By Nathan Boardman
There are numerous strategies when it comes to trading. From the technical signals provided by the indicators to the underlying fundamentals that serve as the primary catalyst for the asset or instrument. Gather a group of traders together, and they will likely approach trading the same asset or instrument in various ways.
Regardless of the trading strategy employed, traders must reflect on certain crucial inquiries and be able to provide satisfactory responses. A deep understanding of the instrument or asset being traded will give traders a sense of mastery over their actions.
If you find yourself uncertain, consider asking yourself these five questions to determine if you have a comprehensive understanding of the asset or instrument you are trading or if you are trading without any specific information.
What Is the Current Behavior of the Asset?
This is within the technical domain. When engaging in trading or considering a trade for a currency pair, it is essential to inquire about the current behavior of the asset or instrument. Which direction is it heading in? Is it on the rise or the decline?
Please provide the locations of the support and resistance levels. Is the market currently experiencing an upward or downward trend?
Responding to these inquiries will provide you with a more comprehensive comprehension of the instrument’s actions and its anticipated behavior.
From a trading standpoint, this implies that you will have a clear understanding of when your bias is incorrect and when it is necessary to minimize your losses.
What Factors Are Influencing the Price?
Although numerous day traders, particularly in the forex market, often rely on technical analysis for their trades, it is crucial to have a solid understanding of the underlying fundamentals that influence price movements.
It involves examining the statements made by the central bank, the prevailing interest rates, and the overall economic forecast.
Understanding the underlying factors will provide you with a comprehensive understanding of what other traders are observing and contemplating.
Furthermore, you can apply this information in the future when overseeing your trades to detect any change in the inclination.
By implementing this strategy, you can effectively manage your emotions and gain a clear understanding of the reasons behind your trade reaching the take profit level or hitting the stop loss.
What Are the Thoughts of Other Traders?
Anticipated outcomes drive market fluctuations. The price is constantly looking ahead and consistently incorporates any new information. Occasionally, the markets can become overly optimistic. This often occurs when traders and central banks have different expectations.
Occasionally, you may come across situations where the markets and economists express great enthusiasm about an economic indicator, only to discover that the actual data turns out to be quite underwhelming.
An excellent recent illustration of this would be the “Trump Trade.” The markets surged and continued to surge for a few months. This surge occurred solely based on traders’ anticipation that Trump’s economic stimulus proposals would contribute to a rise in inflation numbers.
They hardly had the markets received a dose of reality when traders promptly began readjusting their expectations.
What Is Your Strategy for Trading?
It is undisputable that trading without a well-thought-out strategy can have catastrophic consequences, leaving one vulnerable to unpredictable market forces.
In situations like these, when there is no clear strategy in place, your emotions can start to dominate. At this point, your ability to handle and plan your finances may become compromised.
After striving to generate income, you will quickly transition to trying to minimize your losses.
However, dealing with emotions can prove quite challenging, ultimately resulting in a more significant impact on you. This could jeopardize all the profits you have made and the capital you have invested in trading.
What Is the Reason Behind Your Decision to Trade This Specific Asset or Instrument?
One crucial question to consider is the reason behind your decision to trade a specific asset or instrument.
Typically, you’ll discover the solution if you’ve already responded to the initial four inquiries. Questioning the choice of this particular instrument can assist in developing a comprehensive understanding that incorporates both technical and fundamental analysis while also considering your trading strategy and plan.
Keep in mind that consistently engaging in trading demands a level of self-control and a specific mindset.
Having a structured strategy in trading is crucial, as it helps maintain a level-headed mindset and introduces rationality and impartiality to the markets you wish to engage with.
