I have seen many different (and often incorrect) questions regarding various strategies. In this post, I will explain my trading process before identifying and entering a technical setup to help beginners and non-profitable traders. In my opinion, this framework should be implemented in any strategy.
1. Detect the Right Direction on Higher Time Frames
There are two ways to determine the correct direction, and ideally, both should align:
- Observing Higher Time Frames: Analyze higher time frames to identify the general market direction.
- Fundamentals: If you are not familiar with fundamental analysis, you can rely solely on the first method. However, for fundamentals, you should at least use COT (Commitment of Traders) data. If you know how to combine COT data with economic news such as CPI, GDP, etc., it will provide even greater insight.
These two tools (higher time frames and COT data) can give you a significant edge in the markets, but only if used correctly. They need to clearly show the direction. It is not difficult if done properly.
2. Understand Market Expectations Using COT Data
Based on COT data, you should anticipate the market behavior for the upcoming day—whether it will range, continue a trend, or possibly reverse. For example:
- If COT data shows mixed positions for the Dollar and Yen, expect a choppy, sideways market.
- If the data indicates strong buying for the Dollar and selling for the Yen, you can expect the USD/JPY to continue its bullish trend (if the trend is already established). If the market is bearish for USD/JPY, expect a trend reversal.
The first and second parts of this framework will show you the direction and help you prepare for the next day or week. If your analysis is unclear and you cannot predict the market, avoid trading. If you follow these steps correctly, regardless of the strategy you use—whether it’s breakouts, trendlines, support and resistance, or supply and demand—you will be profitable.
3. Identify Market Key Levels
Key levels are not complicated. Go to higher time frames (H4 is the minimum) and draw support and resistance levels to be aware of them. The price will typically attempt to reach these levels, where it will either reject or break through them. It’s as simple as that.
4. Money Management
If a trade starts moving against your setup, cut it early. This is the most important money management rule, in my opinion. Following this rule will save you a lot of money.
Another critical point is adjusting your position size based on the time frame. When you complete the steps above correctly, your trading setup might appear on different time frames (e.g., M5, M30). The issue lies in the variance of stop-loss ranges.
To manage this:
- Always calculate and risk the same percentage of your account per trade, regardless of the time frame.
- Adjust your lot size based on the stop-loss distance. For example, this ensures that your risk remains consistent (e.g., $50 per trade rather than $50 on one trade and $100 on another). This consistency is essential to maintaining a stable win-loss ratio.
5. Strategy
Once everything else is in place, your strategy becomes the final piece of the puzzle. Use it to identify specific trading setups based on technical analysis, such as moving averages, support and resistance, or other tools.
I hope some traders find this topic helpful. If you have any questions, feel free to post them below. In a few days, I will share my strategy as well.
Searching for a profitable strategy on YouTube won’t help you if you skip the steps mentioned above. I guarantee it.