The Components of a Perfect Trade

trade pyramid

As it’s the start of a new year, I thought it would be a good idea to write a post about some of the things that I’ve changed in my trading process recently. I’ve not made drastic changes and I am still trading the same markets but I understand the way I trade a lot better now and how they fit nicely into small niches in the markets – mainly due to being able to gather more data.

This post will provide a brief overview of my optimised trading process. The majority of my trades are now taken based on the factors below:

5. Supply and Demand Zone – It all begins with supply and demand zones. This is the foundation of my trading strategy because these areas of interest are where I expect a predictable movement. I highlight these zones on my charts and watch closely when price reaches those areas which reduces active screen time a lot.

4. Pattern – After price reaches a supply or demand zone, I begin waiting for a recognisable price pattern. Patterns give a real time account of the battle between buyers and sellers. They also provide a logical entry point and stop loss area as well as a pre-defined risk reward. This means you do not need to worry about making decisions on the fly which reduces mistakes. There are many repeating patterns in the markets (not just classic chart patterns) and understanding the meaning behind them, why they occur and how to trade them effectively makes trade execution much easier.

3. Confluence – These are additional factors that support the trade which can give traders more confidence. Examples of confluent factors can include round numbers, moving averages or a specific point on a technical indicator. The main function of supporting confluent factors is that traders using different strategies but with one or two of the same indicators are likely see a similar trade at the same area which will cause a predictable movement.

Over the years my opinion on confluent factors have changed a little. As I gather more data on my trades, I find myself less dependent on, quite possibly, arbitrary confluent factors and find them to be more restrictive than a mark of quality. In my opinion, a lot of people (including myself) place too much weight on confluent factors when we should be focusing on context (which will be explained below). Nonetheless I still look for confluence and they are still a component of a perfect trade.

2. Context – Context is different from confluence as it’s not based on an arbitrary supporting factor. For example, a reversal at a round number is confluence whereas one at a weekly high with a head and shoulders pattern would have context because there’s a meaning behind it i.e. A reversal pattern at potential area where selling is likely to occur. In short, it’s the area in which a trade is occurring along with the meaning of a price pattern. I’ve been slowly moving away from just looking at patterns with confluent factors to being a little more selective with trades by ensuring that they are taken in contextually relevant areas.

1. Narrative – The narrative factor is concerned with why a movement may be happening, what happens when it’s confirmed and how the trade fits into the overall picture of the market. Context is the “where” and narrative is the “why”. It is my most important factor for a trade.

This is a factor that I’ve added last year which has helped increase my win rate and trade execution considerably as it forces the trader to choose the best trades. The narrative of a trade ultimately decides whether a position is taken or not and in cases where there is no defined direction, the narrative can provide an “ideal scenario” and directional bias.

Final Thoughts

If you want to ensure you are only taking high quality trades, understanding the components of a perfect trade is important. Picking apart my trading process has revealed areas that can be tweaked and optimised which has should result in an increase in performance this year.

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