Success in trading isn’t about guessing market direction—it’s about executing a well-defined framework with discipline and precision. This framework provides a structured approach to identifying high-probability trade setups while managing risk effectively. By following these steps, traders can tilt the odds in their favor and build a consistent, repeatable edge in the markets.
Step 1: Determine Market Bias – Bullish or Bearish?
Before entering any trade, it's crucial to establish whether the market is in an uptrend or a downtrend. The simplest way to do this is by comparing price action to its moving averages. If the price is consistently trading above key moving averages (e.g., 20 EMA, 50 SMA), the market is bullish. If it's below, the market is bearish. This step sets the foundation for every trade—only looking for long trades in a bullish market and short trades in a bearish market keeps the trader aligned with momentum rather than fighting against it.
Step 2: Identify Trend or Range Conditions
Not every market move is a trend. Before placing a trade, it’s essential to determine whether the price is trending or stuck in a range. One reliable tool for this is the Average Directional Index (ADX). An ADX reading above 25 signals a strong trend, while readings below 20 suggest choppy, range-bound conditions. Alternatively, visually inspecting price action—looking for clear higher highs and higher lows in an uptrend or lower highs and lower lows in a downtrend—can provide confirmation. If the market is in a range, it's best to avoid breakout trades and instead look for reversals at the extremes.
Step 3: Wait for a Pullback and Bounce
Once a trend is identified, the best entries come from pullbacks. Chasing a price at its peak often results in entering right before a reversal. Instead, traders should wait for the price to retrace to a key support or resistance level and confirm a bounce before entering. This ensures entry at a better price, allowing for a stronger risk-to-reward setup.
Step 4: Place Stop Loss on a Lower Timeframe
Risk management is the backbone of a winning strategy. Instead of placing stop losses based on the entry timeframe, a lower timeframe could be better for determining stop placement. This allows for a tighter stop, reducing potential losses while improving the risk-reward ratio. A well-placed stop keeps risk small but avoids premature stop-outs from minor fluctuations.
Step 5: Risk Only 1% Per Trade
No matter how good a setup looks, protecting capital is paramount. By risking only 1% of the account per trade, a trader ensures that a string of losses doesn’t wipe them out. This allows for long-term sustainability, preventing emotional decision-making and reckless trading.
Step 6: Set Profit Target on a Higher Timeframe
To maximize profits, traders should determine their target based on a higher timeframe. This provides a broader perspective, helping identify logical resistance or support levels where the price is likely to stall. Aiming for a minimum 1:2 risk-to-reward ratio ensures that wins are larger than losses, allowing profitability even with a 50% win rate.
Step 7: Manage the Trade – Move Stop Loss as Price Moves
Executing a trade isn’t just about entry—it’s about managing it to protect gains. As the price moves into profit, moving the stop loss up to breakeven eliminates risk. Further adjustments ensure that profits are locked in, preventing winning trades from turning into losses. This dynamic risk management approach allows traders to ride trends while minimizing the downside.
By following this structured framework, traders can eliminate guesswork, trade with confidence, and build a sustainable edge in the market.