Stories That Teach Life Lessons

How to Create a Trading Plan for Stocks

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To begin with:

The following should be the motto of every trader:

I intend to learn the ins and outs of the business.

Finding and making a deal is something I intend to study.

I plan to develop a business strategy and stick to it.

My feelings won’t lead me to chase the market.

Before I join the market, I will decide whether to be a day or overnight trader (or longer).

I’m willing to wait for the market to stabilize.

A stop-loss order is an integral part of my trading strategy.

If the market doesn’t satisfy my requirements, I won’t participate.

I have perfected a tried-and-true methodology that I employ while developing a trading plan. When formulating a strategy, I always begin with the big image and hone in on the specifics.

First, I look honestly at myself as a trader and the market activity I’m interested in. Then I must decide when to get out of a trade and where to place my money management limits.

In what ways can I tailor my approach to your unique mindset?

The Market Is Yours to Choose

The selection of a trading venue is the initial step. This seems like a simple choice, but it’s pretty complex in practice, especially for novice dealers who tend to focus solely on the financial benefits. They attempt to choose the one they think will bring in the most cash. Making a choice based solely on economic considerations is risky. The trader’s mindset is the most crucial factor in successful dealing in any market. If you can’t handle the emotional side of trading, there’s no point in developing a highly successful plan.

How Long Do You Plan to Trade?

Day trading, trading on daily charts, or trading on monthly charts are all options you should consider. Intraday trading and full-time employment are incompatible pursuits. It’s not unattainable, but it is extremely tough.

Many would rather keep their day jobs while trading on the side. Trading on a daily or monthly chart is more suitable for this purpose. You’ll have to schedule your market research for after-hours to make it work with the rest of your plan.

The plan shouldn’t call for constant market monitoring throughout the day. I believe that the money you can make trading the markets is fixed and proportional to the time frame you choose.

Choosing a period is entirely up to the individual, and there is no correct response. Your final choice should be based on your preferences and budget constraints. However, this option must be made before looking for indicators, as the hands available depend on the chosen time frame.

It’s time in the market, not timing it, so remember the adage that says everything will turn out great if you “buy and hold.”

You’ll need more hands-on control of your portfolio to beat inflation with your stock investments over the next five years.

In this type of market, I believe that short-term or day trading is preferable to buy-and-hold strategies, but this strategy must be feasible given your time constraints.

Various Market Categories

I think trading in a directionless market is highly challenging, so that I won’t discuss it here. Instead, I recommend trading in either a rising or high volatility market.

Choose a volatility strategy and have long periods of inactivity while waiting for the next trade, or go with a trend strategy and know that you will have to trade through periods of decline during the directionless phase.

As we develop our plan, we’ll consider both a fluctuating and a rising market.

A Volatile Market Is…

Markets that experience large price swings in either direction are considered volatile. Volatility can be measured in several ways, including the difference or spread between two moving averages (which widens as volatility rises) or by looking for price action signals like gap openings or a rise in the daily range.

We’ll examine the characteristics of both trending and volatile markets and the methods best suited to each so that you can make informed trading decisions in any market condition.

Technique: Market uncertainty

Short-term trading strategies generate trades that you will likely close before a substantial amount of market time has passed.

The Foreign Exchange (Forex) market is an example of a market that I would classify as volatile; trend-following strategies don’t work well in this market. Volatility strategies produce a high percentage of winning trades, albeit trades that create tiny profits per trade.

Today’s record volatility has created significant value for CFD or day trades while allowing you to set conservative strike prices. If you have the proper trading methodology, you can take advantage of this market opportunity without worrying about whether the market will go up, down, or sideways.

You can learn to take advantage of the current chaotic market conditions and aim for attractive earnings, regardless of how much experience you have as a day trader.

However, trading in a volatile market, such as day trading, is populated by the sharpest minds in the game, and they are all out to grab your money. The best way to begin day trading is slowly, calmly, and armed with as much education and the best mentorship as you can muster.

Day trading’s entry and exit points and risk-to-reward ratios vastly differ from those of medium- or long-term investing. If you’re starting day trading, take it easy, don’t risk too much of your capital, and stick to a trading strategy.

Let’s take a peek at the metrics I track.

I employ a mixture of volume, MA, MACD, and the stochastic indicator.

I use a 5-minute chart with moving averages of 18, 39, and 50 periods, with the MA50 as a trend predictor. I also include volume, MACD, and stochastic in my analysis.

When trading CFD, I first establish a daily trading range using my Bias Indicator, as described on my website and then scan multiple charts in my monitor list for potential trades based on the presence of trends and volatility.

