10 Steps to Smart Trading

Time and again on this blog, Adam has emphasized the need for a game plan (a.k.a.trading plan), but how many traders actually have a written trading plan?

Price Headley of Big Trends would like to share his list of trading plan essentials which lead to profitable trading in general. Comment and let us know what you think goes into a successful trading plan and be sure to visit Price at BigTrends.com

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You need to be able to answer one simple question when trading…

Could another trader execute my trading strategies if I gave them a copy of my trading plan?

If not, then you absolutely should stop trading right now until you can answer the 10 questions below.

Why you might ask?  By taking the time to write down your plan, you put yourself in the top 3% of individuals who have written goals and plans, giving you an immediate edge.

1.    How will you enter trades?

The key to good entries is putting on trades where there is relatively low risk compared to much higher reward.  You also should write down a clear catalyst for the expected stock move.

2.    How will you exit trades?

You should define an initial stop point for your trade, or said a different way, the point where the trend is invalidated.  You will also need a 'trailing stop' technique to protect your profits.

3.    What type of orders will you use to enter and exit?

When entering, I like to use limit orders, good for the day only, while exits are often market orders. Why? Because limit orders allow me to define my risk and reward clearly on the entry of a trade.  In contrast, when I need to get out of a trade, a market order gives me an immediate exit without fear missing my exit with a limit order.

4.    How much capital will you need to trade successfully?

To get serious about trading, you can’t be cheap.  There are economies of scale as you increase the amount of capital you trade.  Costs related to commissions, quote systems and equipment begin to diminish as the percentage of capital invested goes up.

5.    What percentage of your capital will you invest in each trade?

The amount of capital I typically use is 10% per trade in my own accounts.  I know traders who commit anywhere from 5% of their account per trade to 20% of their account per trade.  You goal should be to keep portfolio risk per trade at less than 2% per trade (for example if you invest 20% of your portfolio in a trade, a 10% loss on that position would lead to a 2% loss on your portfolio).

6.    How many positions will you focus on at once?

I like to concentrate my portfolio in my best ideas, plus I like to stay focused on how each stock is acting.  If my portfolio is too big (I'd say more than 7 stocks is too many to focus on), then I will lose focus and invariably miss an exit on a trade that I should have previously exited.

7.    What will your Trading Journal look like?

In my Trading Journal, I note daily observations, particularly related to my ability to execute my trading plan.  I also commit to doing a post-trade analysis every month.  I note what I did right and wrong, and seek to learn from mistakes to minimize future errors in similar circumstances, while also looking for winning patterns where I seek to repeat big successes.

8.    What is your Position Review process?

Have an end-of-day routine to close your day. Review your trades, and assess if you followed your plan. Keep a log of all your trades, and make comments on each position.

9.    What is your Preparation process before trading?

You need defined time to prepare for the next trading day to build up your trading confidence.  I prepare after the close for the next day's trading, which allows me to formulate a plan of action BEFORE I get into the heat of battle.  This keeps my trading proactive instead of reactive.

10.    What broker will you use?

Most traders mistakenly think that commissions are the number one factor they can control.  In reality, commissions are a small cost compared to the broker's effectiveness at executing your trade.  Your focus should be finding a broker who gets you speedy and fair execution of your orders.

Once you have defined these facets of your trading plan, you are in an excellent position to have a strategy to control your emotions when trading.  Make sure to review your plan on a regular basis to create effective trading habits.

Trade Smarter,
Price Headley, CFA, CMT
President & Chief Analyst

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BigTrends.com team of analysts, led by Hall-of-Fame Market Timer Price Headley, is constantly developing, testing, and implementing brand new trading techniques.  They are on the cutting edge of new trading systems and indicators, which we utilize for profitable Option Trading, ETF Trading, and Market Timing. Visit Price Headley’s “7 Steps for Options Trading Success” for more information.

5 thoughts on “10 Steps to Smart Trading

  1. I think you have to: choose high volume stock then you are controlling risk because you can exit "close your trade at any time" with 1% loss or 2% gain or any other limit you decide according to the expected range of that stock. Always exit at 50% of the Gain - example if you decide to take profit at 3% then you must exit at 1.5% loss or less, provided the range between Open and Close is equal to or better than 3%.

  2. Cynthia,

    I would in this case have to agree to a certain extent with your broker. In the real world (non-demo account) you have slippage, fast markets and a great many other variables that can and do effect pricing.

    Hope this helps.

    Adam

  3. My question is how can I know whether my broker's effectively executing my trades. I noticed when I went live it was much harder to get my orders filled than in a demo account. My broker said it was impossible to match what happens in a demo account verses a live account.

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