Five Smart Trade Plan Elements
Your time horizon |
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Your Entry Strategy |
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Look for entry signals for example, divergences from trend lines and support levels to help you make your trades. The signals you use and the orders you use to optimize them depend on your trading style and preferences. An example of a break out of a support or resistance level with increasing volume, also known as a breakout.
Your exit plan |
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When it comes to an exit strategy, plan for two types of trades those that are in your favor and those that are not. You may be tempted to let favorable trades run, but don't overlook opportunities to take some profits. For example, when a trade is going your way, you might consider selling part of your position at your initial target price and letting the rest of your position run.To prepare for when a trade goes against you, you can set a stop order at a price below the support level to help manage your risk if the stock breaks below that level.
Size your position |
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Trading is risky. A good trading plan establishes the basic rules of how much risk you are willing to take on a single trade. Say, for example, you don't want to risk losing more than 2%–3% of your account on a single trade. You can consider portion control, or changing the size of the positions to fit your budget.Here's a scenario: A trader with a net worth of $150,000 is interested in a stock trading at $67 per share. A trader can set a maximum budget of 10% of the account, or $15,000 per trade. This means the maximum number of shares a trader can buy is 223 ($15,000 ÷ $67).Let's also imagine that the trader doesn't want to lose more than $3,000 of his $150,000 on this trade. If we divide this amount by 223 shares, that means the trader can afford a loss of $13.45 per share ($3,000 ÷ 223). By subtracting this amount from the stock's current price, the trader gets a target stop price of $53.55 ($67 - $13.45). A trader may never need to use this stop order, but at least it is in place if the trade goes wrong.
Your Trading Performance |
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Are you making or losing money from your trading? And, most importantly, do you understand why? Look at your trading history to calculate your theoretical trade expectations, i.e. your average profit (or loss) per trade. You start by determining the percentage of your trades that have been profitable versus those that have not. This is known as your win/loss ratio. Next, calculate your average profit for profitable trades and average loss for unprofitable trades. Next, multiply your win/loss ratio by your average profit/loss to find the average loss per winning trade and the average loss per losing trade. Subtract the former from the latter to determine your trade expectation.
Dear @azeem22,
The article discusses five key elements to consider when creating a smart trade plan, including time horizon, entry and exit strategies, position sizing, and evaluating trading performance. It emphasizes the importance of establishing clear rules for risk management and tracking performance to improve trading outcomes.