If the trend is going up, I look for a chance to go long; if the trend is going down, I look for an opportunity to go short. I always wait for a retracement and keep an eye on the MACD and stochastic signs.

Assuming an uptrend with a retracement over the last few candles, one should look for the stochastic indicator to flip up from oversold and the moving average convergence divergence (MACD) to begin to rise. One should also look for candles to indicate a clear swing low.

It takes at least three bars on a bar chart for a swing low to be established. A swing low is formed when the low of one period is lower than the low of the preceding period and the high of the following period. A swing high is formed when the joy of one period is higher than that of the prior period and the thrill of the next.

You can use this as your long-term entry spot.

Exits are somewhat more intuitive, mainly once you are in profit. I typically exit when I get a swing high, when the MACD turns down, or when the stochastic indicator turns down.

A certain amount of mechanical precision and intuitive decision-making is involved in day trading.

In my opinion, it is one of the most challenging forms of investing, but it also has the potential to yield the highest rewards in a highly volatile market.

Let’s dive into developing a plan for a dynamic industry.

Should we make maps every week or every day?

Trading weekly charts is more challenging because it requires more self-control. Traders who use weekly charts make their decisions on the weekends and can’t make any changes until the following weekend.

Few traders use weekly charts, but I’ve found that they’re an excellent resource for profiting from trend trading. If you want to succeed in the markets, you have to go where the herd doesn’t go.

The definition of a trade set-up.

Let’s take a look at some of the indicators we could employ. I like to use Exponential Moving Averages (EMA) of 150, 50, and 20 periods when trading in a trending market for the medium to long term. I should also mention that I rarely initiate a trade long when the price exceeds the 150-day EMA.

Volume is another indicator I use to gauge the market’s attention and momentum.

The Moving Average Crossover Strategy is one that I’m sure most traders have tried at some point in their careers. The typical trader will look at this strategy and think the only thing to test is if the two or more moving averages cross over.

Most novice traders will try various average durations before settling on the 150, 50, and 20-period Exponential Moving Averages (EMA) I recommend.

If they can’t find a moving average strategy that works for them, they give up on the idea in search of the Holy Grail indicator that will make them rich overnight.

As human beings, we are all too familiar with the experience of dismissing a good idea without giving it a fair chance. I believe any indicator can be turned into a profitable strategy; yes, I said any indicator. When we dismiss moving averages, we are making a mistake because moving averages are only half of the strategy development process.

I’ll explain what I mean by “Entry Point” and how it can be used with something as basic as a moving average crossover to create a potentially lucrative trading technique—two parts of a strategy that most traders ignore.

Set-ups are the conditions that must exist before considering a market position. They consist of the indicator or group of needles that tell us to get ready to enter the fray. Set-ups do not get you into the market; they merely make you aware that a trade could be possible.

Some typical components of a trend-following framework are as follows:

A quick EMA is going over a sluggish one.

Price action near or outside a channel, such as a Bollinger or Standard deviation channel.

When prices cross the boundary between the moving average’s upper and lower bands.

There was an abrupt rise in output.

You are restricted only by your imagination, as there are infinite other indicators and conditions that could be used as setups.

Once we have established our setup rules, we can move on to defining our standards for entry.

Making Admissions Criteria

If trading only set-ups was profitable, every trader would be a millionaire. However, trading set-ups without an entry plan leave you vulnerable to market volatility and reduces your potential for success.

Once all of the transaction conditions have been satisfied, the trader is signaled to buy the contract in the market via an entry.

Your chosen trading strategy will inform your entry choice, and various trading strategies will require different types of entries.

To enter a trade successfully, you must observe these two guidelines.

We want the price action to confirm the set-up and force us into taking a position, so the first rule requires prices to move in the expected direction before entering the market. If our set-up indicates a long post, we would need the price action to move up in some specified manner before we would be comfortable taking a position.

For instance, say that our set-up has given us a long signal at today’s close. Still, before we risk entering the market, we need to see specific market action in the direction of the set-up, such as a breakout above today’s bar high, to confirm that the market is in bullish mode.

It is up to you to determine your entry point once you have a setup, but one example would be to place a buy order if the price is more than a certain number of points above the previous day’s close.

There is no shortage of methods for exciting entries; the only limitation is your imagination.

The second guideline is to join the trade once your entry point has been reached.

Trading the set-up and entry idea and ensuring you follow the rules provides far superior results compared to changing either set-ups or entries alone.

I hope you have luck in trading, and if you have any questions, feel free to email them to me.

If you’re interested, you can visit my website, where you’ll find a (hopefully) effective and inexpensive mentoring program, and I may be able to assist you along your learning journey.

Don’t be shy about sending me an email if you need clarification.

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