Buying a stock is frequently based on a gut feeling that you can benefit from it. However, markets are unpredictable, and a lot may happen between inspiration and success, which is why seasoned traders develop trade strategies before risking any money.
In a nutshell, a trading plan entails establishing criteria for entering and exiting transactions, as well as determining how much money you’re willing to risk and a profit strategy. Consider it a tool for maintaining a level head while you develop and rearrange holdings in volatile markets.
The first element is your time horizon
- How long do you intend to keep a stock in your portfolio? Your trading technique will determine this. Traders often fall into one of three categories:
- Single-session traders are particularly active during the trading day, looking to profit from modest price movements over relatively short periods (minutes or hours).
- Swing traders look for transactions that may be closed in a matter of days or weeks.
Element 2: Your approach for entering the market
To assist you in making your trades, look for entry signs such as divergences from trend lines and support levels. Your trading style and preferences will influence the signals you utilize and your orders to execute them.
The third element is your escape strategy
Plan for two sorts of deals when it comes to an exit strategy: those that go your way and those that don’t. You may be tempted to let profitable deals run, but don’t pass up the chance to benefit. For example, when a trade is going well, you can consider selling a portion of your position at your initial target price and letting the remainder run.
Element 4: The size of your position
Trading is a high-risk endeavor. A smart trading strategy lays out the parameters for how much you’re willing to risk on each deal. For instance, let’s say you don’t want to risk losing more than 2%–3% of your account on a single deal. You might want to explore portion control or sizing positions to stay within your budget.
Element 5: How well you’ve done in business
Are your transactions profitable or unprofitable? Do you know why, and, more importantly, do you know what you’re doing?
Calculate your theoretical trade expectation, or average gain (or loss) per transaction, by looking at your trading history. First, figure out what proportion of your deals have turned a profit vs. those that haven’t. This is referred to as your win-to-loss ratio. Then, compute your average gain for winning deals, and for unprofitable trades, compute your average loss. To know more about it, have a look at http://www.smart-trading.ph/make-money-online.