Being traders of the financial markets, we all know how difficult it is to strike the right balance in the number of setups entered. Especially, if the market is slow and corrective, it becomes even more tempting to enter aniffy setup because we run out of patience.
Having problems with selecting and managing trade setups? Read my four solutions for selecting only the best trades setups and how I use a four-step system for managing open trades.
My solution is based on refining my trade selection and flexible approach towards trade management. This article explains the specifics used for such an approach.
My Methods for Trade Selection
Of course, the number one rule is to stick to your trading plan or trading system. But if you trade like myself, then there are plenty of setups that fit within your trading plan, but still do not pass the bar for an entry.
Within my trading plan, I am always on the look for high probability setups in the first place. But less interesting trade setups are also considered when the market is slow and not moving much.
Where do you place the line? When do you filter out some setups, but skip others?
These questions have no universal answer. There are four tips though that work in my favour:
- Know your risk profile;
- Find and focus on your trading niche;
- Understand the road map for the price;
- Candlestick confirmation.
Know your risk profile
Part of the equation rests on your own personal risk appetite and mentality. Risk seekers will typically set the bar at a lower level than risk-averse traders, who might want to use more filters and be more cautious.
Your trading niche
The second important aspect is to find your trading niche within your system or analysis. For me, it’s trend and momentum setups. I feel most confidence in those setups and therefore have the most conviction when entering a setup. That niche is different for everyone of us, so we need to do our homework and find what works best for us.
Road map for the price
The third aspect is to understand “road map of price” by analysing the path of least resistance. Price flows via the path of least resistance are in a way similar to water running down a mountain into the valley, river, or sea. By analysing the market structure – patterns, trend, and S&R – traders can estimate that path and seek out a part and place where the setup has better odds.
Nothing provides more direct information than candlesticks and price action. Candlesticks and candle patterns offer direct information about whether the price is bouncing or breaking, for instance. I personally use candlesticks to confirm my entry after I have analysed the market structure and indicated a zone of interest (also known as decision zone or point of confluence).
Watch the video below for more ideas and tips on finding high probability trade setups!
My Trade Management Rules
Once a setup has been selected and entered into, it’s time for phase two: the management of the open trade.
Entering a setup means that we should have the conviction to stay in the trade as needed. If you lack that trust, then it was probably not a good setup to enter in the first place.
We need to have conviction in a setup because our trading psychology starts to influence our decision-making process after we enter. How? The most common mistake is that traders become fearful of every price move against their setup.
The opposite problem also occurs frequently – traders become overly attached to their setup and refuse to give up on their original idea.
My solution to this dilemma is to keep my mind and view flexible at various stages of trade development.
- Start of the trade: I’m patient and do not close the trade at the first move against my position. I need to give the trade some time to develop. The original analysis is usually not invalidated in the first few candles after entry.
- Becoming more impatient: eventually, if the trade setup does not go my way, I will become more impatient with the setup. I don’t have any specific border in mind, but it could be anywhere between 5 and 20 candles. Then I want to reduce the risk on the setup to either a small loss or break even.
- Giving more space again: I turn patient again once the setup is in a clear positive territory and the risk on the trade has been reduced. Then I want to give the trade space, so it can hit the profit target.
- Tightening trail again: the last step is when the price is getting close to the target or it’s taking too long to hit the target. In this phase, I become more demanding again and less patient. I will use a tighter trail stop-loss to lock in more profit or might even close at a market exit if needed.
My motto is simple: patient, less patient, patient, less patient.
You can check for more details of this approach in the video above.