Every seasoned trader knows that in a short term timeframe, anything can happen. With the amount of risks involved, there is simply no excuse to buy a stock without any sound plan. As a good steward of your hard earned money, your responsibility is to be always PREPARED. To do this, a trader needs to have a reliable way of handling any situation that may happen in the market. This entails meticulous planning through the formulation of a TRADE PLAN.
The Trade Plan is the roadmap of your trading journey. It will tell you the when, what, why, and how of trading. Whether the market goes with you or against you, the Trade Plan will tell you the appropriate responses to take so that you will not make any impulsive decisions.
Here is a sample template on how you can craft a basic stock trading plan.
Key Components of the Trade Plan
The "BUY" signal. Exact patterns that point to a specific entry level.
The "CUTLOSS" point. This allows you to get out of the trade with minimal losses if the setup fails.
The "STOPLOSS" point. If the price rallies, this allows you to protect your profit while riding the bulk of the rally.
The "SELL" signal. Exact price patterns that show you when to take profit.
Basic Trade Plan Illustration
This sample trade plan is predicated on a short to medium term play. Before you make a trade plan for a particular stock, it is crucial that you evaluate the risk:reward ratio should you enter it at a specific support level. If the upside heavily outweighs the risk, then it is time to build a plan around it.
Initial Analysis:
This particular stock is selected since it is currently forming a basing pattern near the key support area of 85php. Institutional buying is constantly seen at that support level which provides a safety net to place an initial position with a clearly defined cut loss point.
On the daily timeframe, price is lowering in volatility near the key support level. This can either lead to a breakout or breakdown. Another bounce at 85 will likely send the price to its initial resistance of 94php. This is a 10% upside from its key support level. A breakout above 95php with above average buying volume may shift the price to a momentum rally with a resistance at 112php. This is a 32% upside from the previous bounce point at 85php.
Given the variables, this stock should provide a low risk high reward swing trade opportunity that may also transition to a momentum play. This now allows us to build a trade plan around it.
Trade Plan Components:
1. Buy Signal
Buy on price bounce near 85php.
2. Cut loss Point
Sell entire position if price closes below 83.50 - 84php.
3. Stop loss Point
Once a breakout rally above EMA9 (green line) materializes, EMA5 will act as a stop loss indicator. If price closes below EMA5, position is sold while profit is still in tact.
4. Sell Signal
Short term profit taking level is near the confluence of resistances at MA100 (blue line). This is a 10% upside from the entry point.
At this level, strict monitoring of volume is conducted. There will be two contingency plans depending on the following parameters:
Strong demand leading to breakout: Sell only 40% of position and leave the 60% as long as the previous resistance at 94.50php will act as the new support. EMA5 is the stop loss indicator at this point. Hold the position as long as the price rallies above EMA5. When price closes below EMA5, entire position is sold.
Weak demand leading to price rejection: When selling volume spikes, price is observed intra day if EMA5 will hold. When price closes below EMA5, remaining position is sold.
Executing the Plan
It is one thing to craft a sound trade plan and another to follow it with discipline. Most of the time, emotions will get in the way and you'll deviate from the plan. You'll get greedy. You'll panic and sell too soon. Or you'll just watch the price move and miss the buying or selling opportunity. Avoid this by simply sticking to the plan and shrugging off all the doubts and noise in your head.
Here is a great piece of advice from Mark Minervini:
A trading plan gives you a baseline of expectation. That way, you know if your trade is working out, or if something has gone wrong. Wishing and hoping are not the same as planning. As fellow Market Wizard Ed Seykota put it, “Be sensitive to the subtle differences between ‘intuition’ and ‘into wishing.’” Hope is not a strategy. Without a plan, you can only rationalize. Often you will tell yourself to be patient when you should be selling, or you may panic during a natural pullback and then miss out on a huge stock move.
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