Top 10 parameters for the correct deal analysis
What does professional trader record in its notes? This question interests all of the newbies in the trading world. Why exactly are these parameters interesting professional successful traders? In this article, we will briefly tell you about these parameters.
Trading strategy — this is how you call a strategy, which led you to the deal. While working with a few strategies, professional trader notes the name of the strategy in front of each deal. For example, "Breakout of volatility", "Mean reversion", "Long term" - this is what you can see among professional trader's notes. Noting strategies helps to understand and analyze the efficiency of the strategy and decided if it is good or bad works for you.
Stop loss price, $ — this parameter is represented by a price level with a real or imaginary stop order. One of the crucial skills for the success in trading is an ability to cut the losses fast. This point of cutting can close your position and reduce the growth of loss. The absence of it is often considered as the most terrible mistake for the trader. Also, having a stop order is definitely good for your mental health;)
Risk, $ — is an amount of money that you've put on a risk in a single deal. So, if you buy 10 contracts on E-mini S&P 500 at price 2 420$ and your stop loss is at 2 417$, so the risk itself for this deal is 1 500$.
Risk, % — is a percentage of a risk per deal. If you buy 10 contracts on E-mini S&P 500 with the risk of 1 500$ that means 1.5% (1 500 / 100 000). Knowing this, you can consider the future's price to fall to 2 417$, the deal will bring 1.5% of the loss.
Target price, $ — this thing is your primary target. You stay in the deal until the price gets equal to the target price. Buying on the 2 420$ level, the price of 2 430$ can be set. In such way, we tell that we intend to hold E-mini S&P 500 until it costs 2 430$. When it happens, we can sell the position completely or partly. Price is influenced by lots of factors, and things can go the opposite way. That's the reason why this parameter is not the most popular among traders.
Profit, $ — our favorite one, without doubts. Everyone hopes to see it positive. If our 10 contracts for 2 420$ grows to the price of 2 430$, and we sell the position completely, then the result will be 5 000$+ for our trading account.
Profitability, % — it is the percentage of our cash profit, which is 5% for our case (5 000 / 100 000).
Mistake? —analyzing the presence of a mistake and keeping your trading rules should always be on your mind. Nothing will help you to analyze the deals like keeping an eye on your mistakes because when you mark the mistake, you think of it again, but from the other perspective. Unfortunately, not every trader keeps an eye on his mistakes. Despite that, it is a highly important parameter for the deal analysis. Mistakes can happen while both opening and closing the position. For example, you see the price gap up in the futures and decide to wait. It gets 2% higher and you buy it. But now the futures turn back and you have to close the position with the loss. But if you had chosen the proper trading signal, you could have the successful deal.
Profit/Loss ratio — this characteristic allows estimating the potential of the deal and making a conclusion about that deal. We bought futures for 2 420$ with the stop order at 2 417$ and expected the price to grow for 2 430$, which means that potential profit/loss ratio here is 3:10, which is pretty high. Even if one deal of ten will be positive, we will not lose.
Notice — it is not really a variable, but still it is quite important for learning a lesson from every deal. Note everything: your success, what you did wrong, your thoughts during making decisions etc.
How to analyze the upcoming trade?
So, we have our characteristics list, but how can it help us? Let's take an example of a new deal and an open position managing with the use of different variables:
- Look for the potential deals
- Analyze the potential profit/loss ratio. This will help us to decide which stock (or futures) is the best for the deal.
Stop price - Entry price = Risk
Entry price - Target price = Profit potential
If the profit potential/risk is more than 2, then the deal can be chosen.
- Define the entrance level for the deal
- Mark the stop loss and place the stop order on the chart.
- Mark the price target on the chart or place a limit order to fix the profit. It is not necessary to leave the position after the price level is reached. Mostly, the position is partially closed (for instance 20 or 30%), and stop order for the rest position moves closer. This is how you can gain the maximum potential of the deal. Stay in trend as long as possible and gain the profit while the price is moving your side.
Marking the multiple price targets is possible when the deal is going your way, and if you are lucky enough to have the best deal, the price will go much higher than the initial price target. But the majority of deals will go against you and close with the minimal loss.
Conclusion of deals analysis
So, the analyzing of the completed trades is more or less the thing that every trader does. Follow these simple steps after every trade closing:
- Mark the info in the trade note after the deal is closed manually or by a stop order.
- Mark the mistakes, it’s very important
- Save the screenshot of the chart with the entry and out points and technical indicators.
- Mark the notice about what was wrong and what should be mentioned next time.
No matter how you analyze your deals - just do it.
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