Congratulations! You have patiently fought through all the theoretical parts of trading. In this section, we will try to put it all together and come up with a trading plan which you will follow. Entering into a position is not difficult. The hardest part of trading is analyzing, testing, planning and patiently waiting for the execution of a trade. A proper plan is important as it serves as a guideline. It is easy to fall off track and into emotional trading which is dangerous, not only for your psychology, but also for your trading capital.
Choosing the instrument to trade depends largely on your preference. You need to understand the fundamental factors that drive the market. Some traders choose to trade the local currency against another foreign currency, for example, people in the Czech Republic prefer to trade USDCZK or EURCZK as they understand the fundamentals and the factors that drive the Czech market. In this case, it is also important to learn the basic fundamentals of the USD. Another factor that you should consider is the market volatility of that instrument. In the example of USDCZK or EURCZK, since the Czech Republic is also part of the European Union, there is an amount of economic stability in the country despite the CZK currency being considered an exotic currency. This brings us to the last factor you need to consider, and that is market liquidity. How liquid is the market you wish to participate in? Is there sufficient liquidity to guarantee that your position will get filled at the price and volume that you expect? Forex, for example, is a decentralized market. Therefore, the market liquidity may be much higher than when trading stocks.
At FTMO, you can trade a wide range of instruments; the choice is purely yours. Forex, Indices, Commodities, Stocks, and Crypto are available for trading on our platform. You can find the full list with all specifications by following this link https://ftmo.com/en/symbols/
Trading requires a certain level of understanding of the market, and one of the aspects that you need to research is market sessions. While you may be saying, “Forex is open 24/5, and crypto is open 24/7, I can trade at any time”, you need also to note that the behaviour of the market in each session is quite different. The main reason is liquidity. The trading/investing world is a complex system consisting of different markets that are interconnected. What we mean by this is that the liquidity of major Forex instruments tends to increase at the opening time of major stock exchanges and banks. You can observe this every weekday at the opening of the London Stock Exchange or the New York Stock Exchange when the liquidity of EURUSD rapidly increases. Throughout the day, the trading session is divided into 3 sessions: the Sydney+Tokyo (Asian Session), Frankfurt+London (European session) and New York (North American session).
Why is this important? The reason is that when the market lacks liquidity, the execution of your trades may be affected and will reflect in the executed price in terms of slippage. By studying the market sessions, you will also learn about essential aspects such as market rollover, weekend gaps, and so on. Detailed explanations on this matter can be found on the following page: https://ftmo.com/en/slippage-order-execution/.
There are 2 types of market conditions that you can observe on the chart. When we look at the chart, we can see that the market is either trending downward/upward or ranging. In order to identify whether the market is trending or ranging, we need to mark the highs and lows. In case the chart is making higher highs and higher lows, we can determine that the market is trending upward. To help you better understand in which phase the market is, multiple indicators available on the market can visually and mathematically help you determine the direction. Some of the most popular indicators are Moving Averages, Bollinger Band, and many others. In order to create a good chance of success in the market, it is important to remember that money management in different market conditions is different and that losses are inevitable. Staying consistent and sticking with the trading plan is the way to tackle this.
While on lower time frames, you may find a signal that the price may move in a particular direction, however, once switched to the higher time frame, you may find that the direction can be completely opposite. This is the reason why having a clearly defined timeframe for entries will help you in reaching more consistent trades. Part of the technical analysis should always be a multiple-timeframe analysis, however, for the execution, it is important to time the entry correctly. Among the higher time frames, we may consider Weekly, Daily, and 4-Hour time frames and trading on each timeframe has its own advantages and disadvantages. Therefore, first research before placing any trades, and observe how your psychology is affected on different timeframes.
Over-risking and over-leveraging a trading account will inevitably cause extra unnecessary stress on your psychology that directly impacts performance and decision-making. You have certainly heard that fear, greed or even FOMO stems from over-risking a trading account. Risk management is nothing else than a process of analyzing, mitigating and accepting risk. There are a lot of factors that influence your decision making and one of them is improper risk management that has a direct impact on your psychology and therefore on your results. While it is very tempting to risk everything on a single trade, however, in the long run, this type of decision will lead to negative results. The top priority before generating profits should always be preserving your capital. Trading is a marathon and not a sprint; therefore, having a long-term vision and always being ready to trade for another day is the way to go. Generally, traders risk from 1-3% per trade and for traders that trade accounts with a set account stop such as a maximum loss, the risk per trade may even drop to 0.1%. As with any other business, it is better to start small and build up the confidence, as well as the balance, for larger positions. This is when our in-house developed Margin calculator might get handy so that you can calculate the position size in time.
At this stage, you should be able to perform a complete technical and fundamental analysis of the market and, based on your set criteria, you will set entry points that you will follow. Just keep in mind that a small change in each entry may lead to completely different results, therefore, try to keep the criteria consistent for your entries. As there are many variables to consider before entering a position, all of them must be defined and well-backtested in order to have a complete trading plan.
Exit points (SL/TP)
Trading without a Stop Loss is a risky manoeuvre that is not far from the truth. Defining the Stop Loss is essential to risk management and protecting the account. Some traders may even set an account stop, which, once reached, will result in trading being halted. Well-defined criteria for exits is as important as setting the entries. However, both entries and exits are also part of your overall well-backtested trading strategy derived from research and market analysis. On the other hand, Take Profit determines the price level when your trade should be closed to secure profits. Both SL/TP help you to protect the account not only from high losses but also to secure profits. Protecting your trading account will also help you manage your emotions while trading. Just remember, when you have already entered a trade with certain SL/TP levels and decide to change the SL/TP in the middle of the trade, you will change the whole idea of the initial trade, which is considered a completely different trade. Except for one instance, one of the more advanced concepts of SL/TP is a trailing SL/TP. It is nothing more than a strategic move of your SL and TP, as your trades are moving in the correct direction. Such a technique can be applied in any timeframe and does require a lot of practice before being able to grasp it.