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.
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!
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.
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.
Example Trading Strategy