Making a Trade Plan

Once you've learnt all the fundamentals about trading, and are ready to get on with it, you have to take one more step and that is to make a trade plan. This is where and how you put into action what you learned about technical analysis applied to price charting. Developing a good trading plan will provide you with a solid base to improve your trading.

The initial step to devising a trading plan is to define your particular goals and a time frame to achieve them. Successful trading is a by product of adhering to a sound plan that addresses your entry and exit strategies, risk and money management.

It's really not difficult to plan your trading, although you may find psychological and emotional problems executing it - each trader will have a different personality and trading a method or system which suits your personality is the key to successful trading. Trading simply consists of finding a good trade, putting down your money, and then closing the position which may be for a profit or a loss. The basic actions are easy to do, and the simpler you keep the process, the better.

First, to make your trading money work the hardest, you need to be trading a leveraged financial product, and the most ubiquitous one is the contract for difference. The CFD allows you to trade in most if not all markets, and is very efficient in terms of how much money you need to deposit versus the potential profit. You need to understand the principle of leveraged trading, and that losses are leveraged too, but dealing with this downside is simply a matter of money management and suitable stop loss positions.

It's usually advised to trade with the trend, as this is relatively low risk, which means it is more likely to work out in your favour. Often you can tell whether a trend exists and in what direction it is going just by inspection, but there also some technical analysis tools which quantify this. However you do it, your task is to narrow down to the financial security where you will actually place your trade.

A good trading plan will take into account an individual's goals, education, risk tolerance and money management amongst others. Making a Trade Plan -:

  1. Study the overall trend of the market.
  2. Consider the macroeconomic indicators in relation to the fundamentals.
  3. Use technical analysis (trends, tools, support and resistance levels) to set precisely your entry and exit points (limit order and stop loss using OCO).
  4. Trade only the best potential setups where the potential reward is much higher than the risk. Do appreciate that not all trades will be winners but the profits should offset the losses.

With so much choice, this is often done by choosing first a market, selecting one exhibiting the best trends, then choosing a sector in that market, again evaluating which of several have a solid trend in place. You can repeat this selection procedure down to an individual stock or security, or you may prefer to trade on an overall index. CFDs allow you the flexibility to choose this, and also to select whether you want the price to go up or down, that is trade long or short.

Trade Entry and Exit Criteria

Your knowledge of technical analysis and/or fundamental analysis will help in determining the best opportunity for placing the trade, and should also be used to check the reward/risk ratio so that you can see the potential for gains is much greater than the possible loss. Traders often look for at least 2 to 1 or 3 to 1 for this factor. There are a various methods that are used to determine your entry including 'buy low, sell high', 'buy high, sell higher' or 'buy high, sell low' for short selling. A good trade entry price will usually account for about 10 - 20% of your trading performance.

The amount you place on the trade is important, as no matter how well you research the product, the markets can turn against you and result in a loss. You shouldn't trade a greater amount than that which will restrict your possible loss to, say, 2% of your trading account, as otherwise a succession of losses could cripple your ability to continue trading.

As soon as you enter the trade, you should have a stop loss position to exit if it starts losing money, and then set up an exit for profit, which may be when a certain target price is reached, or a trailing stop following the price. Either way, this element completes your trade plan.

Trade Your Plan -:
  1. The trade entry and exit price levels of the trade should be determined prior to entering a trade. The exit point is an important element of the position sizing methodology and predetermining your trade exit level allows you to make a decision when you have no capital at risk (where you don't yet have an emotional attachment to the trade).
  2. Once the price hits your entry point do not hesitate to take the trade. Another opportunity may not be available later on. When the entry point is within your sights, take it. Wait too long and you may miss it.
  3. Set up your one cancels the other order (limit order and stop loss for your trade). This protects your trade whatever happens in the market and helps remove the stress attached to the position leaving only any of two choices: either liquidate for your profit or a predefined loss.
  4. Trade and stick to your rules as defined in your trading plan with strict discipline.

Experienced traders can pick suitable entry points with a good level of accuracy, and even though overall they might have more losing trades than successful ones they are still able to trade very profitably, through utilising good risk and money management strategies and techniques.