The online forex trading platforms have advanced to a level that allows us to place and execute trades with the tap of a finger. The trading process is becoming more and more easier and faster with technological upgrades and the introduction of innovative tools. However, beginners in the forex market are still at a higher risk of losses due to their lack of knowledge and skills. When you gather enough of these, the complex trading process can be completed more straightforwardly with a higher probability of success. But you need to pay the most attention to the steps involved in executing a trade with perfection.

This article will teach you about a simple yet essential 5-step test to place a trade like a professional.

Step 1: Find the Ideal Trade Setup

The first step that you have to take for placing a trade is finding an ideal trade setup based on your strategy. As a forex trader, you should start your journey with a solid trading plan and well-defined process. You should thoroughly follow this strategy as it serves as your action plan and route map for quickly navigating the dynamic currency market. There are a lot of currency pairs that you can trade with, but your strategy would already include the suitable pairs and the type of trends, range, or breakout you want to use for trading.

Each and every trader has their method for spotting the proper trade setup. Some rely solely on technical analysis with price charts, while others prefer fundamental analysis. But you can also use these two methods to find the best trading opportunities. Finding the ideal trade setup becomes easier when you trade with significant pairs, as they are the most liquid and tradable of all pairs.

Step 2: Wait for the Right Time/ Identify the Trade Trigger

Finding the ideal trade setup does not mean you can directly enter the trade the next moment. The success rate of trade dramatically depends on the timing, as sometimes, a trend you spotted may lose strength before hitting your profit targets. You can avoid such unfavorable situations by waiting for the right time, which can be identified by an event that makes the prices move in your favor.

This is what we refer to as a trade trigger in technical terms. It is a market situation, like a trend gaining strength or an indication of a possible reversal. This news event can also happen if you follow strategies like news trading. It is a favorable circumstance or market condition that tells you that it is the perfect time to place your order for the trade.

The best method for finding trade triggers is by checking the data that you get from various technical indicators. You don’t need to crowd your charts by adding too many indicators, as that only confuses you. So, stick to 2-3 reliable hands that can work well with your strategy and then use them to find the trade trigger. The trade trigger should be accurate, as entering the trade at the wrong time will leave you with disappointing trading results.

Step 3: Placing Stop Loss

This is one step that no trader should miss, as trading without a stop loss can make you draw in unwanted losses at the end of a trade. It is an essential part of risk management, which needs to be there to secure our trading capital by minimizing potential losses. Placing the stop loss optimally is also necessary for a successful trade. Because some traders keep the Stop Loss too close to the entry price, which limits your chances, you may end up exiting a trade way too early due to the tight Stop Loss.

Similarly, keeping the Stop Loss too low from the entry price would also become a problem, as your loss will go up if the market moves against you. So, accurate calculations are the key to placing the stop loss at an optimal level. Most basic advanced calculations in the forex market take pip value as the basis. Hence, consider pip value for determining the best Stop Loss levels. You can rely on pip calculators to automate the calculation process.

Now, one more thing you must consider while placing the Stop Loss is the type. There are two types of Stop Loss orders: a standard or regular Stop Loss and a trailing Stop Loss. The regular Stop Loss is a fixed Stop Loss that remains unchanged and allows you to automatically exit the trade at a predetermined price. But trailing Stop Loss gives you greater flexibility as the Stop Loss can change independently when the market moves in your favor. Using trailing Stop Loss allows traders to lock their profits in all situations.

Step 4: Deciding Your Target Profit Level

The 4rth step is deciding your target profit level, which is also the price at which you will be exiting the trade. It is the point at which you can close the trade at a reasonable profit. When we open a career, we expect to make a specific profit and take it as our target price for exit. Essential tools like forex profit calculators can help you determine the best price to make the most of a trade. Your profit target should be well-aligned with your trading style and trading goals.

For instance, a scalper will not have a high-profit target as they enter multiple trades to close them within a few minutes at a small profit. But the profit target of a day trader would be higher as they don’t enter as many trades as a scalper. The profit target of Swing traders would be more as they wait for the prices to take a swing, resulting in substantial gains. Positional traders will have the highest profit target as they wait longer to make significant gains from a long-term trend.

One step that you should be adding, along with deciding your target profit levels, is placing a Take Profit order, which is used for exiting the winning trades automatically. One thing about Take Profit orders is that they limit your profit potential, as the maximum profits you can earn from a trade depends on the Take Profit level. So, once the price hits the Take Profit level, the work will be closed automatically even if the prices keep moving in your favor later.

Step 5: Confirm your Risk/Reward ratio

Before entering your trade, the last step you need to confirm that it is by your risk/reward ratio, another aspect of risk management. Suppose you have set the risk/reward ratio at 1:2; then, you should only be taking half the risk of your profit potential for the trade. If you risk $1 for a trade, you should ensure you can make at least $2 as profits.

But if the profit potential is lower or the same as the risk, the trade is not worth the risk. Again, you may need help with the risk-related calculations, which often need to be clarified for a beginner. You can look for suitable tools like online forex trading calculators to make things easier. You have plenty of options for these tools as they are accessible on trusted trading platforms.

The Purpose

While following these 5 steps, you should remember the purpose of this process: to find if the trade you are planning to enter is worthwhile or if you should be looking for a better trading opportunity. You should return from the particular trade if you need help with these steps. So, the purpose here is to find ideal trade setups with enough profit potential and a high probability of success with minimal risk involved. You should never enter a trade just for the sake of trading.

The Bottom Line

So, this is the 5-step testing process to make a trade work in the forex market. Following these steps without fail is essential for staying true to your strategy. Also, risk management is the most important thing to ensure trading success. However, attaining professional-level perfection in trading requires much learning and practice. Hence, keep exploring and experimenting with different trading techniques until you find the one method that brings the best trading results for yourself.