The formula for success in trading is simple. “Consistent Analysis + Consistent Execution = Consistent Results.” Unfortunately, this is easier said than done. Although most traders struggle, due to problems existing on the psychological side of things. Many of those disciplinary issues can be attributed to a lack of routine and lack of process.
Trading is a business and like any other job, a trader needs to follow a consistent routine. This routine should be present in their daily schedule in terms of when they wake up, when they perform analysis, when they’re allowed to trade & the numerous other aspects that go into creating and maintaining a proper trade-state. But even more important than a proper trading routine, is having a proper routine for how you perform analysis.
In order to earn consistent results, there needs to be consistency in the types of trades you take and without a consistent approach to your analysis, well the only thing that will be consistent is your inconsistencies. Having a process is key to reading the charts the same way each time you look at them and the process that I follow is called I.P.D.E.
STEP 1 — IDENTIFY
I always begin my analysis on my (defined) higher. This is important for two reasons. Firstly, it allows me to take a birds-eye view on price & see what’s going on from a macro perspective. Secondly, because I can’t execute trades from this timeframe, it allows me to subdue the trading thoughts in my head & only focus on performing analysis. I know that this may seem strange that a trader wants to subdue their trading thoughts, but trust me, with confirmation bias occurring so easily, a trader can get into a lot of trouble seeing what they want to see, instead of seeing what’s actually there.
The main questions that I want to ask myself during this first step are
1) What is the market doing? (trending, consolidating, recent candlestick close, etc)
2) Where is price relative to important levels of structure?
After these questions are answered I can move on to the next step in the process.
STEP 2 — PREDICT
Once armed with the answers from step one, I then want to take that information & use it to form a prediction. This prompts three subsequent questions.
1) What direction is price likely to move in next?
2) If price moves in that direction, then where is it likely to go until?
3) If price moves in that direction, then how is it likely to get there?
In the chart above I start off by IDENTIFYING that a bearish trend is coming to an end and that the market is close to completing a classic reversal pattern called the Head & Shoulders. I can then make the PREDICTION that IF price can violate the neckline, THEN we’re likely to see a continued move to the upside. IF we do get said move to the upside, then our likely destination is a retest of previous inside structure.
STEP 3 — DECIDE
Once we’ve made our prediction we can now decide on if & how to attack the potential trading opportunity. At this point, we are reviewing the situation & referring to our rules for engagement within our trading plan in order to see what price and/or any indicators you may be using has to do in order for us to get a reason for entry. At this stage, it’s important that we work through all three aspects of our trade meaning entries, stops & targets & make sure they are all aligned before considering it a “good” opportunity.
STEP 4 — EXECUTE
Once price provides us with our reason for entry then we simply need to take the trade. Now although this step seems like the easiest, this is also where trading psychology starts to work it’s way into the equation as we all know the emotional tugs that often come with putting ourselves in a situation where we have money at risk which is out of our control.
In the chart above, after price breaks the neckline of the head & shoulders pattern, in then retraces back into the previous level of structure & provides us with a beautiful formation of candlesticks for what we call a higher high, higher close entry. Knowing our entry allows us to determine our stop loss & ultimately our overall risk to reward ratio for the trade. Assuming it meets all of our requirements then our last duty (aside from actively managing the trade) is to push the buy button.
I.P.D.E. is my preferred process when I trade, but it doesn’t mean it has to be yours. The point that I wanted to get across in this article is that you need to HAVE and FOLLOW a process in order to be consistently profitable and I challenge you to try one out as I guaranteed you’ll have much more clarity in your analysis then you did beforehand.
For more on this subject here’s a podcast episode
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