12 Questions to Answer Before Your Next Trade

09/17/2014 6:00 am EST

Focus: STRATEGIES


In this article, the staff at FXTM maps out 12 important questions all traders should ask, whether it be the forex trader who’s been trading for years, or the trader new to the markets.

If you have been trading forex for a long time, take a moment’s rest to think about how you could improve and ask yourself these 12 questions.

If you’re new to the markets, try answering the questions before you begin on your journey:

1. Do you have the time required to trade?

How busy is your diary and how many commitments do you have? If you have too many, you should think twice about trading because successful trading will take up a lot of your time.

2. What returns are you hoping for?

Have you even thought about this? Knowing what returns to go for is crucial in order to build a consistent trading strategy.

3. What stops you from becoming reckless?

Make sure to know your emotional triggers so that you can react when the bad times hit.

4. Can you describe your methodology?

If you can’t describe your trading methodology in a few short sentences, it’s probably too complicated or doesn’t make much sense.

5. How do you deal with unexpected events?

Long tail and black swan events happen and you should probably have a plan of action for when they hit.

6. Do you use diversification?

Diversification can be an effective way of reducing risk without destroying overall returns so you should at least investigate it.

7. What are the strengths and weaknesses of your strategy?

No strategy is perfect—if it was it would be able to make unlimited returns. Try and understand your strategy better so you can improve it over time.

8. What are your own strengths and weaknesses?

Just as no strategy is perfect, neither are you. The better you can get to know yourself the better trader you’ll be. For one thing, you’ll be better at handling the emotional side of trading. And for another, you’ll be better able to design a strategy that suits your personality.

9. Have you tried different entries and exits?

Some traders use the same rules for opening a trade as exiting a trade. But does this make sense? Wouldn’t it be better to test different rules for both buying and selling?

10. Do you understand your leverage amount?

In forex, a great deal can be gained from trading the right level of leverage. Too much leverage can cause too much risk and too little leverage can lead to small returns. You should try testing different amounts.

11. How many strategies do you trade?

There is nothing wrong with trading one strategy; in fact, it can be preferable for many traders. However, including more than one strategy might be a good way to improve your overall profits.

12. What percentage drawdown can you stomach?

All forex traders should know by now not to trade with money they can’t afford to lose. They should also realize their maximum drawdown comfort level. If you choose a strategy that makes big returns, albeit with bigger drawdowns, you might not be able to stick to it.

By the Staff at FXTM

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