I think the first thing we all need to ask ourselves in regards to the title of this post, is there such a thing as 4 steps to the perfect trade, and if there are such steps to make this “perfect” trade what are they? Are the four steps as simple as when two moving averages cross (step 1), volume is positive (step 2), price is headed in a particular direction (step 3), and there is MACD convergence (step 4)? The answer I’m afraid is no; although these ARE steps, it’s more of an entry strategy than anything else. I have four steps that are necessary for my “perfect trade” and I take them every time before making a trade.
I feel that the first step in the perfect trade is that as day traders we need to have realistic expectations; what this means is that (sorry folks) not every trade is going to be a winner. As the lead oil trader here at the Oil Trading Group (OTG) I talk to a lot of day traders that are either struggling or failing, all these traders have one thing in common: they have unrealistic expectations of every trade being a winner. I’m not going to sit here and tell you to learn to love your losing trades, but I will tell you that you must learn to cope with losses that will come with trading. Step one to the perfect trade is not only realizing that the trade you’re making could “bomb”, but accepting it! So what if your trade is a loser? Accepting and coping with losses will help give you a clear head for the next trade that very well could make your month.
The second step to the perfect trade is to manage your risk; let’s face it guys, we all want to win every time and we wish we could control which direction the market will go, but the fact is that we can’t. That being said, the one thing we can control is our risk (the downside). Typically, in the OTG live trading room I like to keep risk at 2% or less for the day. By controlling what I do risk, it allows me to not only know what my maximum downside is but it helps keep the risk/reward ratios and expectancy in check as well.
For the third step in the perfect trade we’ll start to dig into some of the mechanics of trading. The mechanics I am referring to are market state and market structure. Market state is simply what is the market doing; is the market slow and choppy or is it trending? If it is trending, is it strong or weak? You’ll need to know the market structure as well; if the market is trending what direction is it headed? Knowing the direction of any market is pretty simple, but you’ll need to know the structure to determine entry and exit points. For example, I use support and resistance to determine market structure. When price breaks significant support or resistance in any particular direction I have a better idea of what price may do. Knowing the state and structure allows me to execute my strategy in accordance with what the market itself is telling me.
The fourth and final step to the perfect trade is an execution strategy; I have various strategies in my trade plan that are utilized for various market conditions. For example, if the market state and structure are telling me that the market is choppy and sluggish, I will be more inclined to use a “fade” entry strategy and place my profit targets accordingly. If the market is trending according to market state and structure I will apply a break-out strategy.
The four steps to the perfect trade are simple: (1) Be realistic with your expectations, not every trade will be a winner. Keep a “cool head” when you do lose so your next trade is made without fear or hesitation. (2) Manage your risk, keep the losers small and let the winners run. (3) Know current market state and structure at all times; don’t try to trade against the current conditions. (4) When your mind is in the right place, your risk is managed, and you are fully aware of the current market conditions, execute your strategies in accordance with your trade plan. Even if the trade is a loser, if I follow these four steps it’s still a perfect trade.