Essentials of a Trading Plan - Part 4: Trade Entries and Trade Management
Education - Milan Cutkovic | 25 Apr 2019
In this article, we will discuss three important topics:
- Trade Entry
- Trade Management
- Trade Analysis
How a trader manages his trade entries will mostly depend on his trading style. Scalpers will not have much time for planning, and will make many intuitive decisions. On the other side, swing traders may end up never using market orders and solely relying on limit orders. As with the trading plan, there is no correct or incorrect way of entering a trade – much depends on the trading style and strategy of each trader.
However, it may prove beneficial to define your entry criteria carefully and add filters. You can start by defining your trade signal, trade entry and additional rules if needed.
A simplified example might look like this:
Trade signal: Buy if the 5-day moving average crosses above the 20-day moving average and the RSI is below 70.
Trade entry: Buy on the next candlestick open following the crossover.
Examples for Additional Rules:
- Only enter the trade during the European trading session (for example, if the strategy has statistically proved to be most successful during this trading session)
- Only enter the trade if there is no major holiday in one of the countries where the currencies are issued (e.g. avoiding Japanese Yen during Japanese public holidays)
Scalpers might need to manage their trades with a lot of discretion, but in general, a lack of proper trade management rules can lead to emotional decisions such as closing out a trade too early or adding to losing positions.
The simplest method is to add a fixed stop and take profit order at the time you are opening a trade. If you see that the market has turned and the reason why you entered the trade is no longer valid, you may decide to close the earlier. However, for beginners it might be difficult, as they could end up closing trades too early. In the worst case, a trader might constantly take profits too early, but leave the losing positions running in the hope that the market will turn in his/her favor again.
Therefore, beginners might find it easier to set stop and take profit levels in advance, and stick to them. If you get stopped out way too often, you have to review where you place your orders and/or if your strategy is still functioning.
A trading journal can be a good addition to a trading plan. There, you can log all of your trades and add comments – e.g. what went well or what went wrong. With time, you may discover valuable information and learn from your constant observations.
When analyzing a trade, you want to look at how you entered a trade, how you managed it and how it was closed (manually or triggered by a stop/take profit order). Furthermore, you want to identify if you made any mistakes or broke your own trading rules. However, do not focus only on the negative parts – it is important to make note of your success as well, as you may learn new things and can utilize it to improve your strategy.
It is best to review your trades and update the journal during the quiet times. For example, if you trade during the European session, you may do this after the EU close.
Determining a trade entry should help you identify the right conditions to enter a trade according to your own rules.
Trade management could prevent traders from making emotional decisions and closing trades too early or too late.
Trade analysis is an efficient way to identify your weaknesses and build on your strengths.
READ MORE ON 'ESSENTIALS OF A TRADING PLAN':
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
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