Creating a Trade Plan
Trade Plan
This weekend, we had a very special 90 minutes Webinar on:
How I Scan For Growth Stocks and How I Create a Trade Plan
Lot of my readers and followers were unable to attend the live webinar on Saturday November 19th at 2:00 pm because we had a full class. Some of you couldn't attend because you had other commitments. Last year I had written a post on the subject of "Trade Plan" and for the benefit of my readers and followers who were unable to attend the webinar, I felt that this subject should be brought back to attention. Here is the post from last year that is still applicable for our current market environment:
Every trader looks like a genius when the market supports all of their positions but for me, the smartest traders are those that come up with a system that eliminates their risk variables.
All too often, traders will focus only on their profit target and overlook properly setting up a contingency plan for when things start moving in the wrong direction. I believe any trader can benefit from a refresh on the basics so today, we're going to look at some core elements of a good exit plan.
Work off of the $1 loss to $3 profit ratio
One of the worst mistakes you can make is to think of the profit to loss ratio only from the profit side. Let's use our imaginary friend, Terry The Trader, to highlight an example.
Terry feels really good about taking a position on a particular stock. All of the charts look solid and the profit target is clearly defined. The overall market has been soaring for weeks. To top it off, recently all of Terry's moves have benefitted from the Midas touch so what's to lose? Time to pull the trigger and start looking for the next golden goose, right?
Wrong!
What Terry couldn't anticipate was the upcoming 60 Minutes expose about that company's CEO getting indicted! By mid week, options are limited and Terry is left scrambling.
Situations like this have confronted every trader out there but they're completely avoidable if you take the extra steps needed to plan out a loss threshold.
Stop second guessing your plan
Any time you take a position, you need to place an order for a contingent stop loss right afterwards. Don't put this off for any amount of time - act immediately before your emotions and biases can enter into the mix. Just make this a part of your routine for every single position you take. By the 3rd time, you will have formed a new habit!
It's also important to monitor your position after you've taken it. In my experience, the 34 day EMA (exponential moving average) can be an early indicator that a stock is going against your profit plan. If you see a sudden increase in the selling side of Volume, that's a danger sign as well.
Focus on emerging opportunities
You can spend days spinning your wheels in analysis paralysis after a position goes against you. Unfortunately, throwing a pity party sucks up all of your energy and leads to missing the boat on new opportunities.
When a position goes against you it's important to have your watch list on hand. In our next series we're going to fully examine the best way to build a watch list but for now, you need to make sure that you at least:
- Look at stocks in the same industry group as your profitable positions.
- Avoid stocks that have surpassed their buy point.
- For an early indicator of a stocks momentum, review the 21 day exponential moving average and the relative strength line.
If you aren't already aware, relative strength is your best indication of a stocks value against all of the other stocks in that particular industry group. That's a key metric that you don't want to overlook!
Keep in mind that IBD? is a tremendous resource when you're putting together a watch list. If your list creation process is solid, you might even be able to identify stocks before they crack the IBD? 50. The earlier you can identify an opportunity, the more prepared you can be to pounce when a buy point hits.
I hope this information helps you get into the habit of establishing a proper loss threshold for a position. Watch for our 3rd and final part of this seres next Wednesday where we will examine ways you can identify a window of opportunity for a position.
As always, keep the comments and emails coming!
Happy Trading!
Amin Hemani