When you start exploring the forex market as a trader, you will see that many different aspects need to be considered for carrying out the trading process as per your plan. The primary goal of forex trading is making profits from the price fluctuations of currency pairs, but it is not possible to earn profits from every trade you enter. But as a trader, you need to find the best trading opportunities with a higher potential for profits. The result of a trade can also be a loss if the market moves against your anticipation, and you must be taking calculated risks to keep the potential losses within limits.
As you can see, many things demand your attention as a forex trader, and there is a high chance that you miss out on certain aspects while trying to find your footing in the fast-paced forex market. Hence, this article will give you a simple 7-step checklist to avoid skipping any part that is relevant to your trades.
Determining the Market Trend or Range
The first step in the forex trading checklist is determining the market trend. A vast majority of forex traders follow the classic trend trading strategies, and you must be aware of the ongoing trend while placing a trade with your chosen currency pair. Just identifying the trend will not be enough, as you also need to assess the strength of the trend. Another thing that you need to check is the duration for which the trend can last.
Some trends only last for a short timeframe; hence, they are referred to as short-term trends. Trends that last for extended periods are called long-term trends, which mostly happen due to fundamental market forces. Traders engaged in scalping or day trading will be keen to spot short-term trends that last for a day, but swing traders may look for medium-term trends that go on for a few days or weeks. Long-term trends are considered by traders who follow positional trading strategies.
You can determine the short-term trends via technical analysis alone, but identifying long-term trends requires a study of the fundamentals. But one thing you should know here is that the market may not be trending all the time, as currency pairs can also remain stuck within a range during periods of consolidation.
This is the perfect time to implement range trading strategies, which work well when the markets do not display a clear trend. The ranging market is commonly seen during the Asian trading session, and you can also notice the prices of some currency pairs going up and down within a specific range. In such a market, scalping seems to be the perfect strategy, but traders must take multiple trades to make a significant profit. They will also have to use a pip calculator to find out the number of pips they have made in their currency because all that matters is what’s earned on a trading day.
Support and Resistance Levels
The 2nd step that you need to take for ticking off the forex trading checklist is identifying the support and resistance level, which is the very basis for following price action. Trend traders and range traders will have different perspectives on the support and resistance levels.
Trend traders may not be able to hold a long position if the price starts falling after hitting the key resistance level earlier. Also, traders engaged in shorting a currency pair don’t want the prices to rise after entering a trade following a drop to the key support level.
Hence, trend traders will keep monitoring the support and resistance levels and will only enter a trade after they notice extended breaks of these levels so that they can be certain about an uptrend or downtrend happening for their currency pair.
On the contrary, range traders only look for trade setups when they notice the prices moving back and forth between the support and resistance levels for longer. So, you should never forget to check the support and resistance levels before placing a trade.
Confirming the Trade With Indicators
These days, most traders take the help of indicators to confirm if the trade would be worthwhile. Technical indicators add more precision to your market analysis, and you should have a look at the information provided by the chart indicators. You don’t need to complicate things by adding too many indicators. Instead, you should choose 2 or 3 suitable indicators that fit well with your strategy and use them to confirm the trade signal.
The most popular technical indicators used by forex traders are stated below.
- Moving Averages (MA)
- Moving Average Convergence Divergence (MACD)
- Relative Strength Index (RSI)
- Stochastic Oscillators
- Bollinger Bands
- Fibonacci Retracement Levels
- Volatility Indicators
- Volume Indicators
- Average Directional Index (ADX)
You need to take time to understand the functions performed by these indicators, choose the ones that can provide the most relevant data, and rely on them while making trading decisions. But you should remember the fact that no indicator can be 100% reliable, and overly relying on indicators may not be the best course of action in the dynamic currency market.
Risk to Risk-to-reward Ratio
A trade’s risk/reward ratio is the ratio of the amount being risked for a trade and the amount of profits the trader expects to earn. The risk and reward of forex trading are always measured in pips as the price interest point is the standard unit of measurement for tracking the currency price movements. Here, you can consider the number of pips you will be risking for the trade and the number of pips you might gain from the trade.
The concept of risk/reward ratio will be more clear with an example. Suppose a trader sets their risk/reward ratio as 1:2, this means the trader will be making 2x profits for the risk they take. Hence, their risk per trade would be half of the profit potential.
If you are confused about the calculation of potential profits, then you can use another simple forex tool, a profit calculator. The Forex profit calculator can also tell you about the potential losses that can happen if the market moves against them.
The next thing that you need to check before placing a trade is the position size. The position size or trade size determines the amount of trading capital you use to place a trade. The amount of capital you risk for a trade is relevant for managing the risk effectively. Risking more than 2% of your total capital will result in a lot of risk as you might experience margin shortfall in case of losses.
This is especially relevant for traders relying on leverage as they will be holding larger trade positions for a smaller capital, adding more to the risk. If you are confused about the calculation of position size or other trade-related metrics, you can always rely on simple automated tools that are freely available on various trading platforms and get accurate results with greater speed and minimal effort.
The 6th step you need to take before placing a trade is checking the news, which can impact the forex market or the currency pair you have chosen for trading. Global economic events, financial news releases and key economic data releases always influence the prices of currency pairs. Traders who follow news trading strategies will always keep an eye on the news, but other traders should also do the same to avoid the sudden volatility caused by news events.
See if the Trade Aligns With Your Trading Plan
The last but most important step that you should be ticking before placing a trade is ensuring the trade setup aligns with your trading plan or strategy. Many traders tend to deviate from their strategy to place a trade, which is not the right approach as it results in a lot of risk.
So, you need to reconsider your trading decision, set parameters, and see how they confirm your trading and risk management plans. The main reason behind traders deviating from their strategy is a lack of discipline and emotional trading, which puts them in a dangerous position. Hence, you should avoid this mistake and stick with your original plan while entering trades.
So, these are the 7 steps a forex trader can follow to optimise their performance. But in the end, the result of a trade is still decided by market movements which are beyond our control. But the plans we follow and the trading decisions we take are always in our control, and those who make sound trading decisions surely have higher chances of success.