One of the most important tasks a trader carries out is designing and outlining their trading plan. The trading plan is a key item in facilitating success in the trading business. When putting together the plan, many traders overlook certain areas such as personality fit, psychological issues encountered in trading and effective money management rules to minimize risk while maximizing the ability to profit from big trends.
It is crucial that the trader detail how they will operate in the markets before they ever place a trade. This will allow them to know how they act in a variety of scenarios that can develop once they place the trade. This will take them out of a potentially emotional reaction to price action and instead positions them to proactively take advantage of opportunities created by other emotional traders. To do this task effectively it is best to use a top-down approach, focusing first on defining the overall market environment then looking for relatively strong or weak stocks in the right sectors and defining an options strategy that fits the expectation.
In putting together an effective trading plan the trader needs to write out specific goals. Goals focus the trader s attention and energy on giving their efforts clear direction. Setting goals gives the trader a feeling of control over what actions to take to accomplish a goal. This allows traders to grow beyond past limiting beliefs or fears that had previously held them back. Make sure to set specific measurable goals, with a deadline date for completion. In addition, set a long-term goal and define short-term goals needed to achieve your ultimate goal. Short-term goals have more focus than long-term goals, especially if deadlines are set.
When actually developing the trading plan details there are a lot questions that need to be addressed such as types of orders, how much capital, broker, position review process, and percentage of capital in each trade. However, the two most important questions by far that need to be addressed are how the trade be entered and how the trade will be exited?
Essentially a trade should be entered as defined by the trader s system signals. Every new trade needs to be made without losing focus. The key to good entries is putting on trades where there is relatively low risk compared to a significantly higher reward. The trader should also write down a distinct catalyst for the expected stock move. There should be a written list of rules for entry.
Most traders enter trades with little thought, on a whim or on a new piece of news, without doing the diligent homework required to make sure the odds favor their entry over time. A really good entry is in defining key areas where you can be incorrect relatively little before you have to exit the trade with a small loss, while having the potential to be correct and win much bigger than if you were incorrect. Basically a great risk-to-reward ratio.
Knowing when to exit the trade is very important as well. Exits are multi-faceted compared to entries. Typically, it is easy to get into a trade, but it requires more effort to determine where you will actually exit the trade. First, the trader needs to have in place their plans for how they will take losses. Always worry about cutting losses first and dealing with gains later. Be sure to define an initial stop point for the trade before the trade is entered. This determines the risk the trader is willing to take.
The other exit that needs to be addressed is just where the trader will take profits. Depending whether the trader is conservative or more aggressive in nature will certainly drive their approach. The conservative trader will use a fixed target while the more aggressive will probably opt for using trailing stops on winning positions until the trend breaks.
Keep these tips in mind when developing your own trading approach or plan. Make sure to address all the key facets and put special emphasis on your entries and exits. Doing so will help you immensely in becoming a trading success over the long term.
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