Whether you trade futures, stocks or forex with CFI, there are hundreds of opportunities to place a trade whenever markets are open, therefore knowing when to enter a trade is vital. The biggest challenge is usually deciding when to place a trade and when to decide against it – the potential for profit is not always equally high. It is essential that a new trader learns to evaluate each trade against certain criteria so that they can identify the opportune moment to place a trade in a sea of infinite trading possibilities. Let us look at some steps that you can take to help you decide when to enter a trade, and whether the trade is worth the effort.
When to enter a trade
First off, run potential trades past these checkpoints so that you can decide whether you should go long (buy) or go short (sell) when entering a new trading opportunity.
1.Your trading strategy
The first thing to be clear on when deciding when to enter a trade
is your trading plan
. Only enter trades that align with your trading strategy, because they will give you higher profit potential and you will be able to manage your risk better. Knowing what kind of trader you are, and what your strategy is, will help you choose the trades that align with your personality portfolio.Are you an investor, day trader, swing trader or a trend-following trader? If you are a trend-following trader, is there an established trend in the market? Is the market going up or down? If you are bearish
, then avoid trading when the market doesn’t reflect a bearish pattern – wait for possible reversal points before you enter a position. You need to define what a tradable trend is for you, and avoid placing a trade when market conditions do not reflect your trading strategy.
A trade trigger helps you decide when to enter a trade. After you have established that the market has the right conditions for your trading strategy, you need to have a specific trigger that tells you now is the time to enter or exit the trade
Whether the market is in an uptrend or downtrend
, there are specific features in each trend that provide better opportunities to trade than others. For example, after the price has widened, you may wait for a pullback, or for new highs to form. If you are bearish and you think that the trend will reverse, wait for a bearish engulfing pattern. You should always look for precise events that help you distinguish trading opportunities from the overall price movements.
3.The profit potential
How much are you likely to make from the trade you intend to place? Is it worth your time and effort? Don't just choose your profit target randomly, but base it on something measurable. Look through the charts to see the targets that are being projected based on the pattern. Trends will also show you the possible reversal points based on past price action to help you determine the profit potential of the trade.For example, if you buy near the bottom of the chart, you can set your price target closer to the top of the chart. Having a price target helps you identify the right moment to exit a trade so that you do not hold it for too long and start incurring losses.
4.The risk-to-reward ratio
Do not just sit there dreaming of how you will spend your millions when placing trades. Think about what you would lose if the price hits your stop loss, compared to what you would gain if the price reaches your target price. It is advisable to keep your profit potential at 1.5 times greater than your risk potential. For example, if you stand to lose $10 when the price reaches your stop loss, you should stand to make $15 or more if the price reaches your take profit
target. So before placing a trade, ensure the profit potential outweighs the risk, and avoid any trades where the profit potential is similar to or lower than the risk. Knowing how to avoid a bad trade is as important as knowing how to make favourable ones when it comes to being successful in the financial markets.
5.Mitigate the risk.
Once you’ve considered all of the above factors and have decided when to enter a trade, make sure you have a way of minimizing your losses if everything goes south. Trades can nosedive, and that risk must be managed in order to produce good returns.This is where a stop-loss order comes in. For a short position, place your stop-loss slightly above a recent swing high (a price peak followed by a decline). For a long position, place your stop loss slightly below a recent swing low (a price created when a low is lower than any other surrounding prices in a set period). If you are willing to lose $10 to make $15 and above, using a stop-loss order will help ensure that you do not lose more than $10, without having to stay glued to your computer screen.We have been using the terms “long trade” and “short trade”, but what do they mean? How do you know when it’s a good time to enter a short trade or a long trade? Let’s examine each term.
When to go long or short
When trading with CFI, you should know what it means to “short” or “long” in a trade, so that you can make an informed decision on when to enter a trade.
When you “go long” it means you are optimistic about the market, and you expect the price of your chosen asset to keep on rising. In the best case scenario you make a profit from your position. If you open a long position for the EUR/USD currency pair, for example, it shows you are feeling optimistic that the value of the US dollar will strengthen relative to the euro, so that you can buy more euros with $1 now, and sell the euros later at a higher price. You can achieve this by carrying out both fundamental and technical analysis of the pair by following economic news from the two countries. In a long trade, you buy low expecting to sell high. So, go long with a trade if you are optimistic that the value of the asset you are buying is likely to strengthen.
Going short means that you are bearish about the market, and for you to make a profit, you expect the price of the asset to fall so that you can profit from the deal. If you short the EUR/USD currency pair, you expect the value of the dollar to weaken against the euro. So you sell now at the current high in order to buy later when the price drops. So if you expect the price of the asset you are trading to fall, short that asset now at the current price, and buy later when the price falls. In a nutshell, going short means that you sell high so that you can buy low later.CFI allows you to go long or short your trading position directly from the chart and trade on the go with MT5
on your phone, laptop, or desktop platform. Open your account now and start trading with us.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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