order. The majority of buy / sell signals coming from breakouts, the advantage of this technique is that it allows in some cases to avoid false signals (wicks on resistance / support level) or to optimize your point of entry (position taken on a pullback). You should always wait for the candlestick to close before taking a position if you use this technique (except for scalping strategies).
Regardless of the method chosen, you should not take a position if the expected gain is lower than the risk (see money management). Your price target should always be further from your entry price than your stop loss is. The ideal is to tend towards a return / risk ratio of 2. Between 1 and 2, the trade is tolerated but it is not recommended for a novice trader to take a position if the ratio is too close to 1.
Step 5: Determine the size of your position
The size of a position varies according to each trade and is a function of several elements:
: Depending on the stock, index, commodity or currency pair chosen, the type of contract will be different and the value of a point will have a different value.
–Distance from stop loss
: The level of your stop loss determines the size of your position and not the other way around. The stop loss must be placed according to a market level (see sheet placing your stop loss ).
–Desired overall risk
: On each trade, you can set the amount you want to risk. Depending on this amount (to be set as a percentage), the size of your position varies.
Step 6: Trade exit
The trade exit can occur in 3 cases:
–Stop loss hit
: Even if the odds are your way, in the end, it’s always the market that decides. Your stop loss can also be tapped on a volatility move. You have to accept to lose. Losing trades are part of trading.
: If all the goals of your trade are met, you can take your profits or let the position carry if you see that there is still bullish / bearish potential. As your trade progresses, do not hesitate to move your stop loss (formation of a new high / low…) in order to reduce your risk and protect your gains.
- : Once in position, the price may show signs of a reversal (break of a trend line, exit from a chart pattern, reversal doji, etc.). You may decide to exit your trade prematurely in order to limit your losses or protect your gains.