The market continues to be driven by news headlines, rumors, and tweets. And we’re seeing plenty of volatility, twists, and turns, because of it.
If you’re new to trading, it can be overwhelming.
I know, because I once frustrated and overwhelmed.
You see, after my financial advisor lost half of my portfolio in 2009… I knew I had to take control of my finances. And one of the few things giving me hope at the time was the thought: I can’t possibly do much worse.
(I wish trading was this easy when I started, but it wasn’t. I’ve made over $2M in trading profits since then, and now I want to help you reach your goals. Click here to join my service now)
I started getting serious about my trading in my 50s. I had run businesses in the past, so I understood the concepts of discipline, execution, and having a strategic plan. However, I still needed to figure out how that applies to trading.
That said, my first order of business was preserving capital. I figured if I can just lose a little while I learn…and then master a few trades I will be able to build my account back up.
So for me, step one was to stop losing money during my learning curve.
How do you do that?
You can either paper trade or trade odd lots (a position that is less than 100 shares). Because in the beginning, it’s not about how much you can make… it’s about improving and getting better…and preserving capital.
The money will come later… don’t worry about it at first. I’ve averaged over $200k in trading profits over the last decade, and my first three years were spent just learning the ropes.
My goal is to not only help my clients win in the market but also to provide the education and knowledge they need… so it doesn’t take them three years “to get it” as it did for me.
You see, there is more to trading than having the right strategy (although that is important)… it’s also about putting the right plan together, which includes: proper position sizing, risk management, sticking to rules-based patterns.
That is if you want to become a consistently profitable trader. Furthermore, today’s trading lesson is all about knowing your exits.
If your trading plan does not consist of at least two targets, one for taking profits and the other a stop loss in case you are wrong, then you are setting yourself up for failure.
It’s been a wild week thus far… the markets sold off on Monday… and rallied on Tuesday on the back of Fed comments…
… and yesterday, we saw some pretty dicey action, as the SPY flirted with the Death Line again before it rallied and closed near the high of the day (HOD).
Traders who have positions right now are struggling with big swings… and some are debating whether they should get out of their positions or hold onto them, thinking it’ll act to their favor…
… but that’s just hoping and praying.
When there’s this much volatility in the air… a fully-developed trade plan is best… heck, in any market, having a detailed approach can benefit your trading because it helps to remove the emotions – allowing you to take calculated decisions and risk.
Now, some traders get on the right food and develop an entry plan… however, they end up forgetting about the exit plan, and that can be very problematic.
That said, let’s take a look at how to develop the missing half of your trading plan.
If You’re Going to Plan… Plan for Different Scenarios
For the most start, traders focus on getting into a stock… they don’t want to miss out on a trade, so they quickly come up with a thesis, and say, “I want to buy it here… the bids are stacking up and I think it could run higher, and there’s some positive news.”
Thereafter, they become ensued by the trade… forgetting to plan for an exit.
Sure, the entry is an important part of a trading plan…
… but you know what’s a lot more important?
The exit plan.
In other words, where will you look to take profits and where will you stop out (close your position) if things start to get sour.
Always Have An Exit Plan
Sure, it’s great to have an entry plan… but what happens when you don’t take into account the fact that the stock could move against you?
Well, you could lose a lot more than you’d expect.
For example, check out this daily chart in Facebook (FB).
Let’s say you think the $178 level will hold in FB… and you notice a double bottom pattern (or a “W” pattern forming).
Now, you decide to buy shares at $182… thinking FB has a bullish pattern and it’s going to bounce.
Let’s assume you didn’t have an exit strategy…
Well, the very next day, FB broke below $178…
At this point, you might be thinking… Well, it’s FB this is a very large company… I think this is just a fake out and it’ll go back up. I’m going to average down here.
Well, here’s what happened with FB…
It got some news about the FTC investigating it, and it gapped down and continued to sell off.
This happens all the time to traders who don’t plan for an exit.
They let the stock move against them… buy more shares because they’re so in love with the stock and fail to take into account the downside… until the stock falls too much and they can’t take the pain anymore…
… only to take a massive loss and damage their account.
Now, the same thing can happen if you don’t have a profit target.
You see, there are many traders out there who don’t have targets in mind… they focus on their profit and loss (PnL), and they will just decide if they make enough money in a stock, they’ll sell…
… I hate to break it to you, but the market doesn’t care about your PnL… and if you don’t take profits, they could evaporate.
Let’s say you like to trade momentum stocks and you saw Genocea Biosciences (GNCA) spiking one day.
Well, you look at the chart, and see the stock break above $6 (a previous resistance level), so you decide to buy the stock, thinking it’ll run higher.
Here’s a look at the daily chart in GNCA.
Notice that big candle, where the stock broke above the blue horizontal line on the far right?
Well, if you bought at $6… and didn’t have a profit target in mind, you would’ve seen the stock run to $8… and you probably would’ve been euphoric and thought the stock could move to $10.
However, by the close of that day… the stock closed below that entry, and your big winner all of a sudden became a loser all within one day.
If you had a profit target, say a 10% – 20% target (since we’re talking momentum stocks here – which I don’t trade very often unless I see one of my patterns show up)…
… you would’ve actually locked in profits.
For example, if you had a target to take half your position off the table if the stock went up 10% from your entry… and a second target to sell the rest at say 20%… you could’ve just set a sell limit order for half your shares at $6.60, then a sell limit for the rest at $7.20…
… thereafter, you would’ve been sitting in profits, instead of giving up your gains.
Now, you’re probably wondering how a detailed trading plan looks…
… and no, it doesn’t have to be an essay, it could just be a few lines like this.
As you can see above, these potential trades have entry prices, stop-loss areas, as well as targets… and comments about the trade.
I actually send watchlists like those to my clients regularly – letting them know which chart patterns I’m watching, as well as my thoughts on the market…
Now, if you’re struggling with developing a trading plan, or just looking for new ways to identify where you should enter, stop out, and take profits when you’re trading, click here to learn more.