The Three Most Important Elements of a Trade

It's hard to trade successfully if you don't consider these three important elements of a trade--Context, Direction, and Timing.

Most of us start looking to enter a trade setup based on some timing, or trigger, event. It might be a new high in price, a breakout from a consolidation, or a pullback to a moving average. You must know your trigger, and it should be clear, objective, and precise. The trigger is meant to be a trade location where one has lower risk of entry and a higher degree of confirmation that the trade will work. There should be no hesitation when you see your trigger. The trigger should be one part of a larger strategic plan that addresses the current trend.

Before you pull the trigger, consider the direction of the trade relative to the three price trends on the chart.  On any chart, you can usually see three different trends--long-term, intermediate-term, and short-term. Make sure you're entering when you have fully assessed these three trends, so you your trade does not work counter to the prevailing direction of price. Trends go through periods of retracement and consolidation, which is why you also need to understand the context of your trade.

Context refers to big picture concerns, so look at the higher timeframe to see if the stock is trending in the same direction, in a period of retracement, or stuck in a consolidation pattern. You may see a trend on the daily chart, but the weekly chart may show a large consolidation pattern. If you get a trend trigger when the higher timeframe is consolidating, it is usually best to move on to another stock.