These are questions you should ask yourself before entering a trade. Creating a step-by-step trade plan—a blueprint for how to build positions and reshape them as conditions warrant—can help you develop a disciplined approach to your trading.
Before beginning any trade plan, perform a quick self-evaluation:
- Are you buying a stock for fundamental or technical reasons?
- Which investing style do you prefer (e.g., growth or value, trend or countertrend)?
- Determine your view of market sentiment: Is momentum generally tilted up or down?
Once you have your bearings, and you’ve identified a list of stocks or exchange traded funds (ETFs) based on your research analysis method—fundamental, technical or both—you’re ready to embark on the actual planning. Here are five key steps to help you create a smart trade plan:
Know your time horizon
How long do you plan to hold a stock? What purpose will it serve in your portfolio?
Your trade time frame depends on your trading strategy. Generally speaking, traders fit into one of three categories:
Know your time horizon
How long do you plan to hold a stock? What purpose will it serve in your portfolio?
Your trade time frame depends on your trading strategy. Generally speaking, traders fit into one of three categories:
- Single-session traders are very active and are looking to gain from small price variations over very short periods of time.
- Swing traders target trades that can be completed in a few days to a few weeks.
- Position traders seek larger gains and recognize that it often takes longer than a few weeks to achieve them.
Determine your entry strategy
Once you have a list of stocks and ETFs you’re considering, look for entry signals—for instance, divergences from trend lines and support levels—to help you place your trades. The signals you employ and the orders you use to make good on them hinge on your trading style and preferences.
Here’s a scenario: A trader with $150,000 in total capital is interested in a stock trading at $67 a share. This trader’s maximum budget per trade is $15,000, or 10% of the account. That means the maximum number of shares of this stock the trader can buy is 223 ($15,000 ÷ $67). Let’s say the trader’s risk per trade is 2%, meaning the trader wants to lose no more than $3,000 of his or her total $150,000 on the trade. Dividing that sum by 223 shares reveals how much the stock can drop per share ($13.45), establishing a stop price for limiting losses ($53.55). The trader may never have to use this stop order, but at least it’s in place if the trade moves the wrong way.
Are you making or losing money with your trades? And importantly, do you understand why?
First, examine your trading history by calculating your theoretical “trade expectancy”—your average gain (or loss) per trade. To do this, figure out the percentage of your trades that have been profitable vs. unprofitable. This is known as your win/loss ratio. Next, compute your average gain for profitable trades and average loss for unprofitable trades. Then, subtract you average loss from your average gain to get your trade expectancy.
The final step is to look at your individual trades and try to identify trends. Technical traders can review moving averages, for example, and see whether some were more profitable than others when used for setting stop orders (e.g., 20-day vs. 50-day).
Sticking to it
Even with a solid trade plan, emotions can knock you off course. This is particularly true when a trade has gone your way. Being on the winning side of a single trade is easy; it’s cultivating a continuum of winning trades that matters. Creating a trade plan is the first step in helping you think about the next trade.
No comments:
Post a Comment
Thanks for the comment. Will get back to you as soon as convenient, if necessary.