If you are one of those traders who have been taking trades randomly or watching youtube videos and making consistent losses, this 5 mins read can potentially make you 50% pro trader.

Follow these 5 points and trust power of mathematics to make you a net profitable trader:

Basics

Chart – There are different types of charts but we only need candlestick charts. There are 4 parts of a candle- Open, Close, High and Low price which are self explanatory. If closing price is greater than the opening, the color of candle is white/green and black/red (colors are customizable) if opposite happens.

Timeframe – It denotes the duration of one candle. Some widely used are – 5 min, 15 min, 1 hr, 1D, 1 week, 1 month. A 5 min time frame means a new candle will open, make a high, low and close exactly after every 5 min.

This is how a typical candlestick chart looks like (5 min time frame, where every candle closes after 5 mins).

Trend

Now that foundation has been built, let us start the interesting part.

What is a trend? It is nothing but the direction in which price is moving over a period of time. There are 3 possibilities – Up, Down and Sideways(consolidation).

There is an important question we must ask ourselves, mathematically, if there is 50% probability of making profit or loss, then why do 90% of traders end up losing money? 

Keep reading till the end to find out and you will be shocked and happy at the same time.

This is how all 3 trends looks like – 

Trends may not be same on different timeframes. For instance, a trend on 5 minutes may be Down but Up on 1 hr timeframe. 

When you are trading for a shorter period, that is you are entering and exiting a trade intraday, you use a 5 min timeframe and when you are trading for a comparatively longer period, you choose a bigger timeframe.

Whatever timeframe you choose to trade/invest, always check the trend on the immediate bigger timeframe (e.g. if you are trading on hourly, check trend on daily timeframe) and take positions in that direction only.

Support and Resistance

Support level is a zone where more participants show buying interest than selling which in result prevents the price from going down. Resistance level is a zone where sellers dominate buyers hence price can potentially come down.

Identifying these levels is very easy.

Simply draw a line connecting as many points at the same level. Support and Resistance are not different. When price comes from below, the zone acts as Resistance and vice-versa. Point 1,2,3 and 4 acting as resistance while point 5 as support.

Risk Management

This is the most important part for being a serious trader. Risk management is the only way to be profitable in the long term.

We are going to cover this part in 2 parts – Stop loss and RIsk Reward.

Stop loss is the point where you exit your trade in loss. Stop loss is placed below Support levels or above Resistance.

If you are expecting the price to fall, the best point to enter is near resistance. If the price crosses the resistance, you will exit at a predefined Stop loss as the sellers have failed to take the price down. 

Coming to Risk Reward, it refers to how much you will lose if you are wrong and profit, if correct. ideally , it should be more than 1:2. So, either you lose 1 or win 2.

The above image is enough to show the importance of Risk Reward. Total trades taken are 10 and 50% worked in favor. With Risk Reward, a trader would still end up making money.

Now, let’s compile all the learnings and take our first trade on a 1 hour timeframe which will be applicable to all other timeframes as well.

1. Identify trend and Support/Resistance zone on higher timeframe, Daily timeframe, in this case.

2. Shift back to the 1 hourly timeframe. As the trend is down, enter near Resistance, keep stoploss above resistance and maintain Risk Reward 1:2.

Congratulations! You just have improved yourself by 50% just by following these easy steps.

Psychology

I raised an important point in the beginning of the post that mathematically, if there is 50% probability of making profit or loss, then why do 90% of people end up losing money?

The answer is Risk Management and Psychology.

Having correct psychology for trading is of utmost importance. Below are some of the things to be kept in mind:

1. Nobody knows where the price will go, as no one can predict the future. Stay away from those who say otherwise.
2. Trading is a game of probability; follow risk management sincerely.
3. Exit at once when your stoploss hits.
4. Before taking a trade, know how much you would lose if stoploss hits.

That’s all for now. 

Are these enough for being one of the best traders? No

Are they better than taking random trades? 100%