What constitutes a good trade set?

Now I know everyone's trying to make a buck trading and we all have different styles and methodologies, but one thing you need to understand before you start throwing your hard earned cash around is: 'what actually constitutes a good trade set up'?

Let me just back track one step...when I say 'what constitutes a good trade set up', I mean from a Bankers perspective. There's so many 'trading methods' floating around I wouldn't know where to begin with them. But when I look at the market I look at it the same way I was trained at Citibank starting in 1990 and throughout my trading career with the banks. 

There are a few differences trading at a bank to trading for yourself at home. Firstly, you don't see the large 'flows' going through the books that the bankers see. They have the edge because they see first-hand what the Fund managers are doing. Believe me this is a big edge to have! 

Secondly, they don't trade with their own cash, so they really don't give a toss, although the bonus systems do switch them on 'to care'.

Thirdly, and possible most important they aren't in a rush to make $100K every day. They are getting paid and so they sit back and relax and wait as much as possible for the good trade set ups to come. They aren't in a need to make $5k today to make house payments and the like so they aren't under that same day to day pressure that many retail traders are under.

So they take their time as I said to identify good trading opportunities. They look for key specifics and when they line up they hit them hard. It's as easy as that. The hard part is knowing what actually constitutes a good trade set up. 

There are two major components, that when combined, provide the ingredients for not only a good trade set up but a great one!

1. The Fundamental Drivers - Direction

  • Central Bank opinion/view/policy stance. 

This is the absolute starting point. Long term trends come directly from central bank policy. So when you look at your long term charts, your Daily and Weekly charts, and you wonder why is it trading where it is? It's because of the central bank monetary policy and interest rates. It's as simple as that.

So the first thing bankers look for is clear and specific direction from the central banks. Without it you have 'nothing'. As we've seen over the past few months the most important central bank, the US Federal Reserve, have given out mixed signals with regards future monetary policy and that's created a bit of chaos in the markets. That's not ideal at all and it's the main reason why many traders have been sitting patiently on the sidelines waiting for the central banks to make it clearer for them. For a good trade set up, long term direction for the currency pairs your trading needs to be clear.  

  • Economic data releases

The day to day economic data releases are extremely important to short term direction. Momentum can swing on a dime on the release of top tier economic data. When you look at them by themselves they may not mean much, but when you group them together and look at them over the course of a month they can paint a completely different picture. If for example the numbers throughout the month are all negative, well that's going to give the currency pairs solid short term direction. If this short term direction matches up with the central bank long term direction, well now you're rocking!! 

2. Technical Trendlines (Trends) - Entry levels

  • Short term trendlines provide day to day entry and exit levels.

These trendlines aren't the 'be all to end all' of support and resistance but we need them to get into the trade initially. A good trade set up will at least have a short term trendline involved which provides a clear entry level. If we don't have any technical trendlines around then the trade has a much higher risk profile. It won't matter so much if you know the direction of the currency pair because if you don't have a clear entry level then you may get whipped in and out of the position before it gets going. So bankers will wait for trendlines to enter 'good trades'.  

  • Long term trendlines are the main game!

The longer term trendlines are more what Fund Managers are focusing on. These longer term trendlines are much clearer and better to trade off because no one can miss them. The entire banking community focuses on them so when they break or hold it is a big deal. A really good trade set up will have a long term trendline as the key entry point for the trade. 

FACT - 95% of all interbank transactions (volume) occur around trendlines. So don't waste your time and your money trading mid-range. Technical trendlines provide clear and precise 'entry' and 'exit' levels that you can comfortably apply your trade plan and capital management to.  

Now there are of course a number of 'Probability Enhancers' you could add to fine tune the identification of a good trade set up and you'll find those in our FX Pro Trader course, but the point I wanted to make is the answers are right in front of you.

The main part about being a professional trader is having the patience to wait for the 'good trade set ups'. 

You need 'direction' and 'entry' levels - and once you have these two components you're ready to trade aggressively and with confidence!

Unfortunately most retail traders are looking for a 'fast buck' so they never take the time to learn about the Fundamental drivers or the Technical trendlines. In fact I reckon most would have stopped reading by now because they haven't got a quick fix solution to their trading woes. They chop and change trading strategies & trading robots every other day of the week. They continually chase for the 'holy grail' when in fact the answer has been right in front of them the whole time! 

Take your time to understand the market and most importantly the components that make up a good trade and you'll be making more than you ever have done before.

Brad Gilbert

The risk of loss in Forex trading can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in the light of your financial condition. The high degree of leverage that is often obtainable in Forex trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Past performance is not indicative of future results.