Trade Execution Explained: Key Steps and Strategies for Investors
When a buy or sell order is fulfilled, it is referred to as trade execution. An order is executed when it is filled, not when it is placed by the investor. When an investor submits an order, it is forwarded to a broker, who decides the optimal method of execution.
Many investors who use online brokerage accounts believe they have direct access to the securities markets. They, however, do not. When you press the enter key, your order is transmitted over the Internet to your broker, who decides which market to send it to for execution. When you call your broker to place a trade, the process is similar.
Brokers can execute orders in a number of different ways. They can either send a request to an exchange's floor, trade with a market maker, or finish the transaction digitally. Alternatively, if the broker already has the capability to execute the trade in its own inventory, it can do so.
Trade Execution Flowchart
The best part? Brokers handle these executions, leaving you free to focus on strategy. Here are a few key points to keep in mind —
1. The decision to enter and exit must be based on price, not emotion or fundamentals
Fundamentals do not form the basis of a trade. They do, however, provide a method for anticipating probable volatility. They can't give you a particular price for entering a trade or manage it with a stop price and profit target. A trading plan must have at least three prices to be complete.
You must know the price at which you will enter, the price at which your stop-loss will be set, and the price(s) at which your profit objective will be set(s).
None of these can be identified by news or fundamentals, and they must all be decided by your charts and specifically by price before you make the trade.
2. Before you enter, you must determine whether the market is trending or choppy.
As a trader, you will frequently encounter a "Choppy Market" or "Trending Market".
A choppy market happens when buyers and sellers are closely balanced, or when buyers and sellers are engaged in a heated battle but no clear winner emerges.
A market that is choppy has no obvious direction, and guess what? A market is choppy the majority of the time. Choppy markets can happen at any time and in any market.
The Wave is the most crucial tool you can use. The Wave is the simplest and most dependable way to detect whether the market is trending, as well as the quickest and most accurate approach to see market cycle transitions.
3. Before you enter the trade, you must determine your risk-to-reward ratio.
Finding a potential trade is only half the battle. Once you've identified a momentum or swing trade, you'll need to do some chart analysis to determine your risk-to-reward ratio.
The risk/reward ratio, also known as the R/R ratio, is a metric that compares a trade's potential profit to its potential loss.
The risk is the total potential loss as determined by a stop-loss order, and the reward is the total potential profit as determined by a profit target.
When it comes to profit targets, there is no such thing as a single pricing level. Profit targets are multiple levels throughout the trade's progress that can be exited as it moves in your favour.
Major and minor psychological levels, Fibonacci levels, trend lines, or horizontal support and resistance can all be used to determine these levels. You can also utilise pivot points as an option.
4. Enter the market with a single full-lot trade and exit scaling out at your predetermined profit target (s)
SCALING OUT is a money management technique in which a trader decides to exit individual positions at different (predetermined) price levels.
One of the most difficult orders to execute is the order to exit a trade. The problem is more widely acknowledged in the case of stop-losses—most traders are aware of it. Most people, however, do not associate this difficulty with the lucrative side of the trade.
Using a fixed reward:risk ratio is one of the simplest methods for determining a profit target.