5 Elements of a Smart Trade Plan
Learn the five components that could make your trading plan a success and why you need one.
Element 1: Your time horizon
How long do you plan to remain in your current role? Your trading technique will determine the outcome. There are three broad types of traders:
Active throughout the trading day, single-session traders focus on short time frames (minutes to hours) in which they hope to profit from price fluctuations.
Swing traders look for trades that can be closed in a few days to a few weeks.
Traders that take a position aim for higher profits and understand that it typically takes more than a few weeks to get it.
Element 2: Your entry strategy
To improve your chances of making profitable trades, keep an eye out for entry signals such as price action that breaks away from trend lines and support levels. It's up to your personal trading style and preferences to determine which signals to use and how to execute on them.
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Element 3: Your exit plan
It's important to have a plan for both winning and losing trades when devising an exit strategy. The temptation to let winning trades run may be strong, but you should not pass up the chance to pocket any winnings.
Element 4: Your position size
Risk is inherent in trading. Your trading plan should outline the maximum amount of money you are willing to put at risk in any given deal. So, for instance, you decide you won't put more than 2%-3% of your account at risk on every one trade. To stay within your financial means, you may need to practice portion control or downsize some of your roles.
Element 5: Your trade performance
Review your trading record to determine your average gain (or loss) per transaction, also known as your theoretical trade expectation. The first step is to calculate your win rate in trades and your loss rate. A measure of this is how often you win compared to when you lose.
The first step in getting ready for your next transaction is to learn what makes up a good trade plan.
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