"...not rushed into placing a forex trade yet as I am still learning the ropes about forex," writes Michael.
He goes on...
"How do I spot a trade opportunity or trade signal? At what point do I place a trade?"
A lot of readers have asked the same question.
How do you spot a trade and when should you place a trade?
Well, let’s take a look...
Making the trades jump out at you
The trick to trading is having a clear plan of action...
You need to know what you’re looking for.
That way, when you see it, you recognise it.
In fact, it’ll jump out at you.
If you know what you’re looking for, you’ll know exactly when to enter the trade, and when to get out.
And you’ll have the confidence to actually place the trade.
Now, take a look at this EUR/USD trend line example...
Looking at the chart above, where would you expect the market price to head next?
It had just turned lower after briefly breaching the downtrend line.
You expect it to go down, right?
Exactly.
It suggests the market may resume the down trend and head lower from the price of 1.3549.
But this information on its own is not enough to make a trade.
You see, you always need a stop loss level and a profit target on every trade.
You also need to follow risk management.
For example a stop loss order could be placed above the highest high that breached the trend line.
That would mean placing a stop loss order at around the 1.3700 level.
This would mean 150 pips of risk on this trade, if the entry price was 1.3549.
The profit target would also need to be set...
Setting your profit target like a pro
Many professional traders require a risk reward ratio of at least 2 to place a trade.
That would mean a profit target of 300 pips in this example.
In this example, a sell trade could be placed at 1.3549 with a stop loss at 1.3700 and a profit limit order at 1.3249.
Remember too, you would need to make sure the 150 pips risked on the trade were not more than 2% of your trading account.
At £1 a pip you would need an account of £7,500 to place this trade.
On the face of it, it seems like a lot to remember, but after doing a few times you’ll start to get the hang of it.
I’d also recommend, writing out a written checklist that you can have in front of you to remind you.
This is only an example, and not a trade recommendation, but I hope are starting to see the logic here...
To spot a trade, you first need a trading system that shows you exactly what to look for, and what level to place the trade.
When you see it, you simply place the trade with the stop loss and profit target.
When you start to trade like this, you have confidence to trade and it doesn’t feel like you are clutching at straws.
This is so much better for you and you could be on the way to becoming an independent forex trader.
Best Wishes,
Richard Hill
P.S This article is taken from Forex Round-Up, Richard Hill’s free forex newsletter.
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