TRADE PLAN

TRADE PLAN

Preparing to place a trade

At this point in your trading plan, it’s important to simultaneously think about why, how, where, and when you should enter and exit a trade.

Evaluating both ends of the trade can help manage risk and maintain a disciplined trading strategy.

Create a watch list for the stocks you’re interested in.

That will make it easy to see news headlines, and dividends and earnings announcements at a glance. You can also set price alerts so you're proactively notified when a stock hits a target price you're interested in.

Have an entry strategy

An entry strategy is a plan for how you’ll get into a position. Good traders value efficiency. They’re constantly looking for ways to maximize returns and manage risk.

Types of Entries

1️⃣Entries after a consolidation period

After a consolidation period with clear Support and Resistance levels, this is where your entry should be when there's a breakout.

2️⃣Entries after a pullback from new highs.

After achieving new highs stocks usually pullback(drop in price) momentarily, when it finds a support as shown, your entry should be as indicated.

Have an exit strategy

Exit strategies are one of the most important yet overlooked parts of trading. Successful traders know that their greatest enemy can be their own minds. Often, emotions and loss aversion can get in the way of making good trading decisions. 

Building a sound exit strategy

Once you’ve decided to buy a particular security, there are several ways to plan your exit strategy. Let’s review 2 common ways, target profit/loss ratio and the 1% rule.

A target profit/loss ratio allows you to set profit and loss targets from a purchase price. 

To help evaluate your risk tolerance understand: -

• Your time horizon. Knowing how long you’ll be in the trade can help you better decide your entry and exit points.
• How much risk can you afford to take on a particular trade.
• If the trade aligns with your strategy. Don’t feel like you need to jump into a trade if it doesn’t fit your trading strategy.
• In both cases you should always use a Limit order and Stop Loss.

Indicators can help plan your entry

There are many indicators to focus on, but you must determine which ones may work for you.

Support and Resistance

Resistance, is where the supply is strong enough to stop the security from moving any higher. When a security struggles to break through resistance, it might be time to think about getting out and taking your potential profits.

Support is the opposite of resistance.

Other Indicators 

Are there any upcoming events that could cause the stock to move in one direction or another? For example, if the stock is expected to announce earnings the next day you may consider holding off on the trade, as an earnings report could drive the price in one direction or another.

What are analysts saying? Have they rated this a buy, a hold, or a sell?

Are there technical indicators that indicate bearish or bullish sentiment?

Why are order types important?

There are many different order types: Market, Limit, and Stop Loss Order, to name a few. These simple, yet powerful, tools can help you manage your risk and more effectively implement your strategy.

Understanding the differences between order types can help you to better ensure a trade is executed in a timely manner, at a price you’re comfortable with, and reduce potential risk.

Being smart about your order type is just another way to manage emotions and bring discipline to your trading. We’ll dig deeper into order types in the next lesson.

Conclusion

• It's always important to have both an entry and exit strategy before placing a trade. Evaluating both ends of the trade can help manage risk and maintain a disciplined trading strategy. 
• Support and resistance are key technical levels that can offer insight into a stock’s strength at a given time. 
• Understanding different order types can help to save you time, money, and reduce potential risk.