A Simple Trading Workflow
Let's tie all these concepts together. Here's a simplified workflow for placing a trade:
Step 1: Form a Hypothesis
Start with an idea. "Based on recent positive economic news from the UK, I believe the British Pound (GBP) will strengthen against the US Dollar (USD)." Your trading idea is to go long (buy) GBP/USD.
Step 2: Consult the Chart (Technical Analysis)
You look at the GBP/USD chart. You see the price has pulled back to a key support level. This looks like a good area to buy.
Step 3: Plan Your Trade
You define your exact entry, exit, and risk:
• Entry: 1.2500
• Stop Loss: 1.2450 (below support). Your risk is 50 pips.
• Take Profit: 1.2600 (next resistance). Your potential profit is 100 pips.
• Risk/Reward: 100 pips / 50 pips = 1:2 ratio. The trade is worth taking.
Step 4: Calculate Position Size
You have a $5,000 account. Using the 1% rule, you can risk $50 on this trade. Since your stop loss is 50 pips away and each pip on a standard lot is ~$10, you know a standard lot is too big. You use a position size calculator and determine the correct size is 0.1 lots (a mini-lot), where each pip is worth $1. Now, a 50-pip loss equals a $50 loss, which is exactly 1% of your account.
Step 5: Execute and Manage
You place the order with your broker, including the stop loss and take profit levels. Now you let the trade play out, resisting the urge to meddle with it.