There are many different approaches to trading. From technical signals given by the indicators to the fundamentals that become the driving force in the asset or instrument. Put a few traders in a room and chances are that they will trade the same asset or instrument differently.
Despite the different approach to trading, there are some key questions that every trader should ask themselves and should be able to answer. Knowing the ins and outs of the instrument or asset that is being traded will put you in control of what you are doing.
If in doubt, ask these five questions in order to understand whether you are trading the asset or instrument in question knowing the details about it or whether you are merely trading with no clear details.
1. What is the asset doing?
This falls under the technical purview. When you are trading or want to trade a currency pair, the first question to ask is what is the asset or instrument doing? Is it going up or going down?
Where are the support and resistance levels? Is the market in a bullish or bearish trend?
Answering these questions will help you to get a better understanding of what the instrument is doing and how it is likely to behave.
From a trading perspective, this means that you will know when you are wrong in your bias and where to cut your losses.
2. What is driving the price?
Despite the fact that many day traders, especially in forex, tend to trade with technical analysis, it is important to know the fundamentals that are driving prices.
This means taking a look at the central bank speeches, interest rates, and the economic outlook.
Know the fundamental reasons will give you a broad idea of what other traders are looking at and thinking.
You can also use this knowledge later on while managing your trades to see if there is any shift in the bias.
This will ensure that your emotions are put in check, and more importantly you will know why you trade went to fill the take profit level or hit your stop loss.
3. What are other traders thinking?
The markets move on expectations. Price is always forward looking and continues to discount any new information. At times, the markets can get ahead of themselves. This is commonly found with diverging expectations between traders and central bank decisions.
At times you will also find this with the markets and economists extremely hawkish on an economic indicator only to find that the actual data was very disappointing.
A very good recent example of this can be the "Trump Trade." The markets rallied and continued to rally for a few months on. This rally came merely on traders’ expectations that Trump’s fiscal stimulus plans would help to boost inflation figures.
No sooner did the markets get a reality check only then did traders start adjusting their expectations accordingly.
4. What is your trading plan?
It goes without saying that trading without a plan can be disastrous as you will be caught in the crosswinds.
Times like this, due to lack of a plan, your emotions can begin to take control. This is when your money management and strategy can go for a toss.
From attempting to make money, you will soon switch to attempting to cut your losses.
But with emotions, this can be difficult, and as a result, you will end up taking a bigger hit. This could potentially put all your previous profits and trading capital at risk as well.
5. Why are you trading this particular asset or instrument?
The last but most important question to ask is why are you trading a particular asset or instrument.
In most cases, you will find the answer if you have already replied to the first four questions. Asking "why this instrument" can help you to form the full picture that combines both technical and fundamental analysis, as well as bringing in your trading strategy and plan.
Remember that trading requires a bit of discipline and a certain approach at all times.
It is important to have a disciplined approach to trading as it can always keep you grounded while also bringing some logic and objectivity to the markets that you want to trade.