Now it is time to focus on putting together your trading strategies, which at this point mostly concern how you establish your entry and exit points. In many (if not most) cases, the timing of your position entries and exits will be the most stressful and thought-over parts of the entire trade.

It is extremely important to establish clear entry and exit criteria and stick to those rules because it is far too easy to base a decision on an emotional response rather than a strategy. Be absolutely definitive in identifying all of the trading strategy elements you plan to use. You might also find it helpful to cite specific examples of trades you will or will not make based on a particular strategy.

Identify market indicators

Market indicators are your trading inputs. For example, you might use charts to track certain market trends and only enter a trade when particular patterns have emerged. Or, you might use a series of technical indicators related to momentum, moving averages and trendlines. When exiting a position, you might establish profit/loss limits to stick to as the position develops. Write down the exact conditions that must be met before you can enter or exit a particular trade!

Define set-ups and trigger points

  • Set-ups are the conditions you think provide a high probability of success. It can be useful to have a clear idea of the set-ups on which you like to trade, such as higher highs, lower lows or moving averages.
  • Trigger points define the precise moments you want to trade, such as markets moving through a new high or low.

Managing open trades

This aspect of the trading plan helps you deal with the emotions of holding open positions. Emotional responses to losing (you see the market drop and want to cut your losses or wait for a comeback) or winning (the market spikes and you want to hold your position even longer) are real and difficult to manage in the moment. In these emotionally charged situations, it is essential to already have a strategy in place that you can call on.

Exit strategy

Professional traders play defense first because they know exit points are far more important than entries. Before you enter a trade, you should know where your exit points—and there are at least two for every trade. First, what is your stop loss if the trade goes against you? It must be written down. Mental stops don't count. Second, each trade should have a profit target. Once you get there, sell a portion of your position and move up your stop loss on the rest of your position to break even if you wish. As discussed above, never risk more than a set percentage of your portfolio on any trade.

About my Trading Strategy

  • What indicators will I use to determine my entry into a market position?
  • What are my set-ups?
  • What are my trigger points?
  • How will I manage my open trades?
  • What are my exit strategy?
  • What is my stop loss for a particular type of trade?
  • What is my profit target?
  • What is the percentage of my portfolio I am willing to risk on any individual trade?

Example Trading Strategy

  • I intend to carefully monitor the 200-day moving average (MA) in all currency future contracts, as it is an important support/resistance point. If, for example, the Yen is breaking, I will always be a buyer at around the point of the 200-day MA, on the presumption that the market will find significant support at that point.
  • On trades of this type, I will use a stop-loss order of up to 2% of my equity.
  • The only time I will withhold from making a trade of this type is if volume and open interest are extremely high, indicating a major market move is underway in the opposite direction.

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