June 14, 2011 at 9:36 am | | Comments 2

YOUR Trading Plan, Part 2

your-trading-styleIn Part 1, I put forth some questions that need to be answered by you in order to move forward with any lasting effect. Those help you identify what it is you’re after, what styles you should pursue, and which approaches you should completely avoid. Let’s proceed.

Start With the Basics

Understanding your preferences, biases, needs and availabilities will clarify your basic approach.

For example, if you were trading a retirement account (non-margin, and thus no short selling, and you prefer the long side and capturing segments of uptrends, you’ve got a starting point.  You might narrow your focus to a long-only style based on patterns such as resistance breakouts, as well as bullish continuation patterns like bull flags, bull pennants, and ascending triangles. Those are easily identifiable patterns, which is nice, so you should have a steady flow of candidates to suit your needs.

See what I meant in Part 1 when I said trading allows you a custom-designed approach?

Go Big AND Go Home

Next, decide on a risk amount per trade, in terms of potential dollar loss – not in terms of cash outlay. Think in terms of “real risk” or what you’re truly risking before exiting on the downside. This is the amount you’re willing to lose if/when you are wrong.

That sounds negative, but it’s crucial. Whether it’s $200 or $500 or $5,000 doesn’t matter, so long as it’s a suitable amount of risk for your unique situation. The amount itself is of secondary importance to simply having an amount. It’s a starting point for every trade.

Too many traders fail to begin with an amount of risk they can stomach, and they trade too big and pay the price.  That’s no good, so always aim to trade within your means so you can survive and make good decisions.

For example, let’s say your risk amount is $200 per trade.  This is what you’re willing and able to risk (lose) if the play doesn’t work out.

So take a trade in XYZ with a pattern that suits you, like an ascending triangle pattern. A breakout might be at $18, and a failure might be at $16. So you could go long this hypothetical trade at $18 with a $16 stop. That’s a $2 per share stop, and you’ll risk $200 per trade, so you could buy 100 shares.  Easy math.  It doesn’t have to be complicated to be helpful to your trading.

See how knowing *the number* for you can help you understand how much to be trading? The strategy itself is based on the pattern confirmation (entry) or failure (stop loss), but your position size comes down to what you’ll risk per trade. Few traders incorporate this into their plan, but if they did, they’d be miles ahead and avoid many painful trading disasters as well.

In part 3, I’ll wrap this up with some specifics for your overall process.  Until then, decide on some basics which suit you and figure out your ‘number.’

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

Follow TheStockBandit on Twitter or Facebook to keep up!

Trackbacks: 2  |  Trackback URL

  1. From YOUR Trading Plan, Part 1 | on Jun 14, 2011
  2. From YOUR Trading Plan, Part 3 | on Jun 28, 2011

Sorry, comments for this entry are closed at this time.