Wednesday, March 11, 2015

9 Simple Steps To Creating A Trade Plan


If you were watching CNBC yesterday, two things were pretty apparent - the market is headed for a correction, and the Apple iWatch is a big deal!  It's times like this when it's good to plan for the next opportunity.  Something I've noticed, is that that many people don't actually know where to start with their trade plan.  

Without a trade plan it's incredibly difficult to identify and seize opportunities so I've put together a check list that lays out the basics.  I'll break down each element in a 3 part series over the coming weeks but essentially I'll be focusing on these themes





Identifying Your Profit Target
Establishing Your Loss Threshold 
Determining Your Window Of Opportunity

In today's post we'll dig into Identifying Your Profit Target.  With ANY plan, it's just good sense to set up a goal for success and it's no different with trading.  There are various approaches out there but I prefer to work under the $3 to $1 profit to loss ratio.  It's a simple discipline to follow and it allows me to both repeat my successes and mitigate my risks.

Here are some specific actions you can take that will help you identify a profit target for a particular stock



Review the most recent chart for your stock


Keep a close eye on the 10, 20, and 50 day moving averages.  You can even draw a "channel" based on these lines to help project the movement you expect to see.  Once you've got your channel, ensure that Relative Strength aligns with the uptrend.



Determine the ideal buy point


Typically, a buy point will fall within 5% of a breakout but IBD® is one of the best resources out there for identifying an ideal buy point.  They operate from a set of proprietary variables that basically produce a goldilocks zone for every stock.  

Acting within this range mitigates some of the risk variables for a trader.  In some cases, a trader may delay their decision and as a result they might miss the prime buying window.  It can be temping to chase a stock but I've found out the hard way, that's a bad idea.  

If the math isn't in your favor, it might make more sense to add the stock to a watch list instead.  There could be another buy point coming, or it may re-trace and provide an opportunity to short (for traders that are in that game). 

Perhaps another stock is moving into the goldilocks zone, and might be more advantageous to take that position instead. 



Measure the performance of the stock over time


I can't stress enough, the importance of measuring the performance of a position over time.  You shouldn't ignore road signs if you're driving around an unfamiliar city, the same holds true with charting a stock you're involved with.  

An often overlooked metric is the 34 day EMA (exponential moving average) which shows if institutions are still supporting a stock.  Keep in mind that institutions are highly informed and quite well versed in trading so their investment behavior has a significant impact on the value of a particular stock.  

Hopefully this gives you an idea of where to start with a trade plan, next week we'll examine ways to establish your loss threshold.  Keep yours eyes peeled for my Friday post where I'll share some of my favorite reading from this week!

Amin Hemani
investorspotlight@gmail.com











DISCLAIMER



Do not take a position unless you are prepared to sustain a TOTAL LOSS. Your loss could include the money you invested as well as commissions and transaction charges.


The Information I provide is for education and informational purposes only. The Information provided is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information provided is general in nature and is not specific to you or anyone else.


YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A LICENSED PROFESSIONAL. You understand that you are using this Information AT YOUR OWN RISK.