A trading blueprint is constantly refined and enhanced. Over time you will create a blueprint that fits your life and trade style!
The Blueprint of a Trade:
- This can be generated by anything, your chart patterns, ta, price action, news, speculation, insight, analysis of any kind. You name it. The end result of any trade idea is “I want to long or short this asset. You may ask well how do you generate ideas? That comes with time, and if you are already skilled you may have the opposite problem. You are not optimizing your trade ideas effectively to make money. We will touch on this more another time.
- Once you establish an idea you need to determine the timeframe by which to take the trade. Do you plan to hold this trade for a few days or a few weeks? Perhaps you are trading intraday. The timeframe of your idea can vary widely and depends on your trading style.
Calculating Risk (R)
- Risk is opportunity. Without Risk you would make no money. Therefore, you should create guidelines of your own on how to define your own trading risk. Risk is tailored to your current trading plan and lifestyle. What do I mean by that? Let me show you an example.
I had reason to believe the USDMXN pair was going to rally based on dollar strength today. However, I did not want to hold this position for very long. So I decided to trade it for 2 or 3R based on a smaller interval timeframe in the example chart below:
Since I did not want to make a longer swing trade. I moved to the 4h. My favorite intraday trading interval. The Stoploss on this play was 42 points. For 30-50 point risk plays I like to lower my risk allocation just slightly as per my trading system. For example, say I normally risk $1000 per trade. This is my R. However, I normally trade on the 1D and 3D timeframes. This I have more data on, and know my own edge. My intraday trading setups have a lower risk amount due to current volatility in the forex markets. The probability of this setup succeeding was pretty good however so according to my plan this morning I altered my R around $800 risk for this trade.
As you can see, the trade was a success and I made 3.11R which * $800 = $2488 Profit. Minus fees we succeeded in making 3:1. As you may notice there are many variables to consider when managing risk. This is just basic, maybe in the future we can go into how to add some variables to improve your overall trading edge and some tips to improve risk/reward. However most of the time you want to keep it simple.
*Tip make sure you record your setups and journal your trades. When you see a setup that maybe be similar to one you taken you can allocate risk and have statistics and your journal backing you. I recommend edgewonk. They have chart books, and are the kings of managing trades.
Optimizing your trade/Optimizers
- Did you exit too early?
- Impatient entry?
- Current market condition: Is the trend up, down, or currently sideways.
- Get shaken out and proven right?
- Position too big
*And we can go on. These are factors to consider before, during, and after a trade. Then you record the results in your edgewonk journal.
Until next time guys,