%% ID: 13829360 Updated: 2022-02-28 %% ![](https://readwise-assets.s3.amazonaws.com/static/images/article3.5c705a01b476.png) # About Title: [[Other/Obsidian Starter Vault(Second Brain)/Readwise 1/Articles/Only Make a Trade if It Passes This 5-Step Test]] Author: [[Full Bio]] Category: #articles Number of Highlights: ==17== Last Highlighted: *2022-02-23* Readwise URL: https://readwise.io/bookreview/13829360 Source URL: https://www.investopedia.com/articles/active-trading/090415/only-take-trade-if-it-passes-5step-test.asp # Highlights each second the markets are open provides an opportunity to trade. Yet not every second provides a high-probability trade ^291086893 --- you'll only take trades that align with your trading plan and offer good profit potential for the risk being taken. ^291086894 --- At first it will take some practice, but once you become familiar with the process, it takes only a few seconds to see if a trade passes the test, telling you whether you should trade or not. ^291086895 --- Step 1: The Trade Setup ^291086896 --- If your reason for trading isn't present, don't trade ^291086897 --- If your reason for trading—the setup—is present, then proceed to the next step. ^291086898 --- Step 2: The Trade Trigger ^291086899 --- when the price pulls back to support near $115, wait for the price to form a bullish engulfing pattern or to consolidate for several price bars and then break above the consolidation. ^291086900 --- Before a trade is taken though, check to make sure the trade is worth taking. ^291086901 --- The risk on that trade must also be managed with a stop-loss order ^291086902 --- Another method is called the Average True Range (ATR) stop loss; it involves placing the stop-loss order a certain distance from the entry price, based on volatility. ^291086903 --- A profit target is based on something measurable and not just randomly chosen. ^291086904 --- Step 5: The Reward-to-Risk ^291086905 --- when taking a trade, you should still consider if the profit potential is likely to outweigh the risk. ^291086906 --- If the profit potential is similar to or lower than the risk, avoid the trade. ^291086907 --- Set a stop loss and target, and then determine if the reward outweighs the risk. If it does, take the trade; if it doesn't, look for a better opportunity. ^291086908 --- This may seem like a tedious process, yet once you know your strategy and get used to the steps, it should take only a few seconds to run through the entire list. Making sure each trade taken passes the five-step test is worth the effort. ^291086909 # Only Make a Trade if It Passes This 5-Step Test ![rw-book-cover](https://readwise-assets.s3.amazonaws.com/static/images/article3.5c705a01b476.png) ## Metadata - Author: [[Full Bio]] - Full Title: Only Make a Trade if It Passes This 5-Step Test - Category: #articles - URL: https://www.investopedia.com/articles/active-trading/090415/only-take-trade-if-it-passes-5step-test.asp ## Highlights - each second the markets are open provides an opportunity to trade. Yet not every second provides a high-probability trade - you'll only take trades that align with your trading plan and offer good profit potential for the risk being taken. - At first it will take some practice, but once you become familiar with the process, it takes only a few seconds to see if a trade passes the test, telling you whether you should trade or not. - Step 1: The Trade Setup - If your reason for trading isn't present, don't trade - If your reason for trading—the setup—is present, then proceed to the next step. - Step 2: The Trade Trigger - when the price pulls back to support near $115, wait for the price to form a bullish engulfing pattern or to consolidate for several price bars and then break above the consolidation. - Before a trade is taken though, check to make sure the trade is worth taking. - The risk on that trade must also be managed with a stop-loss order - Another method is called the Average True Range (ATR) stop loss; it involves placing the stop-loss order a certain distance from the entry price, based on volatility. - A profit target is based on something measurable and not just randomly chosen. - Step 5: The Reward-to-Risk - when taking a trade, you should still consider if the profit potential is likely to outweigh the risk. - If the profit potential is similar to or lower than the risk, avoid the trade. - Set a stop loss and target, and then determine if the reward outweighs the risk. If it does, take the trade; if it doesn't, look for a better opportunity. - This may seem like a tedious process, yet once you know your strategy and get used to the steps, it should take only a few seconds to run through the entire list. Making sure each trade taken passes the five-step test is worth the effort.