Your indicator gives a signal. Your finger hovers over the buy button. You feel confident.
Stop.
Before any trade, three questions need answers. Skip them, and you're gambling. Answer them honestly, and you'll avoid half the losses that blow up retail accounts.
Question 1: What Is My Invalidation Point?
Translation: at what price am I provably wrong?
This isn't "where will I set my stop loss?" That's the mechanical execution. The question is deeper: what would have to happen for this trade thesis to be incorrect?
If you're buying because you see a support bounce, your invalidation is that support failing. If price closes below that level, your thesis is wrong.
The invalidation point must be:
- Structural, not arbitrary. "2% below entry" isn't an invalidation. "Below the accumulation range" is.
- Clear and objective. No judgment calls when you're in the trade and emotional.
- Respected without exception. If it hits, you exit. Period.
Traders who can't articulate their invalidation point don't have a thesis. They have a hope.
Question 2: What Is My Reward If Right?
Translation: where is the logical target, and is this trade worth taking?
The invalidation point tells you how much you're risking. The target tells you how much you're trying to gain. The ratio determines whether the trade makes sense.
Your target should also be structural: next resistance level for longs, next support for shorts, previous high/low that's likely to draw price.
A 1:1 trade needs a 50% win rate to break even. A 1:2 trade only needs 34%.
Most retail traders take trades with terrible risk-reward. They risk $1 to make $0.50 because the setup "looks good." Even with a 60% win rate, this is a losing strategy.
Before entering, know the numbers. If the risk-reward doesn't make sense, the trade doesn't happen.
Question 3: Why Now?
Translation: what makes this entry better than waiting?
This question catches impulse trades.
"The setup looks good" isn't a reason for now. Setups can look good for hours. Why click the button at this specific moment?
Valid "why now" answers:
- Price just hit my predetermined entry level
- Confirmation candle just closed
- The signal I was waiting for just triggered
- Risk is now definable (structure just formed)
Invalid "why now" answers:
- It's been moving without me
- I feel like it's about to go
- I'm bored
- I need to make back yesterday's loss
The "why now" question catches 80% of revenge trades, FOMO trades, and boredom trades.
The Pre-Trade Ritual
Make these three questions a ritual. Before every trade, answer them out loud or write them down.
"My invalidation is the low of this accumulation range, $142.50. If it closes below, I'm wrong."
"My target is the previous high at $168, giving me a 3:1 reward-to-risk."
"I'm entering now because the spring just completed and the confirmation candle closed above the range."
This takes 30 seconds. It prevents thousands of dollars in bad trades.
The Bottom Line
Three questions. Every trade. No exceptions.
- What is my invalidation point?
- What is my reward if right?
- Why now?
Can't answer all three? Consider passing on the trade. The discipline isn't natural. Build it anyway. Your account depends on it.
Objective data makes these questions easier to answer. Cycle phase tells you where structural invalidation likely sits. Volume-based levels like POC and VAL provide logical targets. Confluence scoring indicates whether conditions support entering now or waiting. When the data is clear, the three questions practically answer themselves.
Pentarch provides clear cycle context so you can answer these questions with structure, not guesswork. Where are we in the cycle? What's the logical target? Is now the right time?
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