Trader’s Guide 3.1- Executing a Trade Plan
Trade planning is a crucial part of successful trading. It helps traders to set clear goals and a defined strategy for executing trades. In this article, we will discuss how to set up a trade plan using a lower trend line for entry and the top of a trend channel for an exit, including a stop loss and profit target. We will also discuss the importance of position sizing and provide an example trade with 7 intra-trade values.
Step 1: Identify the Trend
Before setting up a trade plan, it is important to identify the overall trend of the market or security you are trading. This can be done using trend lines, which are lines drawn on a chart to connect the highs or lows of a security over a specific time period. In this trade plan, we will be using a lower trend line as our entry point and the top of the trend channel as our exit point.
Step 2: Set the Entry Point
Once the trend has been identified, the next step is to set the entry point. In this trade plan, we will be using the lower trend line as our entry point. This means that we will only enter a trade when the price of the security crosses above the lower trend line.
Step 3: Set the Exit Point
The exit point is just as important as the entry point, as it determines when we will exit a trade and take profits. In this trade plan, we will be using the top of the trend channel as our exit point. This means that we will exit a trade when the price of the security reaches the top of the trend channel.
Step 4: Set the Stop Loss
A stop loss is a risk management tool that is used to limit potential losses in a trade. In this trade plan, we will set the stop loss at a level that is just below the lower trend line, but close enough that it does not get triggered before the trade moves into a profitable direction. This helps to protect against unexpected price movements and minimize potential losses.
Step 5: Set the Profit Target
The profit target is the level at which we will exit a trade and take profits. In this trade plan, we will set the profit target at the upper trend channel. Additionally, we will monitor the Relative Strength Index (RSI) and exit the trade if it falls simultaneously with the price reaching the upper trend channel.
Step 6: Monitor Intra-Trade Values
Once a trade has been entered, it is important to monitor the trade and adjust the trade plan as needed. In this trade plan, we will monitor 7 intra-trade values:
The price of the security relative to the lower trend line
The price of the security relative to the upper trend channel
The RSI of the security
The position size (discussed in more detail in another chapter)
The risk-to-reward ratio
The potential profit or loss
The overall performance of the trade relative to the trade plan
Step 7: Adjust the Trade Plan as Needed
As the trade progresses, it may be necessary to adjust the trade plan. This could include adjusting the stop loss or profit target, or even exiting the trade early if the trade is not performing as expected. It is important to remain flexible and adapt the trade plan as needed in order to maximize profits and minimize losses.
Example Trade:
For this example trade, we will assume that the original position size is 5% of the total portfolio. The security is trading in an uptrend, with a lower trend line at $50 and an upper trend channel at $60. The RSI is currently at 70, indicating that the
continue
security may be overbought.
At the start of the trade, the price of the security is at $53, which is above the lower trend line of $50. We enter the trade at this price.
The price of the security reaches $57 and the RSI falls to 60. We adjust the stop loss to $52, just below the lower trend line.
The price of the security reaches $59 and the RSI falls to 50. We adjust the profit target to $58, just below the upper trend channel of $60.
The price of the security reaches $58 and the RSI falls to 40. We exit the trade at this price, taking profits.
The final intra-trade values for this trade are as follows:
Price at entry: $53
Price at exit: $58
RSI at entry: 70
RSI at exit: 40
Position size: 5% of total portfolio
Risk-to-reward ratio: 1:2
Potential profit: $5
Performance relative to trade plan: Successful, as the trade moved in the expected direction and the profit target was reached.
Trade planning is an important part of successful trading. By setting clear goals and a defined strategy, traders can better execute trades and maximize profits. Using a lower trend line for entry and the top of a trend channel for the exit, along with a stop loss and profit target, can help traders to manage risk and make informed decisions. By regularly monitoring intra-trade values and adjusting the trade plan as needed, traders can stay on track and achieve their trading goals.
In addition to traditional stock trading, trade plans can also be applied to options trading. However, options trading involves additional factors that must be considered and accounted for in the trade plan. These factors include time, volatility, and other environmental variables that can impact the price of the option.
One example of an options trade that incorporates these additional factors is the ADAPT SPX options trade. This trade is designed to take advantage of changes in the market environment, including changes in volatility, time to expiration, and other variables. To properly execute this trade, it is necessary to measure the impact of these variables and create a trade plan that is tailored to the specific market conditions.
Options trading can be thought of as 5-dimensional chess, as it requires traders to consider multiple variables and how they may impact the trade. In contrast, traditional stock trading is more like 2-dimensional chess, as it only involves the price of the security and the direction of the trend.
Creating a trade plan for options trading requires a thorough understanding of the underlying security, as well as the various factors that can impact the price of the option. This includes analyzing the historical and implied volatility of the security, as well as the time to expiration of the option. It is also important to consider the market conditions and any macroeconomic events that may impact the trade.
By properly measuring and accounting for these variables, traders can create a trade plan that is tailored to the specific market environment. This can help to increase the chances of success and maximize profits in options trading.
