Previously, we dove into how to plan ahead and optimise your trading in 2023. In this article, we take a closer look at trading plans and the steps to go through before entering a trade.
Before entering any trade, you must create an ironclad plan. Without a plan, a trade is nothing more than a gamble.
We believe a trading plan consists of more than just an entry, take profit
(TP) and stop loss (SL).
Let’s dive into how great traders plan their trades, allowing them to take fewer losses, and generate more profits.
In our previous article, we planned our trading strategies for 2023
, setting out a framework to follow in the months to come. We created an overall outlook for 2023, we set goals and targets, decided on a trading style, and broke down the strategies we would use. On top of that, we created a risk-management framework to follow in any trade.
So how does that translate into a single trading plan, and how do I plan for a trade?
A great trading plan prepares you for multiple outcomes. While not exhaustive, great traders prepare themselves by following the steps below:
- Conducting their analysis (according to their trading strategy)
- Identifying a trading setup that matches that strategy (identifying SL and TP)
- Calculating the position size, checking all boxes, and even checking their own emotional state before entering the trade.
Let’s get to work!
Step 1: Analysing and Identifying a Setup
First things first, we perform the analysis using the tools we set out to use in our annual trading plan. The below image demonstrates this process, using basic analysis tools like horizontal levels and Fibonacci extensions
This gives us a better look at the chart and can help us identify a trading setup that matches the trading strategy described in our 2023 trading plan.
If we stick to the example of using simple support
levels; the trading setup is quite clear. Price is sitting at support and the 0.5 Fibonacci retracement. There is a clear target too: the 1.618 Fibonacci extension lines up well with a resistance area. All we need is a point where we cut the trade at a loss, when our idea is proven wrong.
This brings us to the following setup that matches everything we described in the example 2023 trading plan.
Naturally, it is important to perform your analysis in a way that matches what you personally wrote down in your plan for 2023, rather than the simple examples we used above. Of course, there will be moments where your analysis does not immediately present a clear trade. This is fine, trading is as much about patience as it is about analysis. Use the tools you know best and wait for these tools to present an opportunity.
Step 2: Calculating Your Position Size
We have found our trading setup, consisting of our target, entry and stop loss. With this information – and some inputs from our 2023 trading plan – we can figure out the position size
. Setting position sizing is not arbitrary, it follows a strict strategy based on a few data points.
Look back at your 2023 trading plan and find the risk management
section. In this section, we described rules to keep your emotions in check, the maximum amount of money on a single exchange, and the maximum amount you are willing to risk on a single trade. The latter is crucial here: how much should you be willing to risk on a single trade?
Let’s say you currently have a 10,000 USDT
trading account, and your maximum risk per trade is 1%. That means you cannot lose more than 100 USDT on this trade. Now to bring us to our position size, we need to measure the distance from our entry to our stop loss. In the example trade we looked at earlier, the stop loss was 3.33% below the entry.
That gives us the following information:
Account Size: 10000 USDT
Account Risk: 1%
Distance to stop loss: 3.33%
With this information, we can calculate position size as follows:
Position size = account size x account risk / distance to stop loss
Position size = 10000 USDT x 0.01 / 0.0333
Position size = 3003.33 USDT
In other words, our position size should be 3003.33 USDT. This checks out, as 3.33% of 3003.33 USDT is 100 USDT, our maximum loss on this trade.
Step 3: Checking All The Boxes, Assessing Emotional State
This is where you put your trading plan to the test, and check if it matches the criteria outlined in your 2023 plan. This will take time at first, but once you have burned the criteria in your head, it will only take a split second. You will just know.
This is also a good time to assess your emotional state. Ask yourself questions such as: am I able to think clearly? Are there any personal issues ongoing that can cloud my judgement? How am I feeling? Asking these questions will help you understand if you are in the right headspace to trade.
Step 4: Executing the Trade
If your trading plan is still sound after the first three stages, that means you have a solid trading plan! Time to execute! Creating this plan is essential to having a consistent trading performance. Planning ahead eliminates improvisation and allows you to trade more clinically.
You can now enter the trade, knowing that you are prepared for any outcome. Let the trade run its course, whether it approaches your take profit area, or stop loss. I hope your trades play out the same way as the example trade:
If there is one thing to take away from this article, it’s this: the process of taking a trade should be systematic, based on a predefined set of rules, and not on intuition or emotions.
Sticking to your trading plan requires discipline and patience. Don't get discouraged if you encounter setbacks – just stay focused and continue your journey to trading success.
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