Creating a Trading Plan (Part 2)
Entries and Exits
Welcome back to my series on trading plans. Last week we spent time identifying our trading goals and what type of investment instruments we would use to achieve those goals. If you haven’t read that yet I will post a link down below. This week we will continue to build upon that and define clear entry and exit rules.
Having clear and well-defined entry and exit rules can help with trading in several ways:
Avoiding FOMO (fear of missing out) and emotional decisions: One of the biggest pitfalls of trading is letting emotions guide your decisions. FOMO can lead you to enter trades impulsively, without properly considering the risks or potential rewards. On the other hand, fear and greed can lead you to hold onto losing trades for too long or exit winning trades too soon. By having clear entry and exit rules in place, you can avoid these emotional pitfalls and make more rational, well-informed decisions.
Increasing discipline and consistency: Trading can be a highly unpredictable and volatile activity. Having clear entry and exit rules helps you stay disciplined and consistent in your approach, even when the markets are volatile or uncertain.
Before we dive into our entry and exit rules make sure you are subscribed so you can follow along week to week.
Let’s get started now with entry rules. These rules are designed to help you make informed decisions about when to enter a trade, and can be based on technical analysis, fundamental analysis, or a combination of both.
When defining your entry rules, it's important to consider what gives you an edge in the market. To define an edge, you can consider specific factors or strategies that give you an advantage in the market. This could be based on a technical chart pattern, an indicator signal or something else. Whatever your edge may be, it's important to carefully consider how it can be incorporated into your entry rules to give you the best possible chance of success.
As we go through this next section we will define:
The Edge
The Entry
When the Edge Fails (stop)
Miscellaneous Notes
Screenshot of your set up for reference
Example:
Edge: Upside Reversal Bar
Current bar undercuts previous bar
Price closes in the upper 60% of the range
Entry: Price pushes above the high of the upside reversal bar
Edge fails if (stop): Price falls below the low of the upside reversal day
Misc: The upside reversal should occur near a potential area of support (moving averages, previous pivot point, earnings gap high volume close or low, AVWAP)
Now that you've seen an example of how to define an entry rule based on a trading edge, it's important to go through this process for every edge you have. Take the time to carefully define entry rules for each of your advantages in the market.
Let's move on to the next crucial aspect of our trading plan: exit rules. Exit rules are just as important as entry rules, as they help you determine when to exit a trade and can significantly impact your profits and losses. While every defined edge you have should have a failure point (stop loss) where you exit the trade, the exit rules in the next section will focus on when to sell to lock in profits or exit as a stock begins showing weakness that is not where your entry tactic fails.
Sell rules can be as simple as at X% gain I will sell half of my position and bring my stop to breakeven or more complex by looking for technical reasons to sell.
Example:
Sell Rule: Break above upper channel line
Must occur on weekly logarithmic chart
Trendline at least 18 weeks long
Must connect to at least 3 points
Entry and exit rules are an essential part of any trading plan. These rules help you make informed decisions about when to enter and exit trades, avoid making emotional decisions and help you stay consistent.
Next week we'll take a closer look at the important topics of risk management and market timing rules.
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The content presented is for informational and educational purposes only. Nothing contained in this newsletter should be construed as financial advice or a recommendation to buy or sell any security. Please do your own due diligence or contact a licensed financial advisor as participating in the financial markets involves risk.