A good trading method should be as simple as possible to provide a powerful edge to the disciplined trader that is based upon specific setup conditions, entry rules, initial stops, and exit strategy. In addition the management of position size and number of positions must be according to strict money management rules. A good trading method also must be relatively easy to follow.

Setup conditions – These are the specific requirements that must be met to consider a pair for a trade. These requirements are expressed in terms of technical analysis indicators, patterns and price action. The aim here is to only consider a trade when the market sets up for a high probability profit potential trade and to stand aside otherwise. This is one of the ways required to put the odds in your favor.

Entry Rules – Once the setup conditions are in place, entry rules define the trigger necessary to actually enter into the trade. This usually means that price must behave in a certain way in order to “trigger” into a trade using either a market, stop, or limit order.

Initial Stop Rules – These are the rules that govern how a new position should be protected from an adverse move in the market. Since there is always risk when trading the Forex markets, it is very important to know the appropriate place to place the initial stop order. Placed too close to the market risks being stopped out prematurely. Placed too far from the market takes on too much risk. This is one of the most critical aspects of trade management. Effective Initial Stops should be place where you don’t expect the market to go and if it does, the premise of the trade is over and you should exit the trade with a small lose.

Exit Strategy Rules – These rules govern how to manage a trade to exit the trade profitably. These rules should strike a balance between protecting open profits as much as possible without risking a premature exit from the market and missing a great market move.