Last week, I tweeted what I see as my trade entry process. This was the tweet:
For every trade, I structure my process from 1 to 6. Each step isn’t possible without the previous one. Anytime, certain price action can invalidate the entire setup and make me abandon it.
2. Directional bias
3. Trade plan
4. Entry filters
5. Entry criteria
— Felix (@smartfxlearning) January 4, 2019
Since then, I got so many questions that I wanted to take a moment to write in more detail how I use this process to make better trading decisions.
If you ask me how much pips I made last month, I will tell you I don’t know.
But I will know my R-multiple of last month: a 6.1R profit. This R number often results in confused looks. What does R stand for?
In order to figure this out, we need to take a step back and look at our performance and its relationship with risk.
Risk and Reward To Risk
When you say that you made a 50 pip profit, that only tells me part of the story. The key piece of information that is missing here is how much you risked to make this profit. After all, a 50 pip profit is a good result if you had a 25 pip stop loss but if your stop loss was 200 pips, you risked a lot to get a relatively small reward.
Imagine the following scenario: you’re starting the year, completely motivated. This is going to be YOUR trading year! This is the year where you will make it happen.
When you look at your trading, a few things need to be fixed, though. You know you should start a trading journal. You need to stop revenge trading. Cutting losses is still hard to do. And really, your trade management is pretty subjective so your trading plan needs some work.
You need some solid trading habits but more importantly, you need to look at ways to stick to those newly created habits. Everyone who has ever tried to lose weight, stop smoking or exercise knows this all too well:
It’s easy to start a habit but harder to stick to it