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Trading Education Posted by Team Topstep September 2, 2021

5 Ways to Transform Good Trades Into Great Trades

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Today, we will give some basic steps that can potentially improve any trade you make. These principles can help transform good trades into great trades and may even help turn negative trades into positive ones. 

This article is not going to be the reinvention of the wheel. Instead, I will articulate some very fundamental principles that could be critical in your trading improvement. Perhaps you are struggling and finding yourself in many losing trades, then many of the points of this article will be worthy of your consideration. 

Or, you may be a mediocre trader, with your account balance often reflecting a “break-even” status; if that’s you, then there may be multiple aspects to this article that, if implemented, could be your bridge to success. Even if you are already successful, you likely know that self-analysis and improvement are the critical secrets to longevity in your trading career. For you, there may be one or two items to focus on and challenge yourself.

5 Ways to Transform Good Trades Into Great Trades

Multi Timeframe Analysis 

This is one of those simple principles that goes a very long way. My readers likely remember that I have consulted with many traders in various aspects of their careers. I’ve often found traders employing excellent approaches and systems but were missing one thing. So, multi-timeframe analysis is one of my first go-to propositions.

One occasion was where a profitable trader was looking for a more significant edge. She had about 50% winners on a 2:1 return on risk ratio. Before quitting her day job and committing more capital toward full-time trading, she wanted to increase her edge to about 60% or greater for winners. For her, the simple remedy was to use a three-time frame analysis to engage her entries more critically. It worked as her winning percent increased to her threshold. Her new issue was that she was taking only about ⅓ fewer trades. So, to compensate for this, she took on an extra market where her analysis worked, and last I knew, she was trading successfully from home.

Scrutinizing your entries and exits based on multiple time frames is one way to fine-tune your trades, helping to ensure you are entering and exiting as the most opportune spots. 

Enter and Exit in Partials

This is another crucial aspect that has assisted traders in going to the next level with their trades. I have found that most new traders are sometimes tempted to “go all-in” and place 100% of their allocated capital into the trade at once. And, likewise, they often exit with 100% capital as well. 

Entering trades with 50% of your allocation can negatively affect securing profit if your trade immediately goes in your favor. However, the benefits are that you can responsibly defend a trade and enter at two preferred technical areas by leaving enough room to add to your trades. 

Furthermore, when a trade is going in your favor, you can continue to add to the upside, and if you manage correctly, you can add to the upside with no additional risk if you keep your stop-loss appropriate. 

On the flip side, it’s tempting to exit trades all at once, securing a profit. I’ve found one of the most prominent ways for traders to reach profit potential is if they scale out in halves or thirds. We all know how bad it feels to exit a trade with a modest profit and then kick ourselves because if we had only maintained the position, the fair profit would have been enormous. 

Blend Technicals with Fundamentals

This one is a bit more nuanced. If you are a short-term trader, then this is likely less pertinent to you. As for longer-term traders, this critical truth can be a profit inducer. Rather than creating a false dichotomy of technicals or fundamentals, employ them both in your decision-making. Even if you choose to take a trade contrary to fundamentals, then, knowing you are going against the fundamental grain, you can elect to change your management approach, such as trading with a tighter stop loss or even trading smaller.

Go With The Flow

Trend and Momentum are a trader’s best friends. While I believe that counter-trend trades are helpful, it remains amazing to see how many traders focus on that type of contrarian strategy. Meanwhile, the path of less resistance is to go with the trend. 

Here is where the first rule comes into play. When using multiple time frames, you can go with the overall trend but then counter-trend trade a micro time frame enabling you to go with a trend continuation pattern of the macro trend. Furthermore, many traders who do trade counter-trend don’t properly consider the risk vs. reward aspects. 

If you are trading against the trend, you are likely to have many failed trades; therefore, when you do correctly call bottoms or tops, your successful trades need to incorporate an extensive target. I don’t believe you can counter-trend trade with a 1:1 return on risk ratio or even be very successful using 2:1. Instead, if you are going against the trend, you have to aim very large for your winners. However, going with the trend momentum is much easier than swimming against the current. 

Pair Strong Pairs with Weak Pairs

This one applies specifically for forex traders, but there is a way commodity traders can utilize this as well. I’ve noticed that lesser experienced currency traders will often use a base market. For instance, many traders will only trade U.S. dollar pairs like the USD/JPY, USD/CAD, GBP/USD, etc. This makes some sense as it is a simplistic approach. However, there is another crucial ingredient that your recipe may be missing. 

Let’s say you trade the USD, and the Japanese yen, for example, appears to be weak, and you want to short the JPY. Let’s then presume you go long the USD/JPY pair, but that pair goes sideways. Sure, the JPY may be weak, but if you chose to go long with another weak market, as the USD might be, you could not maximize the potential. 

Now, let’s assume the EUR is very strong, then, paired long with the EUR/JPY, that market can capture the full momentum of a weak JPY. Why? Simply put, because a strong market was paired against a weaker one. I can’t begin to tell you how often I’ve seen a good hypothesis fail when implemented into a trading strategy merely because the wrong pair was chosen.

Now, if you are a very advanced trader who holds swing positions in commodities, this idea could also work for you. For example, if you are trading on U.S. futures exchanges, any market is automatically paired to the U.S. dollar. Therefore, if you want to short gold, but do so with the COMEX product, you are also hoping for a strong dollar. However, if the dollar is also weak, then your gold short may not work. But, if you were to short a product like gold futures and do so with a strong currency, you could buy the futures product of that currency, like the 6E as an example, and essentially be short gold via a currency other than the USD. 

Bonus Recommendations!

Now that I’ve given you five crucial aspects to improving your existing trades, I will throw in another two bonus recommendations. 

First, stay disciplined. This is another “no brainer.” The more disciplined you are, the closer you stick to your time-proven rules, the better potential all of your trades have. The quickest way to reverse good trades and turn good trades into losers is by wavering from your plan and losing discipline. 

The second “softball” word of advice is to take care of yourself. Life is much more than about trading, and hopefully, we all realize that. The life of a trader can be gratifying financially but simultaneously taxing on our minds and bodies. We need to make sure that we eat the right things, exercise regularly, have a good sleeping schedule, take time for fun and leisure activities, and have some therapy for our mind, in whatever form that may come for us. Without taking care of your health, there’s no way you can make good trades become better ones.

These are just a few simple but profound ways that each trade you make has the potential to be improved upon. There are no “one sized fits all” answers to trading. Each of us has different strengths and growing edges, as well as a variety of personalities. Accordingly, some of these aspects of advice will resonate with some while being less practical for others. It’s up to you to cultivate your skills and determine what’s for you, eat the meat, and spit out the bones. Until next time, trade well!