Mock Stock Trading For Beginners – No matter what market you trade – stocks, currencies or futures – every second that the market is open provides a trading opportunity. However, not every second provides a high probability trade. In a sea of near-infinite possibilities, put every trade you’re considering through a five-step test so you only take trades that align with your trading plan and offer good profit potential for the risk being taken. Apply the test whether you are a day trader, swing trader or investor.
It will take some practice at first, but once you get the hang of the process, it only takes a few seconds to see if a trade passes the test, telling you whether you should trade or not.
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Setup is the basic conditions that must be present to even consider a trade. For example, if you are a trend following trader, then the trend must be present. Your trading plan should define what a tradable trend is (for your strategy). This will help you avoid trading when the trend does not exist. Think of the “setup” as a reason to trade.
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Figure 1 shows an example of this in action. The share price is moving higher overall, as represented by higher swing highs and lows, as well as prices above the 200-day moving average. Your trading setup may be different, but you need to make sure that the conditions are favorable for the strategy being traded.
If your reason for trading is not there, don’t trade. If your reason for trading — setup — is present, go to the next step.
If your reason for trading is present, you still need a precise event that tells you that now is the time to trade. In Figure 1, the stock has been in an uptrend all along, but some moments within that uptrend provide better trading opportunities than others.
Some traders like to buy at new highs after price moves or pulls back. In this case, the trade trigger could be when the price rises above the $122 resistance area in August.
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Other traders like to buy during pullbacks. In this case, when the price pulls back to the support near $115, wait for the price to form a bullish capture pattern or to consolidate for several price bands and then break above the consolidation. Both are precise events that separate trading opportunities from all other price movements (for which you have no strategy).
Figure 2 shows three possible trade triggers that occur during this uptrend in stocks. What your exact trade trigger is depends on the trading strategy you use. The first is consolidation near support: a trade is initiated when price moves above the consolidation high. Another possible trade trigger is a bullish capture pattern near support: Along is triggered when a bullish candle is formed. The third buying trigger is a rise to a new high after a pullback or range.
Taking. With a trade trigger, you always know in advance where your entry point is. For example, during July, a trader would know that a possible trade trigger is a rise above the June high. This allows time to verify the validity of the trade, with steps three through five, before the trade is actually executed.
Having the right entry requirements and knowing the trade drivers are not enough for a good trade. The risk in that trade must also be managed with a stop-loss order. There are several ways to set a stop loss. For long trades, the stop loss is often placed slightly below the recent low of the momentum, and for the short trade slightly above the recent high.
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Another method is called Average True Range (ATR) stop loss; it involves placing a stop loss order at a certain distance from the entry price, based on volatility.
Determine where your stop loss will be. Once you know the entry and stop loss rate, you can calculate the position size for the trade.
Now you know that the conditions are favorable for trading, as well as where the entry point and stop loss will go. Then consider the profit potential.
A profit target is based on something measurable, not just randomly chosen. Chart patterns, for example, provide targets based on the size of the pattern. Trend channels show where the price has tended to reverse; if you are buying near the bottom of the channel, set your target price near the top of the channel.
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In Figure 3, the EUR/USD triangle pattern is approximately 600 pips at its widest point. Added to the price of the triangle breakout, it gives a target of 1.1650. If trading the triangle breakout strategy, this is where the target is set to exit the trade (with profit).
Determine where your profit target will be based on the tendencies of the market you are trading. A trailing stop loss can also be used to exit profitable trades. If you use a trailing stop loss, you won’t know your profit potential in advance. That’s okay though, because trailing losses allow you to take profits out of the market in a systematic (not random) way.
Aim to only take trades where the profit potential is greater than 1.5 times the risk. For example, a loss of $100 if the price reaches your stop loss means you should make $150 or more if the price target is reached.
In Figure 3, the risk is 210 pips (the difference between the entry price and the stop loss), but the profit potential is 600 pips. That’s a reward-to-risk ratio of 2.86:1 (or 600/210).
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If you use a trailing stop loss, you will not be able to calculate the trade’s reward-to-risk ratio. However, when placing a trade, you should still consider whether the profit potential is likely to outweigh the risk.
If the profit potential is similar to or less than the risk, avoid the trade. It may mean doing all this work only to realize you shouldn’t accept the trade. Avoiding bad trades is just as important to success as participating in good ones.
The five-step test acts as a filter so that you only take trades that are consistent with your strategy, ensuring that these trades offer good risk-relative profit potential. Add other steps that suit your trading style. For example, day traders may want to avoid taking positions right before major economic numbers or company earnings are released. In this case, to make the trade, check the economic calendar and make sure that such events are not scheduled while you are likely to be in the trade.
Make sure the conditions are right for trading a particular strategy. Set a trigger that tells you now is the time to take action. Set a stop loss and a target, then determine if the reward outweighs the risk. If so, accept the trade; if not, look for a better opportunity. Consider other factors that may affect your trading and take additional steps if necessary.
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This may seem like a tedious process, but once you know your strategy and get used to the steps, it should only take a few seconds to go through the entire list. Making sure that every trade you make passes the five-step test is worth the effort.
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World markets attract speculative moths like capital to flames; most people throw money at securities without understanding why prices move up or down. Instead, they chase hot tips, make binary bets, and sit at the feet of gurus, allowing them to recommend buying and selling decisions that don’t make sense. The better way is to learn how to trade the markets with skill and authority.
Start with a carefully considered self-examination