The 4 pillars of trading are Psychology control, Fundamental Analysis, Technical Analysis, and finally Risk Management.
For new traders and beginners, the financial markets seem to be like a stormy ocean that never seems to settle. However, this doesn’t just apply to the financial markets, this is the reality in everything in life. If you are not skilled in your profession or if you don’t have the necessary resources to tackle an issue you will feel trapped and out of options
Let’s look at trading as if it is a problem that needs to be solved (Figure 1).
Figure 1: Source, Trading View WTI Crude Oil 1
First of all, you need to be fully aware of the problem you are facing, know the reason behind the problem, and actually accept the risks that might occur from this problem.
Now comes Analyzing the problem, whereby we use the techniques we have acquired, such as fundamental analysis and technical analysis in order to see where the market is standing at the time. As we can see currently, the WTI is forming an expanding triangle pattern which usually in normal market conditions indicates a continuation movement. In this case, the trend was previously upwards, so combined with the said pattern, this might indicate a continuation movement. However, further confirmations can be adapted as well.
Fundamentally speaking Oil is witnessing an increase in demand due to the easing procedures most countries started adapting post-vaccination phase. Also adding that the supply of Oil was not increased by OPEC+, which eventually will lead to an increase in the prices.
After we have analyzed the problem we need to develop a solution. In this case, the solution was to enter the trade with a bias to the upside, meaning that a long position will take place.
Figure 2: Source, TradingView WTI Crude Oil 2
We will now implement the solution taking into consideration (Figure 2) risk management metrics in accordance with the capital.
Finally, the final step is the evaluation phase (Figure 3).
Figure 3: Source, TradingView WTI Crude Oil 3
In the evaluation phase, we have achieved a 6.21 risk to reward ratio, so by risking $10,000 on this trade on WTI, we made now $62,100. However, it is to be clearly noted that due to the random probabilities in the market this similar setup might lead to a loss in some other cases (Figure 3), hence the reason behind implementing proper risk management all the time.
Figure 4: Source, TradingView WTI Crude Oil 4
In conclusion, trading in the financial markets needs practice, patience, strict methods, and strong emotions. It seems complicated at some points, however, with practice it becomes second nature.
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The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.