Knowing the TYPE of environment you're in and WHERE you are in that Big Picture is crucial in ensuring you have the largest reward possible for the risk your taking. What we commonly see more often than not with newer traders or struggling developing traders on our desk is a lack of overview. They will solely focus on the smaller time frame chart and setups within that time frame and completely disregard the type of environment and/or the bigger picture. Thus resulting in a very poor risk to reward trades, frustration and inability to grow the account.
Taking the time to understand any news catalysts currently moving the market, potential economic data releases and the sector you’re operating in is so very important. This enables you to know the type of environment and identify any potential risks or factors that could either minimize or maximise a trade setup or idea. An example of this is trading a VIX related derivative instrument without checking the economic calendar before a important announcement. This enables you to also gauge the liquidity or potential liquidity which can be vital.
Once you understand the type of environment you're operating in, you then need to know where you are relative to it. Using the daily chart and ensuring to draw those support/resistance lines which you can then be used on the smaller time frame is cruital. As an example, seeing your favourite short setup on a small time frame, where the stock has had bad news a few days ago, is heavily beaten down but currently sitting at a major daily support level. This allows you to roughly gauge where the current price is relative to the bigger picture and your probability of success.
There are other things you can also do to increase your odds in terms of the bigger picture. Understanding the fundementals of the company like cash flow, float, warrants or potential offering can all help greatly depending on your strategy.
Just taking the time to understand WHERE you are and the TYPE type of environment your in can not only reduce your risk considerably but also really maximise the profit potential of a trade. Trading is just about putting all the pieces together to really give your trade the best chance of success and reward for the risk your taking.
Please Note: We can NOT accept any US-based traders, this restriction is based on their location rather than their nationality and we can NOT accept any Canadian based traders directly.