Professional traders look for “high-probability” trades. The following are 5 questions you should know before making a trade.
Let’s say that the EUR/USD is in an uptrend and you see an opportunity to buy the currency pair. You would most likely just execute the trade if you were trading purely on the data of a single chart or setup. That is a recipe for disaster. At minimum, it is important to take a look at the general trend in the market because being unaware of the markets sentiment can lead to unnecessary losses.
Fundamental indicators, technical indicators, and the market sentiment are three factors that can and will affect every trade. If you wait for those factors to align in your favor, you have a far greater chance of reducing your risk and landing a potential profit.
Ask yourself these 5 questions to help determine whether a trade is worth the risk or not:
1. How deep is the retracement?
In trading, a very strong retracement is much more difficult to recover from than a shallow decline. Buying after a deep correction in an overall uptrend is generally a lower probability trade than buying after only a small retracement. The general rule is that a deep correction increases the risk of the currency pair breaking its uptrend.
2. What is the fundamental reason behind the decline in the currency pair?
If the decline in the currency pair was triggered by a very disappointing economic data such as an abysmal report on consumer spending, then this is a trade you should probably not take because the short-term fundamentals are not in your favor. If there is no major reason or news to explain the dip, there’s a greater chance that the uptrend will resume and you may make profits on this trade.