Introduction

With so many indicators and forms of analysis, taking trades may seem overwhelming – there’s always conflicting information and varying viewpoints. But there is a simple trading strategy.


Break every trade down into four parts, and only focus on one part at a time. Here are the four steps that form the anatomy of every trade. Keep your focus on these for simple trading.

1. The Setup:

This setup is what’s needed for a trade to potentially occur. There are thousands of trade setups, ideally you should only trade one or two if you want to keep your trading simple. Assume for a moment you use Bollinger Bands Breakout. You buy or sell when the candle break the upper or lower band and close above or below the band (this is not an endorsement of this method, just an example).



Figure 1. AUD/USD Daily Bollinger Bands Strategy

When the candle in the middle of Bollinger Bands, there is no possible trade setup. You do nothing. When the candle break the bands and close you now have a potential trade setup you’ll want to watch for.
Having a setup lets you know when you should be trading and when you shouldn’t. No setup, no trading. If a setup is forming, proceed to next step.


2. Establish Your Exits:

You have a trade setup forming. Your next step is to determine if you should take the trade, if it “triggers” (step three).
A trade requires an exit. How will you exit this trade? Consider the possibility of the trade being a loser or a winner … you need an exit in either case. Once you’ve established this, if you’re comfortable with taking the trade, then you can trade the setup if your trade trigger occurs (next step).
With an Bollinger Bands Breakout strategy the exits can be quite simple. Whether the trade is profitable or unprofitable,take profit can be set double stop loss.
stop loss sets under or above depending on (buy or sell) the candle that break the band to protect capital in the case of a losing trade. Your exits are now determined.

During this stage, also consider your position size and the percentage of your account you’re willing to risk on the trade. While you don’t know your exact entry price yet, you can estimate it, and use the estimated entry point along with your stop loss to determine your risk. Too much risk? Avoid the trade.

Once you’ve established how you will exit (based on your strategy), and you are comfortable to proceed with the trade—should it “trigger”—move to the next step.


3. The Trade Trigger:

A trade setup isn’t a signal to enter a trade. The setup just lets you know a trade could happen.
Actually entering a trade requires a “trigger.” With the Bollinger Bands, the trigger may be “Enter a trade if the candle break and close (above or below) the band.” As soon as that occurs, you enter a trade. you can set pending orders.

Trade triggers vary by strategy, but it should be something precise, which tells you now is the time to act and get into a trade. The trade trigger is something used on every trade (for a particular strategy); it doesn’t change based on the whims of the trader.


4. Trade Management:

Once in the trade, your only goal is to manage the trade as laid out in step two. Place stop loss order and take profits as dictated in step two.

Once in the trade, no new decisions are made. How you will manage this trade has been determined in advance. This relieves a lot of psychological pressure, because you have a plan, and all you need to do is follow it. This is done on every single trade.


Bringing It Together

You only need to focus on one thing at a time:

  1. No trade setup, no trade. You don’t even need to watch the market. Set an alert that will notify you when a trade setup is starting to form.
  2. Once a trade setup is forming your only job is to assess if you want to trade it, and how you will trade it – establish your position size, and how you will exit the trade (win or loss).
  3. Based on step two, if all the qualities of the trade are acceptable, take the trade if it triggers. If it doesn’t trigger, there is no trade.
  4. Once the trade is in place, your only job is to manage the trade as specified in step two.

Conclusion

Each trade is composed of four parts: Setup, Exits/Risk/Profit, Trade Trigger and Trade Management. At any one time you only need to think about the elements related to the stage of the trade you are in. Most of the time, this means doing nothing. Trading is as much about knowing when not to trade as it is about actually trading. Once in a trade, follow the plan you laid out in prior steps. This helps avoid making impulsive and emotional decisions when real money is on the line.
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